UPDATED, May 24, 3:59 p.m.: Nearly a decade after bad real estate loans helped thrust the U.S. economy into a major recession, the House of Representatives passed a bill to roll back a number of regulations for banks. The changes, experts said, could become a catalyst for increased commercial real estate lending, opening up many new sources of funding to developers.
On Tuesday, the House voted 258-159 in favor of a bipartisan regulatory relief bill that would remove some provisions of the 2010 Dodd-Frank Act, which was created in the aftermath of financial crisis. It follows the passage of a similar Senate bill that passed in March.
The bill, which Trump signed Thursday, reduces some regulatory burdens for community and regional banks. These banks have long argued that Dodd-Frank has been too costly and unfairly burdensome, maintaining that it was Wall Street and major banks that were responsible for the toxic lending that led to the financial crisis, not smaller lenders.
The legislation will leave a dozen big banks in the U.S. under stricter federal oversight, relaxing restrictions on thousands of lenders with less than $250 billion in assets.
Changes in the bill pertaining to a type of commercial real estate loan could increase the number of banks lending to some commercial projects. In theory, this would be great news for developers who are looking to finance a restaurant or hotel since it means they have more access to capital at potentially lower rates than what is currently available.
“The number of lenders will increase and a few more banks will step into the game,” said Heidi Learner, chief economist at Savills Studley, a commercial brokerage. “In general, when there is more supply you would expect there to be lower costs.”
Learner said one major change in the bill pertains to certain type of commercial real estate loans known as “High Volatility Commercial Real Estate” loans.
These loans, which are used for the acquisition, development or construction of some real estate projects, are deemed to be riskier by regulators. As a result, banks are required to reserve more capital, which is also more costly for banks.
“It made the cost of financing those loans that much more expensive because they had to hold more capital,” Learner said.
But the new proposed rules clarify when banks are able to reclassify a HVCRE loan to a non-HVCRE loan, which have lower capital set asides. This could potentially result in cheaper rates for developers in the market for funds.
The new bill also revised a provision where commercial borrowers are required to put down 15 percent equity, which could be done through an appreciated value of a property versus a cost basis under Dodd-Frank.
Douglas Stanford, a Miami-based commercial transactions and finance attorney, said some of the new rule changes in the bill could result in banks stepping in to lend to more small commercial projects.
As some banks have backed away from lending in this space over the past few years, private equity has filled the void. Generally, however, private equity charges a higher rate than what traditional banks offer, Stanford noted.
“Many banks have been discouraged from making commercial real estate loans,” he said. “Those same players can possibly get another shake out of this…. And you might see banks getting some of the business back.”
Too big to fail
Another major revision the bill calls for is increasing the threshold at which banks are designated “systemically important financial institution (SIFI)” – also known as “too big to fail.”
The rule was designed so that regulators can keep a closer eye on large financial institutions’ capital levels, since their failure could have a ripple effect on the global economy. Under Dodd-Frank, banks with $50 billion in assets or above were deemed as a “SIFI” and faced tougher regulations, including annual “stress tests.”
But the new law would increase this threshold from $50 billion in assets to $250 billion in assets, meaning that about 40 banks between $50 billion and $250 billion in assets could lend and grow more without having to worry about increased regulations. Only 12 banks would still meet this classification, but many of them have found a back door into the commercial real estate lending game.
As a result, mid-sized banks such as Miami Lakes-based BankUnited, which has over $30 billion in assets, can grow their real estate loan portfolio without having to worry about additional regulatory burdens. So too, potentially, could Bank of the Ozarks, which with just $22 billion in assets as of 2017 is South Florida’s most active condominium construction lender and one of the most active lenders in the New York market.
For banks nearing the $50 billion in asset mark, “it eliminates one concern when looking at growth and planning,” said Russell Hughes, of the real estate data provider Trepp.
Hughes said that the changing designation “could potentially spur M&A mergers and acquisitions.” Meaning that banks that might have been concerned about growing larger could now start acquiring more banks.
While many developers will likely turn their focus on how this new bill will impact commercial real estate, local bankers also see potential implications for residential lending.
In the House’s bill, banks under $10 billion in assets will no longer have to meet some of the same stringent mortgage underwriting requirements that larger banks do.
Since the financial crisis, many banks have stopped originating mortgages, claiming that regulations have made the line of business too costly. Nonbank financial institutions, including giants like Quicken Loans and LoanDepot, originated 48.3 percent all mortgages in the U.S. in 2016, up from 30 percent in 2012, according to a recent paper by researchers from the Federal Reserve Board and the University of California, Berkeley.
But that could change if the rollback bill becomes law.
“One of the most significant reforms is on residential mortgages,” Keith Costello, CEO of Orlando-based First Green Bank, which has over $730 million in assets, wrote in an email. “Community banks will be exempt from ability to repay laws (congressional underwriting) on loans we hold in our portfolios. This will allow us to ramp up residential lending using our own standards and risk parameters for loans we hold.”
This story has been updated to reflect that the bill’s HVCRE capital requirements would not decrease by 50%, but could clarify when a bank could reclassify a HVCRE loan to a non-HVCRE loan, which have lower capital set asides.