HVCRE Rule Ignores Reality of Real Estate Market

By Ashley Gunn

The high-volatility commercial real estate (HVCRE) regulation, effective as of Jan. 1, 2015, mandates that, in order to be exempt from an HVCRE designation, borrowers who originate commercial acquisition, development and construction (ADC) loans must meet a 15 percent equity requirement, and the leverage on such loans cannot exceed 80 percent of the estimated completed value of the project. If these conditions are not met, the loans will be subject to a 150 percent risk weight requirement—an increase from the previous 100 percent requirement. Additionally, the rule dictates loans are required to stay designated as HVCRE until the credit facility is converted to permanent financing, sold or paid in full. For a complete ABA summary of the rule please see here.

According to an article published in the American Banker, industry reaction to these requirements has been largely negative claiming the rule ignores certain realities in the real estate market. ABA VP Hugh Carney expressed concern that the 150 percent risk weighting could stifle HVCRE lending and increase the price of loans, putting banks at a competitive disadvantage relative to nonbank lenders. Other trade associations echoed this sentiment, claiming the new rule will incentivize borrowers to avoid the HVCRE classification by holding their investments below the 15 percent equity minimum, and are urging regulators to allow borrowers to take advantage of a reasonable amount of internally generated capital. The industry is also pressuring regulators to allow for reclassification once an HVCRE loan meets the bank’s internal underwriting standards and to allow for the appreciated land value to count toward the borrower’s 15 percent equity requirement.

ABA is providing additional resources on Basel III requiring limits for higher risk weighting for HVCRE loans which cause complications for many ADC loans. ABA and the Appraisal Institute will hold a briefing on Aug. 5 to help bankers and appraisers learn about the effects of HVCRE requirements on commercial lending, as well as how bank credit departments can work with appraisal departments to address “as-completed” value scenarios in appraisal reports. Register for the briefing.