ABA Urges Agencies to Reconsider Higher Risk Weighting for HVCRE ADC Loans

As financial regulators consider the treatment of high-volatility commercial real estate under the S. 2155 regulatory reform law, the American Bankers Association in a comment letter today urged the agencies to reconsider applying the proposed 150 percent weighting to loans that fall under the statutory “HVCRE ADC” definition.

A provision of S. 2155 limited regulators’ ability to apply a higher risk weight to HVCRE exposures only to those that meet the definition of “HVCRE ADC.” The agencies proposed to defined HVCRE ADC loans as those that are secured by land or improved real property; have the purpose of providing financing to acquire, develop or improve the real property such that the property would become income producing; and are dependent upon future income or sales proceeds from, or refinancing of, the real property for repayment of the loan.

ABA pointed out that S. 2155 does not require regulators to apply a heavier risk weighting to these loans, it simply prohibits them from applying a heightened risk weight to HVCRE exposures unless they meet the HVCRE ADC definition. The association urged regulators to not treat HVCRE ADC as a separate class, but rather apply the general 100 percent risk weight and wholesale correlation factor to all ADC loans.