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Issue

HVCRE Clarification

Rulemaking for the Risk-Based Capital Treatment of High Volatility Commercial Real Estate Loans

ABA Position

ABA strongly supports the legislation created in Section 214 of S.2155 which provided much-needed clarification of the risk-based capital treatment of High Volatility Commercial Real Estate (HVCRE) loans.

An important feature of the newly defined HVCRE loan is that: 1) primarily finances, has financed or refinances the acquisition, development or construction of real property; 2) has the purpose of providing financing to acquire, develop or improve such real property into income-producing real property; and 3) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility.

Here is a quick outline of additional features of the new definitions HVCRE:

  • Maintains the original heightened risk weight that insured depository institutions must assign to HVCRE ADC loans (150%).
  • Retains the exemptions from HVCRE exposure characterization for borrowers that have contributed capital of at least 15 percent of the real property’s appraised “as completed” value. Maintains borrower contributed minimum amount of 15 percent capital.
  • Redefines what constitutes an HVCRE loan.
  • The new definition also allows for appreciated value of real property when calculating compliance with the 15 percent contributed capital requirement, no longer requirement the lender to use acquisition cost of the land.
  • Permits reclassification to permanent refinancing when the substantial completion of the development or construction of real property and sufficient cash flow is generated to support the debt service and expenses of the real property accordance to the institutions underwriting criteria, such loans can be reclassified as non-HVCRE ADC.
  • The statutory HVCRE ADC loan definition excludes any loan made prior to January 1, 2015.

On July 6, 2018 interagency statement information on S.2155 HVCRE rules provides that institutions:

  • Effective upon enactment, S. 2155 specified that depository institutions are permitted to risk-weight at 150 percent only those commercial real estate exposures it believes meet the statutory definition of HVCRE ADC.
  • When reporting HVCRE exposures via the Call Report and FR Y-9C, institutions and holding companies may use information to report only HVCRE ADC loans, as defined in S. 2155. Alternatively, institutions and holding companies can report and risk-weight HVCRE exposures in a manner consistent with the current instructions to the Call Report and FR Y-9C, until the agencies take further action.

An important feature of the newly defined HVCRE loan is that: 1) primarily finances, has financed or refinances the acquisition, development or construction of real property; 2) has the purpose of providing financing to acquire, develop or improve such real property into income-producing real property; and 3) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility.

Here is a quick outline of additional features of the new definitions HVCRE:

  • Maintains the original heightened risk weight that insured depository institutions must assign to HVCRE ADC loans (150%).
  • Retains the exemptions from HVCRE exposure characterization for borrowers that have contributed capital of at least 15 percent of the real property’s appraised “as completed” value. Maintains borrower contributed minimum amount of 15 percent capital.
  • Redefines what constitutes an HVCRE loan.
  • The new definition also allows for appreciated value of real property when calculating compliance with the 15 percent contributed capital requirement, no longer requirement the lender to use acquisition cost of the land.
  • Permits reclassification to permanent refinancing when the substantial completion of the development or construction of real property and sufficient cash flow is generated to support the debt service and expenses of the real property accordance to the institutions underwriting criteria, such loans can be reclassified as non-HVCRE ADC.
  • The statutory HVCRE ADC loan definition excludes any loan made prior to January 1, 2015.

On July 6, 2018 interagency statement information on S.2155 HVCRE rules provides that institutions:

  • Effective upon enactment, S. 2155 specified that depository institutions are permitted to risk-weight at 150 percent only those commercial real estate exposures it believes meet the statutory definition of HVCRE ADC.
  • When reporting HVCRE exposures via the Call Report and FR Y-9C, institutions and holding companies may use information to report only HVCRE ADC loans, as defined in S. 2155. Alternatively, institutions and holding companies can report and risk-weight HVCRE exposures in a manner consistent with the current instructions to the Call Report and FR Y-9C, until the agencies take further action.
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