[House Report 115-392]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-392
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CLARIFYING COMMERCIAL REAL ESTATE LOANS
_______
November 6, 2017.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 2148]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2148) to amend the Federal Deposit Insurance Act
to clarify capital requirements for certain acquisition,
development, or construction loans, having considered the same,
report favorably thereon with amendments and recommend that the
bill as amended do pass.
The amendments (stated in terms of the page and line
numbers of the introduced bill) are as follows:
Page 2, line 7, strike ``(as defined'' and all that follows
through ``this section)'' and insert the following: ``(as such
term is defined under section 324.2 of title 12, Code of
Federal Regulations, as of October 11, 2017, or if a successor
regulation is in effect as of the date of the enactment of this
section, such term or any successor term contained in such
successor regulation)''.
Page 2, line 19, strike ``finances or has financed'' and
insert ``primarily finances, has financed, or refinances''.
Page 3, line 17, after ``property'' insert ``, if the cash
flow being generated by the real property is sufficient to
support the debt service and expenses of the real property, as
determined by the depository institution, in accordance with
the institution's applicable loan underwriting criteria for
permanent financings''.
Purpose and Summary
Introduced by Congressman Robert Pittenger (NC-09) on April
26, 2017, H.R. 2148, the ``Clarifying Real Estate Loans'',
amends the Federal Deposit Insurance Act'' would clarify
capital requirements for certain acquisition, development, or
construction (ADC) loans classified as high-volatility
commercial real estate (HVCRE), including which types of loans
should and should not be classified as HVCRE loans.
Background and Need for Legislation
In response to the 2008 financial crisis, the Basel
Committee on Banking Supervision (Basel Committee) agreed to
modify internationally negotiated bank regulatory standards
known as the Basel Accords, to increase bank capital
requirements. On July 9, 2013, the federal banking regulators,
including the Federal Reserve, Federal Deposit Insurance
Corporation (FDIC), and the Office of the Comptroller of the
Currency (OCC), issued a final rule to implement most of the
Basel III recommendations, including modifications to capital
requirements.
The Basel III final rule applies to all banks and bank
holding companies domiciled in the United States, with some
exceptions, and went into effect on January 1, 2014, for the
for the U.S. systemically important banking organizations, and
on January 1, 2015, for all other banks.
Basel III imposes new rules for high volatility commercial
real estate (HVCRE), which the regulations characterize as
loans that finance the acquisition, development or construction
(ADC) of real property. Loans that finance the acquisition,
development and construction of one to four family residential
properties, projects that qualify as community development
investment and loans to businesses or farms with gross revenue
exceeding $1,000,000 are exempt from the HVCRE classification.
All loans that meet the definition of HVCRE are reported
separately from other commercial real estate (CRE) loans and
are also assigned a risk weighting of 150% for risk-based
capital purposes. Prior to January 1, 2015, a CRE loan would
have typically been assigned a risk weighting of 100%. In
addition HVCRE loans are to be reported separately from other
CRE. Prior to the HVCRE rule banks could hold 8% of the value
of the loans to alleviate risk, but under the rule are now
required to hold 12%.
In September 2017, the OCC, FDIC and Federal Reserve
proposed a rule that attempted simplify the regulatory capital
calculations for HVCRE. The proposal would change the current
definition of HVCRE and replace it with a new definition
related to high volatility acquisition, development, or
construction loans (HVADC).
The Committee adopted an amendment offered by Rep. Carolyn
Maloney to simplify the capital rules to define what
constitutes a HVCRE ADC loan, and broadens the types of equity
that can be used to meet its capital requirements. This
clarification will reduce the cost to finance these loans, and
promote economically responsible CRE lending.
In a letter of support for H.R. 2148 dated October 10,
2017, the Real Estate Roundtable wrote:
[H.R. 2148] helps address concerns regarding the
Basel III HVCRE rules by amending the Federal Deposit
Insurance Act to clarify the certain requirements for
certain acquisition, development, or construction loans
(ADC).
