While commercial real estate plays a crucial role in growing banks’ loan portfolios, some industry participants have said the confusing rules defining what projects qualify as High Volatility Commercial Real Estate (HVCRE) have hindered lending. H.R. 2148, or the Pittenger Bill, has been introduced to help sift through the murky HVCRE waters. Supporters believe the bill, if enacted, would help to promote a more competitive commercial real estate finance market and enhance overall economic development and growth.
What’s wrong with HVCRE as it is?
Regulators consider certain commercial real estate loans to be riskier than other types of commercial loans. Those loans became known as High Volatility Commercial Real Estate loans, or HVCRE. While most corporate loans carry a risk weight of 100 percent, HVCRE loans currently carry a risk weight of 150 percent, raising the capital reserve requirement for qualifying acquisition, development and construction (ADC) loans. Increased capital requirements can provide banks less incentive to provide financing for development and may increase the price tag of a construction loan for borrowers. In addition to higher required capital reserves, the definition for what makes a loan qualify as HVCRE is extremely complex. Because of its ambiguous nature, banks have generally been erring on the side of caution when classifying loans as HVCRE in order to “play it safe,” so to speak. Robert Ashbaugh, senior risk management consultant at Abrigo, helped to clarify those confusing points in a Abrigo webinar on HVCRE risk management.
How would H.R. 2148 help?
If the bill is signed into law, H.R. 2148 would greatly simplify and clarify which loans do and do not classify as HVCRE. Key points include:
- - Loans to acquire or improve an existing property—where the property is already performing, and the loan would not otherwise meet the bank’s underwriting standards for permanent financing—would not be defined as HVCRE
- - "Real property" would include appraised value of property, even if it comes from cash used to acquire it or from its appreciation
- - Internally-generated funds would be allowed to be withdrawn from the project
- - Construction loans allowed to be reclassified as non-HVCRE once the project's completed and the borrower has sufficient cash flow to support the debt service and expenses of real property
- - Mortgage loans for improvements to existing assets that produce an income would not be classified as high-risk
- - Loans made prior to January 1, 2015 exempt from the HVCRE rule