‘High volatility’ rules irk banks

Christopher Rosenbleeth, the law firm Stradley Ronon’s real estate chair, received some unusual news from a bank in 2015. The prospective lender on a mixed-use development in Pennsylvania told him that it would not continue pursuing the deal, because it was too valuable.

“The lender called me up and said, ‘We’re sorry but the deal is dead, we can’t go forward with it. The appraisal came back too high,’” Rosenbleeth recalled.

The pullback was the result of a new set of regulations on “high volatility commercial real estate” (HVCRE), which many in the banking and real estate industries now want Congress to overhaul. The regulations, under Basel III, require banks to keep 50 percent more cash on hand when commercial real estate investors put less than 15 percent equity into a construction or acquisition deal.

The intent of the HVCRE rules — which went into effect on Jan. 1, 2015 — has been to curtail risky debt deals following the 2008 financial crisis. But industry lobbyists have been pushing Congress to loosen those restrictions, so that traditional lenders can more easily finance commercial properties and development sites.

The Commercial Real Estate Finance Council (CREFC), one of Washington’s top real estate interest groups, is backing a bill that would drastically reform the bank regulations. The legislation is expected to reach the floor of the House of Representatives in the coming weeks.

The new bill, which includes a key amendment by New York Democratic Rep. Carolyn Maloney, would shrink the pool of loans that regulators could stamp with the HVCRE mark and reduce the capital requirements for banks that want to finance so-called high volatility assets. That includes ground-up construction projects, which are often seen as the riskiest for banks to lend on.

Since the U.S. economic recovery began, construction lending in New York City and other top markets has not sustained the rate of growth that many had anticipated. At an October Federal Reserve meeting, officials noted that “the growth of commercial real estate loans on banks’ books continued to moderate in July and August, reflecting a slowdown in lending.” Of course, there are several factors driving that, including a more cautious approach among banks to lending. But many in the real estate industry say the HVCRE regulations — which also put restraints on how much cash a developer can withdraw from a project before it’s sold — aren’t helping.

“It pushed a number of banks out of the business,” said David Eyzenberg, founder of the eponymous Manhattan-based debt brokerage. “It reduced the leverage that was available, and it also opened the door for nontraditional, nonregulated lenders.”

That includes large firms such as Starwood and Blackstone that are not burdened by the regulations.

Christina Zausner, vice president of industry and policy analysis at CREFC, said she was optimistic about the HVCRE reform bill’s prospects to pass in the House and later in the Senate after it breezed through the House Financial Services Committee with a 59-1 vote in mid-October. Ultimately, though, it will be up to the Senate Banking Committee to decide if the bill is worth its time in an agenda-heavy year.

Among other interest groups, the Conference of State Bank Supervisors — an organization of banking regulators from all 50 states — has urged the committee’s chair to take up the issue this year. The group wrote in an April letter to Idaho Republican Sen. Mike Crapo that the “complexity of the rules requires institutions to redirect resources that could otherwise be employed to serve the financial needs of their communities.”

If the legislation fails to pass both chambers, federal banking regulators have a plan of their own. The Federal Reserve, Office of the Comptroller of the Currency and FDIC have proposed regulations that would reduce the capital requirements imposed on banks but expand the category of loans that could be considered high volatility, according to a CREFC analysis of the proposal.

Zausner, however, said the legislation her organization is backing would likely supersede the proposed regulations from the government bodies.

It’s a situation that in many ways mirrors the uncertainty surrounding the EB-5 visa program. EB-5 is also being pulled in two different directions: one in the form of draft legislation and the other in the form of looming regulations that were first put into motion by the Obama administration.

But for now, the banking and real estate industries have, in many ways, learned to live with the HVCRE rules.

“There was an adjustment period,” Rosenbleeth said, but “people adapted.”