Category: Capital and Credit

Dodd-Frank Reform Legislation Includes Measure to Modify Banking Rule Affecting Acquisition, Development, or Construction Loans; Congressional Votes Next Week

Posted on by Trey Jackson

The Senate is expected to vote early next week on bipartisan Dodd-Frank reform legislation (S. 2155) that includes a Roundtable-supported  measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which would clarify specific requirements for acquisition, development, or construction (ADC) loans.

The Senate is expected to vote early next week on bipartisan Dodd-Frank reform legislation (  S. 2155  ) that includes a Roundtable-supported  measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which would clarify specific requirements for acquisition, development, or construction (ADC) loans.

The Economic Growth, Regulatory Relief, and Consumer Protection Act(S. 2155) represents the most significant change to financial regulatory law since 2010, when the Dodd-Frank Act was enacted. Among the financial issues it addresses, the Act would raise the amount at which banks are considered “too big to fail” – from the current $50 billion threshold to $250 billion – and provides additional relief for community banks and credit unions.

Amendments added this week to the Manager’s Amendment for S. 2155 include a bipartisan  HVCRE measure that originated in the U.S. House of Representatives as the Clarifying Commercial Real Estate LoansHVCRE bill (H.R. 2148), introduced by House Financial Services Committee members Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA). After passing 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 – co-sponsored by Senators Tom Cotton (R-AR) and Doug Jones (D-AL). 

Last Friday, the Roundtable and twelve other real estate organizations 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 Roundtable and twelve other real estate organizations 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 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).

Senate Banking Committee Chairman Mike Crapo (R-ID) and House Financial Services Committee Chairman Jeb Hensarling (R-TX) continue to work with their colleagues to advance bipartisan reform measure that will muster enough votes for passage in both chambers. 

It remains uncertain whether Crapo’s efforts will attract the support of House Republicans, who must approve the bill before it can be sent to the President for his signature.  Hensarling said yesterday that the updated Senate bill doesn’t go far enough and needs more provisions to reflect “the will of the House.” (BNA, March 9)

HVCRE reform is a is a top policy priority of The Real Estate Roundtable and its industry coalition partners, who have submitted numerous letters to policymakers since the measure was enacted in 2015. The Roundtable’s HVCRE Working Group played a critical role in drafting the measure and aiding efforts to advance legislative reforms. (Roundtable letter, March 2)

Financial regulation and its effect on commercial real estate lending will be a focus of The Roundtable’s April 25 Spring Meeting in Washington, DC.

Roundtable Encourages Senate Banking Committee to Consider HVCRE Legislation That Would Clarify Banking Rule Affecting Acquisition, Development, or Construction Loans

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday encouraged Senate Banking Committee leadership to consider a bipartisan measure similar to one passed in the House of Representatives in November that would reform and clarify the Basel III High Volatility Commercial Real Estate (HVCRE) Rule for certain acquisition, development, or construction loans (ADC).  (Roundtable Comment Letter, Jan. 9)

The Roundtable’s letter this week to Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) expressed concerns about the HVCRE Rule since its effective date of January 1, 2015.

The House passed the Clarifying Commercial Real Estate Loans Act (H.R. 2148) on November 7, 2017 following a nearly unanimous vote by the House Financial Services Committee (59-1).  Since the Rule’s effective date of January 1, 2015, necessary clarification for key elements of the Rule have not been provided by regulators despite ongoing requests. Instead, the regulatory agencies proposed yet another, duplicative exposure category for ADC loans –  HVADC. 

This bipartisan legislation – introduced by House Financial Services Committee members Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA) – would help address concerns regarding the Basel III HVCRE Rule by amending the Federal Deposit Insurance Act and clarifying requirements for certain ADC loans. Clarification of the HVCRE Rule would ensure that credit capacity and economic activity would not be impeded, while promoting economically-responsible commercial real estate lending.  (Roundtable Weekly, Nov. 10) 

The Roundtable’s letter this week to Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) expressed concerns about the HVCRE Rule since its effective date of January 1, 2015. 

The letter states: “The current rules are overly broad and include many stabilized loans without construction risk in this HVCRE category, unduly burdening stabilized loans with capital charges appropriate to protect banks from heightened construction risks.  Many 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 Roundtable also submitted comments on Dec. 21, 2017 to banking agencies in response to  their Notice of Proposed Rulemaking (NPR) – “Simplifications of and Revisions to the Capital Rule related to High Volatility Acquisition Development or Construction (HVADC) Exposures” as issued on Oct. 27. 

