On September 18, 2018, the Federal Reserve, FDIC and OCC released a Notice of Proposed Rulemaking (NPR) regarding HVCRE. The good news is that the stated intent is not to alter any of the improvements made by EGRRCPA, instead the agencies describe the proposed rulemaking as conforming the regulatory capital rule to the new statutory definition of HVCRE ADC and providing interpretations of certain terms consistent with their usage in other regulations. This is good news indeed. We were somewhat concerned that the regulatory state in full might try to steal some back here, but they seem to have gotten the message.
There are a few immediate takeaways from the NPR – namely, HVADC is dead and that the test for whether a loan qualifies as an HVCRE ADC exposure occurs only once – at origination. So, after origination, you can fall out of HVCRE ADC (with the new reclassification provisions) but you can’t fall into HVCRE ADC.
Embracing hubris, perhaps, we’d like to think the agencies are readers of Crunched Credit. They certainly address many of the provisions we highlighted in our prior commentary. Here are some of the highlights:
Crunched Credit: What does “primarily finances” mean?
NPR: The agencies request comment on whether the term[] … “primarily finances,” … [is] clear or whether further discussion or interpretation would be needed.
Crunched Credit: When is development “substantially” complete?
NPR: The agencies invite comment on whether [substantial completion of construction] is ambiguous or needs interpretation? The agencies invite comment on what, if any, operational challenges would banking organizations generally expect when determining whether an HVCRE exposure under the proposed revised definition can be reclassified as a non-HVCRE exposure?
Crunched Credit: What is the “cash flow” test?
NPR: The agencies invite comment on what, if any, operational challenges would banking organizations generally expect when determining whether an HVCRE exposure under the proposed revised definition can be reclassified as a non-HVCRE exposure?
Crunched Credit: It’s clear that HVCRE ADC supersedes the old rule for loans made after May 24, 2018 (and provides grandfathering for loans made prior to January 1, 2015), but it’s unclear what it does to loans made from January 1, 2015 – May 24, 2018. Are these loans now subject to HVCRE ADC for re-classification? We would like for clarity (although maybe we already have it) that the new HVCRE ADC applies to those loans as well.
NPR: For ADC exposures issued on or after January 1, 2015, banking organizations would follow the interagency statement that permits them to either apply the statute on a best efforts basis or classify HVCRE ADC exposures according to the superseded definition until the final rule is effective. The agencies invite comment as to whether the final rule should require reevaluation of ADC loans originated on or after January 1, 2015 under the revised HVCRE exposure definition. What are the advantages and disadvantages of requiring reevaluation? What alternative treatments, if any, should the agencies consider?
Crunched Credit: Can mezzanine debt and preferred equity count for the 15% Borrower equity contribution test?
NPR: The agencies invite comment on whether their proposed interpretation of the 15 percent contributed capital exclusion is appropriate and clear or whether further discussion or interpretation would be appropriate. What other issues, if any, relating to the contributed capital exclusion require interpretation?
Well, glad you asked! As with the last rodeo, the public will have 60 days from the date the rule is published in the Federal Register to comment. It has not been published yet, but rest assured readers, we are watching the FedReg for it and will post an update once the comment period begins.
Review our archive of commentary for more background on HVCRE ADC and EGRRCPA. Better yet – we make house calls! We would be happy to do a teach-in or host a Q&A session on the changes. Please let us know if that would be helpful and we’d be happy to set up a time! And- stay tuned for further commentary as we digest the posed questions and consider potential responses.