In October 2017, the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency within the Treasury Department issued a “notice of proposed rulemaking” (NPR) regarding the capital rule for banking organizations. Under the Basel III banking regulations, a “High Volatility Commercial Real Estate” (HVCRE) loan category was created, comprised of commercial acquisition, development, and construction (ADC) loans, which are assigned a risk-weight of 150% (up from 100%). The NPR proposes changing the terminology to “High Volatility Acquisition, Development and Construction” (HVADC) exposures, and lowering the risk-weight to 130%, but also removes certain exclusions to the requirement, thus broadening the types and numbers of loans that are included in it.
NAR has submitted a comment letter to the agencies on the NPR, in addition to joining a commercial real estate industry coalition letter. In these comments, NAR makes several suggestions for improving the capital requirements and the changes proposed in the NPR, including:
- Further clarifying certain requirements within the rule, including the “primarily finances” requirement, to exclude loans secured by non-commercial real estate assets and completed real estate development, and the “permanent loan” definition, to include loans in which a completed project has enough cash flow it support the debt service and expenses of the property.
- Further reduce the risk-weight for HVADC loans from 130% to 100% for banks that make loans that conform with the 2015 guidelines for “Prudent Risk Management in Commercial Real Estate Lending” issued by the Federal banking agencies.
- Reinstate the “contributed capital exemption” to the HVADC rule, which would allow loans that meet a specified loan-to-value ratio and which the borrower has contributed capital equal to at least 15% of the project’s “as completed” market value to be excluded from the higher risk-weight requirement.
- Simplify this exemption by changing the computation for the capital contribution to base it on the appraised market value of contributed land, rather than the historic price paid.
- Include condominiums and cooperative developments in the exemption to the HVADC risk-weight, as is currently done with one-to-four family residential properties.
The comment period closes on December 26, 2017, with a final rule expected out in 2018.