During a Sageworks webinar on HVCRE risk management Rob Ashbaugh, Executive Risk Management Consultant at Abrigo, explained that clarifications on some of the murkier aspects of the HVCRE (high volatility commercial real estate) rule were anticipated by the industry. On September 27, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency released a Community Bank Summary entitled Proposed Simplification to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996. This summary outlines a new rule that would, among other things, clarify and simplify the definition of HVCRE loans.
One intention of the proposed rule would be to replace the current definition of HVCRE with a more straightforward and simpler definition known as HVADC (high volatility acquisition, development, or construction).
The summary provides the broad strokes of the rule:
- The rule would apply to credit facilities that primarily finance or refinance ADC (acquisition, development and construction) loans.
- These loans would receive a 130 percent risk weight (lower than the current 150 percent under the HVCRE definition).
- The HVADC rule would apply to a broader range of loans than HVCRE by removing the exemption for loans with substantial borrower-contributed capital.