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115th Congress    }                                      {      Report
                        HOUSE OF REPRESENTATIVES
 1st Session      }                                      {     115-392

======================================================================



 
                CLARIFYING COMMERCIAL REAL ESTATE LOANS

                                _______
                                

November 6, 2017.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2148]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2148) to amend the Federal Deposit Insurance Act 
to clarify capital requirements for certain acquisition, 
development, or construction loans, having considered the same, 
report favorably thereon with amendments and recommend that the 
bill as amended do pass.
    The amendments (stated in terms of the page and line 
numbers of the introduced bill) are as follows:
  Page 2, line 7, strike ``(as defined'' and all that follows 
through ``this section)'' and insert the following: ``(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)''.

  Page 2, line 19, strike ``finances or has financed'' and 
insert ``primarily finances, has financed, or refinances''.

  Page 3, line 17, after ``property'' insert ``, 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''.

                          Purpose and Summary

    Introduced by Congressman Robert Pittenger (NC-09) on April 
26, 2017, H.R. 2148, the ``Clarifying Real Estate Loans'', 
amends the Federal Deposit Insurance Act'' would clarify 
capital requirements for certain acquisition, development, or 
construction (ADC) loans classified as high-volatility 
commercial real estate (HVCRE), including which types of loans 
should and should not be classified as HVCRE loans.

                  Background and Need for Legislation

    In response to the 2008 financial crisis, the Basel 
Committee on Banking Supervision (Basel Committee) agreed to 
modify internationally negotiated bank regulatory standards 
known as the Basel Accords, to increase bank capital 
requirements. On July 9, 2013, the federal banking regulators, 
including the Federal Reserve, Federal Deposit Insurance 
Corporation (FDIC), and the Office of the Comptroller of the 
Currency (OCC), issued a final rule to implement most of the 
Basel III recommendations, including modifications to capital 
requirements.
    The Basel III final rule applies to all banks and bank 
holding companies domiciled in the United States, with some 
exceptions, and went into effect on January 1, 2014, for the 
for the U.S. systemically important banking organizations, and 
on January 1, 2015, for all other banks.
    Basel III imposes new rules for high volatility commercial 
real estate (HVCRE), which the regulations characterize as 
loans that finance the acquisition, development or construction 
(ADC) 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 $1,000,000 are exempt from the HVCRE classification.
    All loans that meet the definition of HVCRE are reported 
separately from other commercial real estate (CRE) loans and 
are also assigned a risk weighting of 150% for risk-based 
capital purposes. Prior to January 1, 2015, a CRE loan would 
have typically been assigned a risk weighting of 100%. In 
addition HVCRE loans are to be reported separately from other 
CRE. Prior to the HVCRE rule banks could hold 8% of the value 
of the loans to alleviate risk, but under the rule are now 
required to hold 12%.
    In September 2017, the OCC, FDIC and Federal Reserve 
proposed a rule that attempted simplify the regulatory capital 
calculations for HVCRE. 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).
    The Committee adopted an amendment offered by Rep. Carolyn 
Maloney to simplify the capital rules to define what 
constitutes a HVCRE ADC loan, and broadens the types of equity 
that can be used to meet its capital requirements. This 
clarification will reduce the cost to finance these loans, and 
promote economically responsible CRE lending.
    In a letter of support for H.R. 2148 dated October 10, 
2017, the Real Estate Roundtable wrote:

          [H.R. 2148] helps address concerns regarding the 
        Basel III HVCRE rules by amending the Federal Deposit 
        Insurance Act to clarify the certain requirements for 
        certain acquisition, development, or construction loans 
        (ADC).
          The lack of clarity in the Rule and subsequent HVCRE 
        Frequently Asked Questions (FAQs) published by the 
        agencies on March 31, 2015 has resulted in a wide 
        disparity in how banks classify their ADC portfolios as 
        HVCRE or non-HVCRE. This result has negatively impacted 
        ADC loan decisions for some banks, leaving some 
        borrowers with fewer and potentially more costly 
        sources of ADC loan capital. The legislation would 
        clarify and modify the HVCRE rules to ensure that they 
        are appropriately calibrated and do not impede credit 
        capacity or economic activity, while still promoting 
        economically responsible commercial real estate 
        lending.

