CLARIFYING COMMERCIAL REAL ESTATE LOANS
(House of Representatives - November 07, 2017)

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[Congressional Record Volume 163, Number 181 (Tuesday, November 7, 2017)]
[Pages H8547-H8550]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                CLARIFYING COMMERCIAL REAL ESTATE LOANS

  Mr. HUIZENGA. Mr. Speaker, I move to suspend the rules and pass the 
bill (H.R. 2148) to amend the Federal Deposit Insurance Act to clarify 
capital requirements for certain acquisition, development, or 
construction loans, as amended.
  The Clerk read the title of the bill.
  The text of the bill is as follows:

                               H.R. 2148

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as ``Clarifying Commercial Real 
     Estate Loans''.

     SEC. 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:

     ``SEC. 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' 
     value to the project in the form of--

       ``(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

[[Page H8548]]

       ``(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), in connection with the extension of the 
     credit facility or loan to such borrower.
       ``(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.''.

  The SPEAKER pro tempore. Pursuant to the rule, the gentleman from 
Michigan (Mr. Huizenga) and the gentleman from Michigan (Mr. Kildee) 
each will control 20 minutes.
  The Chair recognizes the gentleman from Michigan (Mr. Huizenga).


                             General Leave

  Mr. HUIZENGA. Mr. Speaker, I ask unanimous consent that all Members 
may have 5 legislative days within which to revise and extend their 
remarks and include extraneous material on this bill.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Michigan?
  There was no objection.
  Mr. HUIZENGA. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, in response to the 2008 financial crisis, the Basel 
Committee on Banking Supervision, an organization that, frankly, most 
citizens might not have any idea exists, much less the effects and the 
influences on their banking lives, the Basel Committee on Banking 
Supervision agreed to modify internationally negotiated bank regulatory 
standards, known as the Basel Accords. This was going to increase bank 
capital requirements.
  On July 9, 2013, the Federal banking regulators here in the United 
States--including the Federal Reserve; the Federal Deposit Insurance 
Corporation, FDIC; and the Office of the Comptroller of the Currency, 
OCC--all issued a final rule to implement most of the so-called Basel 
III recommendations, including modifications to capital requirements.
  Basel III imposes new rules for high volatility commercial real 
estate, also known as HVCREs.
  Unfortunately, we have a lot of acronyms in the Financial Services 
space, but you will be hearing a lot about these HVCREs over the course 
of the next few minutes.
  These HVCRE rules are those which the regulations characterize as 
loans that finance the acquisition, development, or construction of 
real property. Loans that finance the acquisition, development, and 
construction of one- to four-family residential properties, projects 
that qualify as community development investment, and loans to 
businesses or farms with gross revenue exceeding $1 million are exempt 
from this HVCRE classification.
  In June of 2017, the Treasury Department released its first report in 
response to the President's February 2017 ``Core Principles for 
Regulating the United States Financial System,'' informing the 
administration's perspective to regulate the financial system. The 
report, entitled, ``A Financial System That Creates Economic 
Opportunities--Banks and Credit Unions,'' calls on regulators to 
simplify and clarify the definition of these HVCRE loans to avoid the 
application of excessively stringent postcrisis capital requirements 
and concentration limits related to such loans, but does not identify 
specific language and changes.
  Additionally, in September of this past year, the OCC, FDIC, and the 
Federal Reserve proposed a rule that attempted to simplify the 
regulatory capital calculations for these HVCREs. The proposal would 
change the current definition of HVCRE and replace it with a new 
definition related to high volatility acquisition, development, or 
construction loans. HVADC is what it has been dubbed.
  The complexity of the HVCRE definition and its uncertain application 
are making it difficult for banks to comply.
  While we appreciate the various banking agencies' attempt at 
simplifying the capital treatment of acquisition, development, and 
construction loans, their proposal actually broadens the number of 
loans subject to higher capital charge. This actually increases the 
amount capital banks will be required to carry for these ADC loans--
hardly a simplification.
  Increases in risk weighting on these loans have had a significant 
impact on institutions' capital ratios and, as a result, have increased 
costs to borrowers. If a loan is classified as an HVCRE loan, the 
lender will face a lower return on its capital as a result of the 
higher capital reserve requirement, meaning they are going to have to 
hold more capital. This will lead to increased pricing on the loan, 
including a higher interest rate for the borrower.
  H.R. 2148, Clarifying Commercial Real Estate Loans, introduced by my 
colleagues Representatives Pittenger and Scott, helps address the 
uncertainty related to the Basel capital rules and its impact on 
certain acquisition, development, or construction loans. The bill 
clarifies the types of loans that should and should not be classified 
as HVCREs and which types of equity can be used to meet capital 
requirements.
  Currently, that uncertainty is creating confusion and affecting 
commercial real estate ADC loans by increasing borrowing costs and 
reducing credit availability, which may be contributing to a slowdown 
in commercial real estate lending.
  I commend the bipartisan works of Representatives Pittenger and Scott 
on this important bill. Having passed the Financial Services Committee 
by an overwhelmingly bipartisan vote of 59-1, there is no reason that 
we shouldn't have the same overwhelming bipartisan support for H.R. 
2148 today.
  Mr. Speaker, I encourage all of my colleagues to vote in favor of 
H.R. 2148, and I reserve the balance of my time.