The lack of clarity in the Rule and subsequent HVCRE
Frequently Asked Questions (FAQs) published by the
agencies on March 31, 2015 has resulted in a wide
disparity in how banks classify their ADC portfolios as
HVCRE or non-HVCRE. This result has negatively impacted
ADC loan decisions for some banks, leaving some
borrowers with fewer and potentially more costly
sources of ADC loan capital. The legislation would
clarify and modify the HVCRE rules to ensure that they
are appropriately calibrated and do not impede credit
capacity or economic activity, while still promoting
economically responsible commercial real estate
lending.
Hearings
The Committee on Financial Services, Subcommittee on
Financial Institutions and Consumer Credit held a hearing
examining matters relating to H.R. 2148 on July 12, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
October 11, 2017 and ordered H.R. 2148 to be reported favorably
to the House as amended by a recorded vote of 59 yeas to 1 nays
(Record vote no. FC-89), a quorum being present. Before the
motion to report was offered, the Committee adopted an
amendment offered by Ms. Maloney by voice vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House as amended. The motion
was agreed to by a recorded vote of 59 yeas to 1 nays (Record
vote no. FC-89), a quorum being present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 2148
will ease FDIC capital requirements by providing for the
easement of High Volatility Commercial Real Estate designations
that were created by Basel III requirements.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 6, 2017.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2148, the
Clarifying Commercial Real Estate Loans.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Sarah Puro.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 2148--Clarifying Commercial Real Estate Loans
H.R. 2148 would revise the current requirement that banks
hold more capital for high-volatility commercial real estate
(HVCRE) loans. HVCRE loans are a subset of acquisition,
development, and construction (ADC) loans, which banks make to
borrowers who wish to purchase and improve real property. Under
the bill, regulators could permit banks to hold between 8
percent and 10.4 percent of capital for certain new HVCRE loans
instead of the 10.4 percent proposed by bank regulators. The
effect of H.R. 2148 would be to exempt loans from the increased
capital requirements if borrowers contribute resources, land,
or property that is worth at least 15 percent of the appraised
value of the financed property. Those loans are called
contributed capital loans.
The bill would apply only to new HVCRE loans. Banks do not
currently report the value of contributed capital loans to
regulators, so the value of new loans subject to the exemption
is uncertain. In addition, depending on future regulations,
banks might change the way they structure those loans, or, if
the capital requirements were perceived as too onerous, banks
might stop making such loans altogether.
On the basis of publicly available data from bank balance
sheets, CBO estimates that banks currently hold about $315
billion in ADC loans, which amounts to about 2 percent of their
total assets. In CBO's baseline projections, bank assets grow
by roughly 5 percent each year over the 2018-2027 period. CBO
expects that the value of ADC loans will grow in line with
other assets and thus ADC loans would constitute roughly 2
percent of those additional assets.
Banks now must hold 8 percent of the value of ADC loans
that are not determined to be HVCRE loans in capital reserves.
Under regulations proposed in September, banks would need to
increase the reserve amount to 10.4 percent for loans that were
subject to the additional-capital requirement.\1\ CBO estimates
that about one-quarter of ADC loans are exempt from the
additional-capital requirement because they finance
construction of properties that include between one and four
family residences. Because it is unknown whether that new rule
will become final under current law, CBO has assigned a 50
percent chance that the capital reserve requirement will
increase to 10.4 percent for those loans for the purpose of
estimating future reserve requirements in its baseline.
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\1\Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Office of the Comptroller of the
Currency, ``Agencies Propose Simplifying Regulatory Capital Rules,'' NR
2017-111 (press release, September 27, 2017), https://go.usa.gov/xnT6j.
