A new bill working its way through Congress could loosen financial regulations stifling bank acquisition, development and construction lending.
The Clarifying Commercial Real Estate Loans Act, a bill introduced by Rep. Robert Pettenger in April, aims to clarify and adjust capital requirements for Highly Volatile Commercial Real Estate loans under Basel III.
“There are a lot of questions about the interpretation of [HVCRE rules]. There are idiosyncrasies in regulation that counter some of the goals of the regulation. The rule applies unevenly right now, in a lot of cases because it is poorly worded and constructed [and is] not aligned with the industry’s standard operating procedure,” CREFC Senior Director of Policy and Industry Analysis Christina Zausner said.
The Clarifying Commercial Real Estate Loans Act passed a House committee on Nov. 7, and has since been read by the Senate twice and is now in the Committee on Banking, Housing and Urban Affairs.
Current HVCRE standards require borrowers to contribute at least 15% in cash to a deal, all of which must remain tied up in the project until the loan is paid in full. Under the revised bill, should borrowers wish to originate a similar loan to fund construction, they could count the appraised value for the land toward the borrower equity contribution – this means should the land increase in value, their cash contribution would be less due to rising revaluations.
For example, if developer Jane Doe purchased land worth $1M several years ago that is now worth double, the value of her initial equity contribution would double too under the new bill, Zausner said.
The second major change presented in Pettenger’s bill could benefit banks in particular and encourage more lending in the construction and development space. Currently, should a borrower wish to refinance a maturing HVCRE loan and reclassify the construction loan to a permanent loan (a normal 10-year fixed-rate loan), the lender would have to receive full payment and close out the loan entirely.
Under these conditions, CREFC Executive Director Lisa Pendergast said banks run the risk of losing that loan to a competitor. The clarified rule would allow banks to transition HVCRE loans to permanent loans once the project is stable, allowing banks to keep the loan on their books. (Source: Bisnow)
Add Comment