                              {time}  1430

  Mr. KILDEE. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, I also rise today to support H.R. 2148, and I want to 
start by thanking the gentleman from Georgia (Mr. David Scott) and the 
gentleman from North Carolina (Mr. Pittenger) for their work on this 
bipartisan legislation, a bill that deals with capital rules for 
commercial real estate loans, including acquisition, development, or 
construction loans.
  It is critical that Federal bank regulators maintain the strong 
capital rules that have been implemented after the enactment of Dodd-
Frank. These rules have made the U.S. financial system much safer, 
while protecting consumers, investors, and taxpayers in promoting 
stable economic growth.
  Unlike some proposals that have been introduced that would gut the 
regulatory framework of Dodd-Frank, I am pleased that this bill 
reasonably seeks to resolve a valid concern raised by community banks 
that certain capital rules relating to high volatility commercial real 
estate, or HVCRE, loans are far too complex. This is an issue that 
financial regulators like the FDIC have also acknowledged must be 
addressed and must be fixed.
  The problem, in fact, was highlighted in their Economic Growth and 
Regulatory Paperwork Reduction Act report, which was published earlier 
this year.
  In September, financial regulators released a proposal to revise the 
capital rules to make the calculations more straightforward. This is a 
good step in resolving this issue.
  Although I am supportive of H.R. 2148, there are some concerns that I 
have heard and that I can appreciate, including that it could provide 
for more rigid definitions relating to capital rules.
  The highly technical standards are important, though, to demonstrate 
congressional intent. But Congress may not need to act, if bank 
regulators correct the problem on their own.
  In addition, according to the FDIC Inspector General, commercial real 
estate loans generally account for more than one-third of community 
bank lending. The GAO found that failure of many small banks in the 
last crisis were ``driven by credit losses on CRE

[[Page H8549]]

