Banks were told tax re­form would spur lend­ing. They’re still wait­ing

First the House and now the Se­nate have in­cluded pro­vi­sions in their reg­u­la­tory re­lief bills that bankers say would go a long way to­ward clear­ing up con­fu­sion over how to treat high-volatil­ity CRE loans.

National Mortgage News - - Contents - By Andy Peters

Con­struc­tion lend­ing by banks has been slug­gish for quite some time, but the reg­u­la­tory re­lief leg­is­la­tion that re­cently passed the Se­nate may help trig­ger a re­vival.

Among the many pro­vi­sions tucked into the bill that passed the Se­nate by a 67-31 mar­gin was one that aims to clear up con­fu­sion about how banks treat cer­tain con­struc­tion loans deemed high-risk by reg­u­la­tors.

The pro­posed changes to rules es­tab­lished by the Basel III reg­u­la­tory regime could help grease the skids for banks to make more con­struc­tion loans, since they’ll have a bet­ter idea what reg­u­la­tors want, said Christina Zaus­ner, the head of in­dus­try pol­icy and anal­y­sis at the CRE Fi­nance Coun­cil, a trade group that rep­re­sents com­mer­cial real es­tate lenders.

“It makes banks less afraid of hav­ing a dif­fer­ence of opin­ion with their ex­am­in­ers on” ac­quisi- tion, de­vel­op­ment and con­struc­tion loans, she said. “It en­sures a greater de­gree of con­sis­tency.”

The CRE Fi­nance Coun­cil is not tak­ing a po­si­tion on the leg­is­la­tion pend­ing in Congress.

An over­re­liance on con­struc­tion lend­ing was a key con­trib­u­tor to com­mu­nity bank fail­ures dur­ing the cri­sis, so Basel III put in place safe­guards that among other things, re­quired banks to set aside ex­tra cap­i­tal on con­struc­tion loans on which bor­row­ers are con­tribut­ing less than 15% of their own money and the loan-to-value ra­tio on a non­res­i­den­tial con­struc­tion project is higher than 80%.

But bankers have com­plained that the guide­lines on what reg­u­la­tors dubbed “high-volatil­ity com­mer­cial real es­tate loans” are overly con­fus­ing and have largely dis­cour­aged them from ex­tend­ing credit to these types of bor­row­ers. They have balked, too, at the reg­u­la­tion’s stiff capi- tal-re­serve re­quire­ment, ar­gu­ing that the cap­i­tal could be bet­ter used else­where.

To be sure, banks have scaled back on all types of con­struc­tion lend­ing since the fi­nan­cial cri­sis. At the end of 2017, con­struc­tion loans ac­counted for just 1.94% of the in­dus­try’s to­tal as­sets, down from nearly 5% a decade ago.

Still, the Basel rules on high-volatil­ity CRE loans kicked in at a time when the econ­omy was im­prov­ing and many banks seemed ready to slowly ramp up lend­ing for con­struc­tion projects.

Bankers say that the Basel lan­guage is so vague that they still aren’t sure what counts to­ward the cash con­tri­bu­tion and what types of loans should be deemed high-volatil­ity in the first place.

“The cur­rent high-volatil­ity com­mer­cial real es­tate reg­u­la­tions are com­plex and al­low for dif­fer­ent in­ter­pre­ta­tions of which ac­qui­si­tion, de­vel­op­ment and con­struc­tion loans fall un­der the HVCRE rules,” Kevin Mor­gi­son, con­sumer and com­mer­cial lend­ing man­ager at the $9 bil­lion-as­set Capi­tol Fed­eral Sav­ings Bank in Topeka, Kan., wrote in a Dec. 22 pub­lic com­ment let­ter.

The pro­posed leg­is­la­tion makes the def­i­ni­tion much clearer, said Kim Mauer, a bank­ing at­tor­ney at Frost Brown Todd, which has ad­vised First Fi­nan­cial Bank in Cincin­nati and other banks.

Specif­i­cally, it says that only the ap­praised value of the land, not what the bor­rower paid for the land, can count to­ward the bor­rower’s 15% con­tri­bu­tion. Bankers said that this has been a con­stant source of dis­agree­ment be­tween banks and reg­u­la­tors since the Basel rules took ef­fect.

The Se­nate bill also al­lows for some types of eq­uity, such as rent pay­ments, to be counted to­ward the 15%, so long as the pro­ceeds are re­main in the project and are not paid out as div­i­dends.

The House of Rep­re­sen­ta­tives in­cluded sim­i­lar pro­vi­sions in a more sweep­ing reg­u­la­tory re­lief bill it passed last sum­mer.

Though some bankers had hoped the leg­is­la­tion would go fur­ther — elim­i­nat­ing the re­quire­ment that bor­row­ers con­trib­ute cash at all, or low­er­ing the amount of cash needed, for ex­am­ple — oth­ers fully sup­port re­quir­ing bor­row­ers to have con­sid­er­able skin in the game.

“We be­lieve that re­quir­ing a 15% cash … con­tri­bu­tion prior to loan funds be­ing ad­vanced and con­trac­tu­ally re­quir­ing it to re­main through­out the project is pru­dent [ac­qui­si­tion, de­vel­op­ment and con­struc­tion] lend­ing,” Cindy McKim, se­nior vice pres­i­dent at the $ 1.1 bil­lion- as­set Kit­sap Bank in Port Or­chard, Wash., wrote in a com­ment let­ter.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.