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High Volatility Commercial Real Estate (HVCRE)

​The HVCRE regulation within the Basel III capital requirements, effective as of January 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% equity requirement, and the leverage on such loans cannot exceed 80% of the estimated completed value of the project. If these conditions are not met, the loans will be subject to a 150% risk weight requirement -- an increase from the previous 100% 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. See the full guidance and an ABA summary.

In April 2015, the regulating agencies released additional FAQs to provide clarification on the final rule. The FAQs, however, are still unclear and do not answer all the outstanding questions associated with the final rule.

In October 2017, the banking agencies issued a proposed rule that, among other things, would replace the HVCRE definition with a definition for high-volatility acquisition, development or construction loans, or HVADC, that would apply to credit facilities that primarily finance or refinance ADC activities and that would receive a 130 percent risk weight, unlike the 150 percent risk weight for HVCRE. ABA submitted a comment letter to the agencies arguing that The HVADC exposure category would subject more loans to a 130 percent risk weight as a result of eliminating the,15 percent contributed capital exemption criterion while expanding the definition to include bridge financing.

ABA has aggregated online resources in an effort to provide additional information for the regulation.

ABA Position

ABA believes that the proposed HVADC exposure definition – which would subject more loans to a higher risk weight than the HVCRE exposure definition - would increase regulatory capital costs and would likely prove to be a drag on economic growth. ABA recommends that the agencies modify the HVADC exposure category to strike a better balance between risk-sensitivity and simplicity.

 

 Newsbytes

 
 

 Comment Letters

 
 

 Industry Resources

 

​Questions? Contact Barry Mills or Sharon Whitaker for more information.

 

 ABA Staff Contacts

 
  • Barry Mills, Sr. Regulatory Advisor, Office of Regulatory Policy
  • Sharon Whitaker, VP, Commercial Real Estate & Finance, Mortgage Markets, Financial Management & Public Policy
 

 Related Topics

 
 

 Additional Resources