Clarifying Commercial Real Estate Loans

To amend the Federal Deposit Insurance Act to clarify capital requirements for certain acquisition, development, or construction loans. 1. Short title This Act may be cited as Clarifying Commercial Real Estate Loans 2. Capital requirements for certain acquisition, development, or construction loans The Federal Deposit Insurance Act is amended by adding at the end the following new section: 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 (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 (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. .

Summary: Clarifying Commercial Real Estate Loans This bill amends the Federal Deposit Insurance Act to specify that a federal banking agency may not subject a depository institution to higher capital standards with respect to a high-volatility commercial real-estate (HVCRE) exposure unless the exposure is an HVCRE acquisition, development, or construction (ADC) loan. An HVCRE ADC loan is a one that: (1) is secured by land or improved real property; (2) has the purpose of providing financing to acquire, develop, or improve the real property such that the property becomes income-producing; and (3) is dependent upon future income or sales proceeds from, or refinancing of, the real property for the repayment of the loan. An HVCRE ADC loan does not include financing for a one- to four-family residential property, agricultural land, real property that would qualify as an investment in community development, existing income-producing real property secured by a mortgage, or certain commercial real-property projects. Furthermore, such a loan does not include any loan made prior to January 1, 2015. A depository institution may reclassify a loan as a non-HVCRE ADC loan if the depository institution is satisfied that: (1) the acquisition, development, or improvement of real property being financed by the loan is complete; and (2) the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property.