Washington Report

Advocacy Updates from Washington D.C.

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.    

Read NAR's comment letter to the OCC, FDIC, and Federal Reserve

Read the Commercial Real Estate Coalition letter to the agencies

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