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CBO estimates that, under the bill, banks' total capital
reserves would be diminished by less than one one-thousandth of
a percent (0.001 percent) relative to their reserves under
current law.\2\ Changes in the amount of capital that a bank
holds can affect its probability of failure, which in turn can
impose costs on the Deposit Insurance Fund (administered by the
Federal Deposit Insurance Corporation). Those costs are
recorded in the budget as increases in direct spending.
However, because that estimated change is so small, CBO expects
that there would be a very small probability of an increase in
bank defaults resulting from the bill. Thus, CBO estimates that
enacting H.R. 2148 would not have a significant effect on
direct spending over the 2018-2027 period.
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\2\The estimated change in capital reserve requirements equals: 2
percent of new bank assets (for ADC loans) 75.0 percent (to
exclude construction loans that include between one and four family
residences) 2.4 percent (the decrease in capital required
under the bill relative to the proposed rule) 50.0 percent
(because of the uncertainty about the proposed increase in the reserve
requirement under current law), divided by 100 percent of the banks'
total capital reserves.
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Because enacting the bill would affect direct spending,
pay-as-you-go procedures apply. Enacting the bill would not
affect revenues.
CBO estimates that enacting H.R. 2148 would not
significantly increase net direct spending or on-budget
deficits in any of the four consecutive 10-year periods
beginning in 2028.
H.R. 2148 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA).
H.R. 2148 could impose a private-sector mandate, as defined
in UMRA. A mandate would not occur if regulations proposed by
the Federal Reserve in September were to become final because
this bill would narrow the population of banks affected by
capitalization requirements. If, however, the regulations are
not finalized, the bill would broaden the population of banks
affected by requirements relative to current law. In that case,
some banks would need to meet higher capital requirements.
Because of uncertainty about how those banks would respond and
the lack of data about the value of new loans, CBO is unable to
determine whether the costs of a private-sector mandate under
such scenario would exceed the threshold established in UMRA
($156 million in 2017, adjusted annually for inflation).
The CBO staff contacts for this estimate are Sarah Puro
(for federal costs) and Rachel Austin (for mandates). The
estimate was approved by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This Section cites H.R. 2148 as ``Clarifying Commercial
Real Estate Loans.''
Section 2. Capital requirements for certain acquisition, development or
construction loans
This Section amends the Federal Deposit Insurance Act to
prescribe capital requirements as related to certain
acquisition, development, or construction loans. This Section
requires Federal Reserve, Federal Deposit Insurance Corporation
(FDIC), and the Office of the Comptroller of the Currency (OCC)
only subject a depository institution to higher capital
standards with respect to an HVCRE exposure (as defined under
section 324.2 of title 12, Code of Federal Regulations, as in
effect on October 11, 2017, and any successive regulations
after the date of the enactment of this section) if such
exposure is an HVCRE ADC loan.
This Section also clarifies the definition of an HVCRE ADC
loan to include secured real property loans that primarily
finances, has financed, or refinances ADC, and where repayment
is dependent upon future income and sale proceeds of such
property.
This Section adds an exemption from HVCRE classification
for loans that finance one to four family residential
properties; projects that qualify as community development
investment and loans to businesses; agricultural loans;
refinancing or acquiring an existing, income producing property
so long as it is producing sufficient income to cover debt
service payments; CRE projects in which the loan-to-value ratio
is less than or equal to the applicable maximum amount, the
borrower has contributed capital in the form of cash or
unencumbered readily marketable assets of at least 15 percent
of the project's as completed value, and the borrower has
contributed the amount of capital required above before the
lender advances funds, and such capital contributed by the
borrower, or internally generated by the project, is
contractually required to remain in the project throughout the
life of the project (concluding only when the loan is converted
to permanent financing, is sold or is paid in full); and loans
made prior to Jan. 1, 2015.
The appraised value of any real property, including land,
may count towards the 15 percent contributed capital
requirement, as long as it meets statutory requirements
prescribed pursuant to section 1110 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989.
