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A Look Inside Lending Reform

May 25, 2018
Agricultural/Farm Land
By: Erin Stackley

By Erin Stackley, Senior Commercial Legislative Policy Representative, NAR

Though the economy continues to rebound, reports of tightness in lending for commercial real estate persist.  One potential culprit is increased regulation on financial institutions. These regulations were enacted to protect against another financial crisis, but some are overly-broad and redundant, resulting in a dramatic increase in compliance burden for financial institutions, felt most heavily by regional and community lenders. One particularly troublesome example is Basel III risk-based capital requirements for lenders. 

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Basel III was implemented in January 2015, creating a new risk-based capital category for “High Volatility Commercial Real Estate Exposures” (HVCRE), for commercial acquisition, development, and construction (ADC) loans. It raised the risk-weight for those loans from 100% to 150%, increasing their cost for lenders and generally making commercial real estate loans less attractive than other types with lower risk-weights. Additionally, the rule is vague which has led to lender confusion about implementing it.   

The 115th Congress has taken steps to remedy this burden, via bills to reform and narrowly tailor regulations to their objectives.  One example, which passed the House and the Senate (as part of a larger package) is HR 2148, the “Clarifying Commercial Real Estate Loans Act,” which addresses issues with Basel III risk-based capital requirements for lenders.    

Rep. Pittenger (R-NC) introduced HR 2148, which clearly defines both “HVCRE ADC” loans and the exemptions. “HVCRE ADC” loans are those which primarily finance ADC projects; provide financing for acquiring, developing, or improving real estate into income-producing; and depend on future income, sales, or proceeds from the property to repay the loan.  Exemptions are ADC loans for 1-4 family residential; real estate investments in community development or agricultural land; acquisition, refinancing, or improving existing income-producing real estate secured by a mortgage on that property if the cash flow is enough to support its debt services and expenses; and commercial real estate with a loan-to-value ratio meeting requirements set by the federal banking agencies and contributed capital of at least 15% of the property’s appraised “as completed” value.  It also clarifies that loans placed into service prior to 2015 are exempt.

HR 2148 passed the House Financial Services Committee by a bipartisan vote of 59-1, and then passed by the House of Representatives by a voice-vote.  A Senate companion bill, S. 2405, was introduced by Senators Cotton (R-AR) and Jones (D-AL), and it was added by amendment to S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which passed the Senate by a vote of 67-31 in March.  NAR supports this important legislation, and will continue to advocate for it as the House and Senate work together toward final passage into law of this common-sense regulatory relief for lenders.

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