loans, particularly loans secured by real estate to finance land 
development and construction.'' We have to be cautious, and we should 
be sensitive to these risks.
  Notwithstanding all of those legitimate concerns that we should keep 
in mind, I support this legislation and hope that it will send a clear 
signal to the regulators that they should consider and address any 
comments on their proposed rule without delay that is fully sensitive 
to the risks that I have discussed.
  Importantly, in committee, Congresswoman Maloney offered an amendment 
that I was pleased was adopted. This amendment better aligns this bill 
with the regulators' proposed rule to fix this issue.
  Mr. Speaker, I urge my colleagues to support this legislation, H.R. 
2148, and I reserve the balance of my time.
  Mr. HUIZENGA. Mr. Speaker, I yield 5 minutes to the gentleman from 
North Carolina (Mr. Pittenger), the vice chairman of the Terrorism and 
Illicit Finance Subcommittee of the Financial Services Committee and 
the sponsor of this legislation.
  Mr. PITTENGER. Mr. Speaker, today, I rise in support of H.R. 2148, 
the Clarifying Commercial Real Estate Loans Act. I would also like to 
thank my colleague, Chairman Huizenga, for his leadership on our 
behalf.
  This bipartisan legislation makes commonsense reforms to the high 
volatility commercial real estate loan process and clarifies the 
existing regulations to help simplify real estate financing in high 
volatility markets, including economically depressed urban communities.
  The complexity of the current HVCRE definition, combined with the 
failure of Federal regulators to clarify and define HVCRE rules and how 
and where they are to be applied, has made certain that these 
development loans have become way too expensive. This has increased 
borrowing costs and reduced credit availability.
  These failures directly impact local communities. We have seen fewer 
jobs, less economic growth, and increased costs for community projects, 
in addition to setbacks for local banks and developers.
  My bipartisan legislation addresses many of these concerns by 
broadening the types of equity the developer may place towards the 
heightened risk requirements of an HVCRE loan. We also clarify which 
types of loans should and should not be classified as HVCRE. We must 
codify and improve the HVCRE rules to ensure market and industry 
stability.
  Mr. Speaker, I thank Congressman David Scott, Congresswoman Carolyn 
Maloney, and Ranking Member Waters, who actively worked with me on this 
important legislation. Please join us in supporting this commonsense, 
bipartisan legislation.
  Mr. KILDEE. Mr. Speaker, I yield such time as she may consume to the 
gentlewoman from New York (Mrs. Carolyn B. Maloney), a distinguished 
member of the Financial Services Committee.
  Mrs. CAROLYN B. MALONEY of New York. Mr. Speaker, I thank the 
gentleman for yielding and for his leadership on this and so many 
issues.
  Mr. Speaker, I rise today to support H.R. 2148, which clarifies and 
simplifies the capital rules for commercial real estate loans.
  This bill addresses an important issue, which is that the capital 
requirements for commercial real estate loans are overly complex for 
banks and unnecessarily punish certain types of commercial real estate 
loans and, thereby, the overall economy.
  I have had many community bankers and real estate developers complain 
to me about this, and I think that they have a point. Even the 
regulators agree that these rules are overly complicated and need to be 
simplified, so there is broad consensus that this is a longtime, 
legitimate problem that needs to be fixed.
  I thank Chairman Hensarling and Ranking Member Waters for all their 
hard work on this issue. I also want to thank Mr. Pittenger and Mr. 
Scott for working with me during this markup on an amendment to 
strengthen the bill.

