CAPITAL & CREDIT – HVCRE – December 7, 2018 - Roundtable Weekly

Roundtable Comments Support Proposed Implementation Rule for High Volatility Commercial Real Estate Loans  

The Real Estate Roundtable's support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a Nov. 26 comment letter to three banking agencies.  The Agencies — tasked with developing a rule consistent with Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) to clarify the capital treatment of HVCRE Acquisition, Development, or Construction (ADC) loans — invited comments on their Notice of Proposed Rulemaking. (Roundtable Weekly,  May 25)

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The Real Estate Roundtable's support for a federal proposal that would implement modified capital rules for High Volatility Commercial Real Estate (HVCRE) loan exposures is detailed in a Nov. 26 comment letter to three banking agencies.

  • The Roundtable's comment letter to the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation states the current implementation proposal "more realistically aligns the requirements for HVCRE loans on commercial real estate projects with the actual periods of development or construction risk."  The letter also notes that when the final proposal is implemented, it "will aid economic growth and job creation, while maintaining adequate capital levels to manage the risks associated with ADC lending."  (Roundtable Comment Letter, Nov. 26)

  • The changes to the capital rules address key deficiencies in the agencies' prior regulations governing the criteria for HVCRE or HVADC loans by providing the following modifications and clarifications:

    • The 15% equity requirement would be revised to expressly include contributed land/property at the appreciated  land value as determined by a FIRREA appraisal and bank review (versus the cost basis under the current rule).

    • Clarifies that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don't trigger the capital penalty.

    • A new exemption would be added to the HVCRE rule covering acquisition/refinancing loans for performing income producing properties.

    • Allows borrowers to use internally generated capital in the project and, once the development/construction risk period has passed, outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).

    • All ADC loans made prior to January 2015 would be grandfathered and do not have to satisfy current HVCRE exemption criteria.

    • Banks would able to withdraw HVCRE status prior to the end of an ADC loan's term.

  • Roundtable President and CEO Jeffrey DeBoer also suggests in the letter that periodic industry forums be held on the implementation of the capital rules. "This feedback would allow the Agencies to appropriately address any possible unintended economic consequences resulting from the regulation by supervisory personnel or by the institutions they supervise that might threaten the soundness of the banking system or the stability of the real estate lending market," DeBoer added.

  • The Roundtable's letter is supported by The American College of Real Estate Lawyers (ACREL) and The American College of Mortgage Attorneys (ACMA).  (Joint Letter of Support, Nov. 27)

The Agencies' HVCRE proposal was one of the issues discussed at this week's meeting of The Roundtable's Real Estate Capital Advisory Committee (RECPAC).  Since 2015, The Roundtable's HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule.  (Roundtable HVCRE Comment Letter, March 2).

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