An ADC loan may be deemed a non-HVCRE ADC loan once the
project is completed and cash flow being generated by the real
property is sufficient to support the debt services and
operating expenses of the real property, and the project meets
underwriting requirements for permanent financing.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
FEDERAL DEPOSIT INSURANCE ACT
* * * * * * *
SEC. 51. CAPITAL REQUIREMENTS FOR CERTAIN ACQUISITION, DEVELOPMENT, OR
CONSTRUCTION LOANS.
(a) In General.--The appropriate Federal banking agencies may
only subject a depository institution to higher capital
standards with respect to a high volatility commercial real
estate (HVCRE) exposure (as such term is defined under section
324.2 of title 12, Code of Federal Regulations, as of October
11, 2017, or if a successor regulation is in effect as of the
date of the enactment of this section, such term or any
successor term contained in such successor regulation) if such
exposure is an HVCRE ADC loan.
(b) HVCRE ADC Loan Defined.--For purposes of this section and
with respect to a depository institution, the term ``HVCRE ADC
loan''--
(1) means a credit facility secured by land or
improved real property that, prior to being
reclassified by the depository institution as a Non-
HVCRE ADC loan pursuant to subsection (d)--
(A) primarily finances, has financed, or
refinances the acquisition, development, or
construction of real property;
(B) has the purpose of providing financing to
acquire, develop, or improve such real property
into income-producing real property; and
(C) is dependent upon future income or sales
proceeds from, or refinancing of, such real
property for the repayment of such credit
facility;
(2) does not include a credit facility financing--
(A) the acquisition, development, or
construction of properties that are--
(i) one- to four-family residential
properties;
(ii) real property that would qualify
as an investment in community
development; or
(iii) agricultural land;
(B) the acquisition or refinance of existing
income-producing real property secured by a
mortgage on such property, if the cash flow
being generated by the real property is
sufficient to support the debt service and
expenses of the real property, as determined by
the depository institution, in accordance with
the institution's applicable loan underwriting
criteria for permanent financings;
(C) improvements to existing income-producing
improved real property secured by a mortgage on
such property, if the cash flow being generated
by the real property is sufficient to support
the debt service and expenses of the real
property, as determined by the depository
institution, in accordance with the
institution's applicable loan underwriting
criteria for permanent financings; or
(D) commercial real property projects in
which--
(i) the loan-to-value ratio is less
than or equal to the applicable maximum
supervisory loan-to-value ratio as
determined by the appropriate Federal
banking agency; and
(ii) the borrower has contributed
capital of at least 15 percent of the
real property's appraised, ``as
completed'' value to the project in the
form of--
(I) cash;
(II) unencumbered readily
marketable assets;
(III) paid development
expenses out-of-pocket; or
(IV) contributed real
property or improvements; and
(iii) the borrower contributed the
minimum amount of capital described
under clause (ii) before the depository
institution advances funds under the
credit facility, and such minimum
amount of capital contributed by the
borrower is contractually required to
remain in the project until the credit
facility has been reclassified by the
depository institution as a Non-HVCRE
ADC loan under subsection (d);
(3) does not include any loan made prior to January
1, 2015; and
(4) does not include a credit facility reclassified
as a Non-HVCRE ADC loan under subsection (d).
(c) Value of Contributed Real Property.--For purposes of this
section, the value of any real property contributed by a
borrower as a capital contribution shall be the appraised value
of the property as determined under standards prescribed
pursuant to section 1110 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (12 U.S.C. 3339), in
connection with the extension of the credit facility or loan to
such borrower.
(d) Reclassification as a Non-hvcre ADC Loan.--For purposes
of this section and with respect to a credit facility and a
depository institution, upon--
(1) the completion of the development or construction
of the real property being financed by the credit
facility; and
(2) cash flow being generated by the real property
being sufficient to support the debt service and
expenses of the real property,
in either case to the satisfaction of the depository
institution, in accordance with the institution's applicable
loan underwriting criteria for permanent financings, the credit
facility may be reclassified by the depository institution as a
Non-HVCRE ADC loan.
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