  The current capital rules punish commercial real estate loans that 
are considered high volatility, by requiring banks to hold additional 
capital against them. They have to hold capital worth 150 percent for 
these high volatility loans, as opposed to the normal 100 percent for 
other commercial real estate loans.
  These high volatility commercial real estate loans, or HVCRE loans, 
are usually made so that a borrower can purchase vacant or undeveloped 
land, which they then will build on or hold for a later time.
  But the capital rules for these HVCRE loans were extremely complex 
and led to a great deal of confusion about which loans were considered 
high volatility and which were not.
  The regulators finally did propose a rule to simplify the treatment 
of high volatility commercial real estate loans just a few weeks ago. 
This bill addresses the same issue as the regulators' proposed rule by 
simplifying the capital rules for commercial real estate loans.
  I offered an amendment in committee that further aligned the bill 
with the best parts of the regulators' proposed rule, which I think 
ultimately strengthened and improved the bill. The bill would simplify 
the capital rules by removing the so-called contributed capital 
requirement, which requires very complicated calculations and forces 
banks to project the value of the property years into the future, which 
is extremely difficult, if not impossible, to do.
  Even the regulators have concluded that this entire contributed 
capital requirement is unnecessarily burdensome and does not add 
protection at all. Removing it will streamline the capital rules for 
banks and make it easier to finance job-creating projects. The 
regulators have proposed to remove this entire requirement, and I 
agree.
  Under current law, banks have to hold more capital when the property 
is vacant and not producing any income. So the bill clarifies that when 
a property does start to produce sufficient income to cover the debt 
service payments to the bank, then the loan is much safer, and thus is 
eligible for capital relief, removing the 150 percent surcharge and 
going back down to 100 percent.
  I think this bill is a very good, commonsense bill that fixes a 
legitimate problem, and I urge my colleagues to support the bill. I 
believe it will make access to capital more fair and will get it out 
into the community, creating jobs.
  I congratulate all of my colleagues who were part of this process, 
and I support the bill.
  Mr. HUIZENGA. Mr. Speaker, I yield such time as he may consume to the 
gentleman from Pennsylvania (Mr. Rothfus), vice chairman of the 
Financial Institutions Subcommittee of Financial Services.
  Mr. ROTHFUS. Mr. Speaker, I thank Mr. Huizenga for yielding.
  Mr. Speaker, I want to start by thanking the gentleman from North 
Carolina (Mr. Pittenger) for leading on this important legislation.
  I rise today to express my support for the Clarifying Commercial Real 
Estate Loans act.
  The Financial Institutions Subcommittee has spent a significant 
amount of time analyzing the state of bank lending. Not surprisingly, 
aside from loans from major banks to major corporations, we found that 
bank lending in today's regulatory environment is weak. We need to 
jump-start our economic growth once again, so we are going to need to 
find ways to address some of the unintended consequences of the rules 
coming out of Washington, D.C.
  The high volatility commercial real estate loan designation is one 
such feature that has inhibited growth and opportunity. The complexity 
and ambiguity of HVCRE makes it hard for banks to comply. This drives 
up borrowing costs for real estate developers and prevents 
entrepreneurs from engaging in the types of activities that create jobs 
and opportunity.
  This legislation will bring clarity and common sense to HVCRE 
requirements, and I ask that my colleagues support the Clarifying 
Commercial Real Estate Loans act, which is important legislation.
  Mr. KILDEE. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, I thank my friend, Mr. Huizenga, for his work on this. I 
also thank Mr. Pittenger and Mr. Scott as well.

[[Page H8550]]

  This is a piece of legislation, again, as the previous legislation 
did, that demonstrates that we do have the capability of solving a 
problem and coming together on specific issues when we can.
  In this case, we have legislation that, I think, strikes that 
important balance in maintaining important regulations and standards in 
place that prevent the kind of catastrophes that we have seen in the 
past, but also, in this case, anticipates that there is a legitimate 
problem that needs to be solved, particularly in this case, in ensuring 
that development can occur in those places where it is often very 
difficult to see development take place. This is something that is 
absolutely critical and makes sense. This legislation strikes a good 
balance between those competing interests.
  Mr. Speaker, I urge my colleagues to support this, and I yield back 
the balance of my time.
  Mr. HUIZENGA. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, I encourage all of my colleagues to support H.R. 2148. I 
commend my good friend, Mr. Pittenger, for his great work on this. 
Again, I point out that this bill came out of the Financial Services 
Committee on a bipartisan vote of 59-1. We think that this is a 
commonsense, reasonable accommodation for a problem that has been 
created by Dodd-Frank, and we are glad that, on a bipartisan basis, we 
can be addressing that.
  Mr. Speaker, I yield back the balance of my time.
  The SPEAKER pro tempore (Mr. Simpson). The question is on the motion 
offered by the gentleman from Michigan (Mr. Huizenga) that the House 
suspend the rules and pass the bill, H.R. 2148, as amended.
  The question was taken; and (two-thirds being in the affirmative) the 
rules were suspended and the bill, as amended, was passed.
  A motion to reconsider was laid on the table.

                          ____________________