On September 27, 2017, the Federal Reserve, FDIC and OCC released a Notice of Proposed Rulemaking (NPR) that they describe as simplifying compliance with certain aspects of the agencies’ risk based capital (RBC) rules to, among other things, replace the standardized approach’s (SA) treatment of HVCRE loans with a simpler treatment for most acquisition, development or construction (ADC) loans called high volatility acquisition, development or construction (HVADC). Spoiler alert: it just replaces vague and confusing rules with a slightly different set of vague and confusing rules.
Continue Reading Yakety Yak – Talk Back: Regulators Respond to HVCRE Complaints

Or perhaps Prometheus had it right in its original form. “Whom the Gods would destroy they first make mad.”  Look at what we are doing to construction lending in the name of our seemingly endless safety and soundness crusade.

Under the new regulatory capital rules, we have a new asset class; HVCRE or High Volatility Commercial Real Estate.  HVCRE includes acquisition, developments and construction loans.  These loans are assigned a risk rating of 150% of the basic risk rating for commercial real estate.  Now, to be fair there are limitations and exceptions to the type of loans that attract this higher regulatory capital requirement, but those are somewhat at odds with the realities of the market.  Just by way of a few examples, to avoid HVCRE status the borrower must have 15% cash equity.  The rules about what is and what is not cash equity are artificially restrictive and not in all respects in accord with the market practice.  So-called soft costs count but appreciation in the value of the real estate is disregarded; only cash paid at acquisition counts.  As a property is held for longer and longer, this makes increasingly little sense.  Why is land value equity any less real than cash invested for so-called soft costs?  I have never met a developer without a fabulist view of what should be counted as soft costs.  Please, I’ll take real live equity in the dirt any time.  Also, for reasons which are entirely obscure, one cannot count the borrowers’ other free and clear assets, letters of  credit, cash or unencumbered readily marketable securities held on account of the borrower.  Also neither preferred equity nor subordinated debt counts.
Continue Reading Whom the Gods Would Destroy, They First Make Meet A Higher Regulatory Capital Burden