The federal prudential banking regulatory agencies have revised their 2018 proposal on the capital treatment of high volatility commercial real estate loans to include loans for developing one-to-four family residential properties. Under the proposal, loans would receive different treatment depending on whether they finance the construction of residential buildings.
A 2018 proposed rule on the capital treatment of high volatility commercial real estate (HVCRE) loans would be broadened to cover loans that finance land development under a new joint proposal by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation. The original proposal was intended to conform the definition of HVCRE exposure in the agencies’ capital rules to the definition provided by the Economic Growth, Regulatory Reform, and Consumer Protection Act (see Banking and Finance Law Daily, Sept. 19, 2018).
Under EGRRCPA and the 2018 proposal, a "high volatility commercial real estate acquisition, development, or construction" loan is credit that:
- is secured by land or improved real estate;
- primarily provides financing for buying, developing, or improving real property;
- is intended to finance the conversion of that property into income-producing property; and
- is expected to be repaid by the future income, sale proceeds, or refinancing of the property.
The earlier proposal included an exemption from the HVCRE definition for credit financing the purchase, development, or construction of one-to-four family residences. It also asked for comments on whether "lot development loans" loans should be exempt.
Development loans. The new proposal uses the term "land development loans," which the agencies note already is defined in the instructions for Call Reports. Land development loans finance improvements to prepare land for construction, but they do not finance that construction.
The new proposal would include loans that include financing for construction in the exemption from HVCRE treatment, but not loans that finance only pre-construction improvements. These loans would be deemed to be HVCRE exposures. The different treatment is based on the risk posed by the loans and the capital that banks should hold against those risks. The treatment accorded to a loan would be determined when the loan was originated, the proposal also says.
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