The Roundtable encourages the agencies to review the language in Clarifying High Volatility Commercial Real Estate Loans (H.R. 2148) and utilize such an approach to clarify the current HVCRE rules and build on this construct in a new consolidated HVCRE/HVADC rule.

Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer commended the Senate Banking Committee for recognizing the important link between bank regulatory policy and economic growth and for taking steps to identify potential ideas that would foster job creation and economic activity.

The Roundtable comments on the NPR were submitted through its HVCRE Working Group and Real Estate Capital Policy Advisory Committee (RECPAC) to the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation.  These comments raise concerns about the creation of yet another exposure category for acquisition, development, or construction loans – High Volatility Acquisition, Development, or Construction (HVADC) – while providing no clarification for the existing High Volatility Commercial Real Estate (HVCRE) Rules.  The Roundtable and eight other national policy organizations also submitted a separate, joint letter in late December to the banking agencies about the NPR. (Roundtable Weekly, Dec. 22, 2017) 

Following these efforts late last year in the House and comments to the banking agencies, this week’s letter to the Senate Banking Committee leadership also explains how the HVCRE Rule issue is not only a problem for commercial real estate owners and bank lenders – but one for the broader economy.  Without adequate credit capacity for commercial real estate lending, jobs and tax revenue will be lost and economic growth impeded.  “As financial institutions absorb a multitude of overlapping Dodd-Frank and Basel regulations, we are concerned about the cumulative impact these rules are having on real estate credit capacity, liquidity, capital formation and job growth,” the letter states. 

Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer also commends the Senate Banking Committee for recognizing the important link between bank regulatory policy and economic growth and for taking steps to identify potential ideas that would foster job creation and economic activity.  DeBoer concludes the letter: “We look forward to working with the Senate Banking Committee on measures such as these that will help craft a sensible financial framework for growing a healthy economy.”

Real Estate Roundtable Supports Bipartisan Legislation to Clarify the Basel Rule and Aid Economic Growth

Posted on by Trey Jackson

(WASHINGTON) — Bipartisan legislation (H.R. 2148) introduced today by Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA) would help clarify and reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which is negatively affecting certain commercial real estate loans and impairing economic growth. The bill is supported by The Real Estate Roundtable and a coalition of national real estate organizations 1 . 

Real Estate Roundtable President and Chief Executive Officer Jeffrey D. DeBoer said, “Congressmen Pittenger and Scott are to be commended for recognizing the negative economic impact that the HVCRE Rule is having on acquisition, development and construction lending and for taking steps to introduce legislation intended to correct these problems. The Roundtable and our coalition partners support regulatory agencies’ efforts to promote economically responsible CRE lending, and the Pittenger-Scott bill will help guide the agencies in clarifying and reforming the HVCRE Rule, while encouraging sound lending practices, spurring economic growth and creating jobs in local communities.”  

By amending the Federal Deposit Insurance Act to clarify capital requirements for certain acquisition, development, or construction loans (ADC), the legislation would address concerns regarding the HVCRE Rule. 

As currently written, the Rule is overly broad and is applied to many stabilized loans without construction risk, unduly burdening stabilized loans with capital charges after the construction risk has passed. Many 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.  

Since introduction of the HVCRE rules in January 2015, necessary clarification for key elements of the rule have not been provided by regulators despite ongoing requests.  Without modifications, the consequences of the HVCRE rule could have an adverse economic impact on commercial real estate lending, local economies and job creation. Without a response from the regulatory community, the proposed legislation is intended to address the problem. 

Among the clarifications in the legislation are the following:

  • Once the development/construction risk period has passed, and the project is cash flowing, it would allow borrowers to use internally generated cash outside the project, rather than forcing them to refinance the loan (possibly away from the original lender).
  • Clarify that loans made to do general upgrades and other improvements on existing properties with rental income do not trigger the capital penalty.
  • Allows banks to establish borrower land value as equity into projects as established by certain safeguards, such as a fully-compliant appraisal and thorough bank review. 
  • Excludes from application and compliance any loans made before January 1, 2015.

As the House Financial Services Committee considers legislation in the 115th Congress to address the HVCRE rule, The Roundtable and its industry partners will continue to encourage policies that permits stable capital formation and balanced lending in a sensible financial regulatory framework.

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1 Building Owners and Managers Association International, CCIM Institute, Commercial Real Estate Finance Council, Institute of Real Estate Management, International Council of Shopping Centers, Mortgage Bankers Association, National  apartment Association, National Association of Home Builders, NAIOP Commercial Real Estate Development Association, National Association of Real Estate Investment Trusts, National Association of Realtors, and National Multifamily Housing Council