The Appraisal Institute (AI) and the American Bankers
Association (ABA) are working to educate the industry about the effects of a
new regulation for commercial real estate.
The high-volatility commercial real estate (HVCRE)
regulation, which took effect Jan. 1, mandates that, borrowers who originate
commercial acquisition, development and construction (ADC) loans must meet a 15
percent equity requirement to be exempt from an HVCRE designation.
AI and the ABA will hold a briefing Aug. 5 to help bankers
and appraisers learn about the effects of HVCRE requirements on commercial lending,
as well as how bank credit departments can work with appraisal departments to
address “as-completed” value scenarios in appraisal reports.
Another requirement of the regulation, according to the ABA Banking Journal, is that the
leverage on such loans cannot exceed 80 percent of the estimated completed
value of the project. If these conditions are not met, the loans will be
subject to a 150 percent risk weight requirement — an increase from the
previous 100 percent 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.
For a complete ABA summary of the rule please see here.
Register
for the briefing.
According to an article published in the American Banker, ABA Vice President Hugh
Carney expressed concern that the 150 percent risk weighting could stifle HVCRE
lending and increase the price of loans, putting banks at a competitive
disadvantage relative to nonbank lenders.
Other trade associations echoed this sentiment, claiming the
new rule will incentivize borrowers to avoid the HVCRE classification by
holding their investments below the 15 percent equity minimum, and are urging
regulators to allow borrowers to take advantage of a reasonable amount of
internally generated capital.