During a Sageworks webinar on HVCRE risk management Rob Ashbaugh, senior risk management consultant at Sageworks, 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.
In light of the lower risk rating, but broader application of this rule, the summary provides a word of caution:
“As a result of this proposal, certain new ADC exposures that would have been considered HVCRE may receive a lower risk weight going forward than they would have received under the current rule (130 percent, rather than 150 percent). However, other new ADC exposures that would not have been considered HVCRE may receive a higher risk weight (130 percent, rather than 100 percent). Banking organizations are advised to carefully analyze their underwriting criteria to appropriately assess the net effect that this proposal would have on their ADC lending activity and the resulting regulatory capital consequences.”
The Summary goes on to state that the new rule would only apply to credits originated on or after the effective date of the final rule.
The Summary also provides detailed clarifications on key terms, such as the scope of the rule and remaining exceptions, such as 1-4 Family Residential Properties, Community Development Loans, Permanent Loans and Purchase or Development of Agricultural Land.