House GOP Leaders Signal Renewed Dodd-Frank Reform Effort; Legislation Includes Roundtable-Supported HVCRE Changes
House GOP leaders have recently signaled a deal could be reached this month between the House and Senate to pass the first rewrite of the 2010 Dodd-Frank Act (DFA). A Senate DFA financial reform bill passed in March includes a measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – a top Roundtable priority.
House Financial Services Committee Chairman Jeb Hensarling, (R-TX) said he is open to moving the Senate-passed Dodd-Frank reform bill without changes if there are "other pathways" to advance House financial reform bills not included in the Senate plan. ( Wall Street Journal , April 26)
The bipartisan HVCRE measure originated in the House of Representatives as the Clarifying Commercial Real Estate Loans bill (H.R. 2148), which was introduced by House Financial Services Committee members Representatives Robert Pittenger (R-NC) and David Scott (D-GA). After being voted out of the committee by a near unanimous vote (59-1), it passed the House by voice vote in November of last year (Roundtable Weekly, Nov. 10). The Senate Banking Committee took up an identical bill in February (S. 2405), which was co-sponsored by Senators Tom Cotton (R-AR) and Doug Jones (D-AL).
With the HVCRE measure included in the Senate-passed DFA financial reform bill, the legislation has lingered in the House amid requests from conservatives, led by House Financial Services Committee Chairman Jeb Hensarling, (R-TX), for more extensive changes. (Roundtable Weekly, March 16 and March 23)
Substantive changes by the House would likely send an amended bill back to the Senate, which could threaten support by Senate moderates and sink the prospects for passing the legislation. Hensarling told reporters last week, "I'm not naïve. Ultimately the fate of these House bills rests in approximately eight self-styled moderate Senate Democrats." (Reuters, April 26)
Hensarling added that he is open to moving the Senate bill without changes if there are "other pathways" to advance House financial reform bills not included in the Senate plan. (Wall Street Journal, April 26)
Speaker of the House Paul Ryan (R-WI) on Monday said, "… the capstone of our regulatory reform agenda is our replacement of Dodd Frank. We already have a bill out of the House. We have a bill out of the Senate, which is pretty amazing. So, we're gonna get that done." He added, "We're a few weeks away from getting our bill into law that rewrites the Dodd Frank law." (The Weekly Standard, April 30)
House Majority Leader Kevin McCarthy (R-CA) this week reiterated that the effort to pass modest DFA reforms, versus repeal, will come soon. "I think you are within a month of getting it ... done," McCarthy said Monday during the Milken economic conference. He pledged that the legislation will be delivered to President Trump before November's midterm elections, saying, "At the end of the day there will be a bill at the President's desk." (Reuters, April 30)
Changes to HVCRE Rule
If the Senate bill moves forward in the House, its Roundtable-supported HVCRE language would clarify and reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule that has created needless confusion and increased borrowing costs.
The Roundtable and twelve other real estate organizations on March 2, 2018 sent a comment letter urging all members of the Senate Banking Committee to take the necessary steps to enact S. 2405 by including the measure in the broader Dodd-Frank reform package (S. 2155).
The current HVCRE Rule is overly broad and includes many stabilized loans without construction risk in this HVCRE category, unduly burdening those loans with capital charges meant to protect banks from heightened construction risks. As a result, banks, including small community financial institutions, have been deterred from making this type of loan, which can represent up to 50 percent of a small bank loan portfolio.
The Senate's HVCRE measure would clarify which types of loans should be classified as HVCRE loans to ensure they do not impede credit capacity or economic activity, while still promoting economically responsible commercial real estate lending. ( Roundtable Weekly, Jan. 12).
Importantly for borrowers, 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). The measure would also clarify that loans made to acquire existing property with rental income and/or do cosmetic upgrades and other improvements don't trigger the capital penalty.
HVCRE reform has been a top policy priority of The Real Estate Roundtable and its industry coalition partners, who have submitted numerous policy comment letters to policymakers since 2015. The Roundtable's HVCRE Working Group has also played a key role in advancing these specific reforms. (Roundtable letter, March 2)