What’s Next for the New HVCRE Rules?

Alston & Bird Partner Gregg Loubier discusses two initiatives proposed to simplify and clarify the real estate lending process, both of which lenders and federal regulators hope to resolve in 2018.
Gregg Loubier, Alston & Bird
Gregg Loubier, Alston & Bird

With the 2017 legislative session coming to an end, real estate lenders are hoping for clarity and simplification of the real estate lending process next year. H.R. 2148 was proposed to clarify High Volatility Commercial Real Estate (HVCRE) loan rules and passed the House, but no further progress has been made on the bill. After many banks noted the complexity and ambiguity of the HVCRE rules, federal regulators then introduced the High Volatility Acquisitions, Development and Construction (HVADC) exposure proposal to further simplify the rules, and the proposal is currently open for comments until Dec. 26. If the new proposal goes into effect, it would replace the current HVCRE legislation.

According to this new rules, traditional lenders would conduct a simpler evaluation to establish whether a credit exposure qualifies as an HVADC loan. The key aspect of this new initiative is the elimination of the 15 percent capital contribution for borrowers.

Gregg Loubier, a partner of Alston & Bird’s finance group, weighed in on the latest proposal for HVCRE regulations and what to expect going forward.

The H.R. 2148 bill passed and now moves to the Senate. What can you tell us about the process so far?

Loubier: The House bill was referred to the Senate Committee on Banking, Housing and Urban Affairs on Nov. 8. No other activity has been reported out of that committee as of today. 

How do you predict the next stage will unfold? Do you think there will be any changes brought to the bill?

Loubier: One legislative observer group, Skopos Labs, is predicting that the bill has a 31 percent chance of passage. The ProPublica website is not reporting any material comments on the bill by members of Congress since its passage in the House. The Congressional Budget Office scored the bill a few days before passage in the House and concluded that the bill would not affect government revenues or deficits and would have a minute impact on bank reserves, which is a positive report, but may suggest that the bill is more important to the real estate and real estate finance industry than to lawmakers.

When do you expect the bill to be signed into law?

Loubier: It’s challenging to know for certain and no clear timeline has been set.     

How is the confusion regarding HVCRE regulations impacting the lending environment today?

Loubier: The construction phase of the real estate economy is continuing. HVCRE regulations and the ambiguities in their application increase burdens on regulated banks, to some extent unnecessarily due to the need for further clarification of the rules, which curtails bank acquisition, development and construction (ADC) lending, and shifts some market advantage to non-regulated lenders, limiting the supply of ADC financing and increasing finance costs to borrowers. Clarifying the HVCRE rules under H.R. 2148 would help eliminate a burden on ADC lending and level the playing field for banks and non-bank ADC lenders, without any fiscal impact that may provide a minor stimulus to the construction economy. 

What other factors are influencing real estate lending today?

Loubier: Inbound foreign investment in real estate equity and debt remains an important driver in real estate investment and finance.  

How do you see the capital markets sector going forward?

Loubier: We can expect relative strength and stability in real estate finance markets for 2018, tempered by caution given the late stage of this mature growth cycle, expectations of higher interest rates generally, and the mixed impact of a possible tax cut that will add stimulus to an economy with full employment and possibly prompt imposition of restraints by the Federal Reserve down the road.   

Image courtesy of Alston & Bird