                                Hearings

    The Committee on Financial Services, Subcommittee on 
Financial Institutions and Consumer Credit held a hearing 
examining matters relating to H.R. 2148 on July 12, 2017.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
October 11, 2017 and ordered H.R. 2148 to be reported favorably 
to the House as amended by a recorded vote of 59 yeas to 1 nays 
(Record vote no. FC-89), a quorum being present. Before the 
motion to report was offered, the Committee adopted an 
amendment offered by Ms. Maloney by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House as amended. The motion 
was agreed to by a recorded vote of 59 yeas to 1 nays (Record 
vote no. FC-89), a quorum being present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 2148 
will ease FDIC capital requirements by providing for the 
easement of High Volatility Commercial Real Estate designations 
that were created by Basel III requirements.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, November 6, 2017.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2148, the 
Clarifying Commercial Real Estate Loans.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Sarah Puro.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 2148--Clarifying Commercial Real Estate Loans

    H.R. 2148 would revise the current requirement that banks 
hold more capital for high-volatility commercial real estate 
(HVCRE) loans. HVCRE loans are a subset of acquisition, 
development, and construction (ADC) loans, which banks make to 
borrowers who wish to purchase and improve real property. Under 
the bill, regulators could permit banks to hold between 8 
percent and 10.4 percent of capital for certain new HVCRE loans 
instead of the 10.4 percent proposed by bank regulators. The 
effect of H.R. 2148 would be to exempt loans from the increased 
capital requirements if borrowers contribute resources, land, 
or property that is worth at least 15 percent of the appraised 
value of the financed property. Those loans are called 
contributed capital loans.
    The bill would apply only to new HVCRE loans. Banks do not 
currently report the value of contributed capital loans to 
regulators, so the value of new loans subject to the exemption 
is uncertain. In addition, depending on future regulations, 
banks might change the way they structure those loans, or, if 
the capital requirements were perceived as too onerous, banks 
might stop making such loans altogether.
    On the basis of publicly available data from bank balance 
sheets, CBO estimates that banks currently hold about $315 
billion in ADC loans, which amounts to about 2 percent of their 
total assets. In CBO's baseline projections, bank assets grow 
by roughly 5 percent each year over the 2018-2027 period. CBO 
expects that the value of ADC loans will grow in line with 
other assets and thus ADC loans would constitute roughly 2 
percent of those additional assets.
    Banks now must hold 8 percent of the value of ADC loans 
that are not determined to be HVCRE loans in capital reserves. 
Under regulations proposed in September, banks would need to 
increase the reserve amount to 10.4 percent for loans that were 
subject to the additional-capital requirement.\1\ CBO estimates 
that about one-quarter of ADC loans are exempt from the 
additional-capital requirement because they finance 
construction of properties that include between one and four 
family residences. Because it is unknown whether that new rule 
will become final under current law, CBO has assigned a 50 
percent chance that the capital reserve requirement will 
increase to 10.4 percent for those loans for the purpose of 
estimating future reserve requirements in its baseline.
---------------------------------------------------------------------------
    \1\Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and Office of the Comptroller of the 
Currency, ``Agencies Propose Simplifying Regulatory Capital Rules,'' NR 
2017-111 (press release, September 27, 2017), https://go.usa.gov/xnT6j.
---------------------------------------------------------------------------
    CBO estimates that, under the bill, banks' total capital 
reserves would be diminished by less than one one-thousandth of 
a percent (0.001 percent) relative to their reserves under 
current law.\2\ Changes in the amount of capital that a bank 
holds can affect its probability of failure, which in turn can 
impose costs on the Deposit Insurance Fund (administered by the 
Federal Deposit Insurance Corporation). Those costs are 
recorded in the budget as increases in direct spending. 
However, because that estimated change is so small, CBO expects 
that there would be a very small probability of an increase in 
bank defaults resulting from the bill. Thus, CBO estimates that 
enacting H.R. 2148 would not have a significant effect on 
direct spending over the 2018-2027 period.
---------------------------------------------------------------------------
    \2\The estimated change in capital reserve requirements equals: 2 
percent of new bank assets (for ADC loans)  75.0 percent (to 
exclude construction loans that include between one and four family 
residences)  2.4 percent (the decrease in capital required 
under the bill relative to the proposed rule)  50.0 percent 
(because of the uncertainty about the proposed increase in the reserve 
requirement under current law), divided by 100 percent of the banks' 
total capital reserves.
---------------------------------------------------------------------------
    Because enacting the bill would affect direct spending, 
pay-as-you-go procedures apply. Enacting the bill would not 
affect revenues.
    CBO estimates that enacting H.R. 2148 would not 
significantly increase net direct spending or on-budget 
deficits in any of the four consecutive 10-year periods 
beginning in 2028.
    H.R. 2148 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    H.R. 2148 could impose a private-sector mandate, as defined 
in UMRA. A mandate would not occur if regulations proposed by 
the Federal Reserve in September were to become final because 
this bill would narrow the population of banks affected by 
capitalization requirements. If, however, the regulations are 
not finalized, the bill would broaden the population of banks 
affected by requirements relative to current law. In that case, 
some banks would need to meet higher capital requirements. 
Because of uncertainty about how those banks would respond and 
the lack of data about the value of new loans, CBO is unable to 
determine whether the costs of a private-sector mandate under 
such scenario would exceed the threshold established in UMRA 
($156 million in 2017, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Sarah Puro 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was approved by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    Duplication of Federal Programs

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed 
rulemakings: The Committee estimates that the bill requires no 
directed rulemakings within the meaning of such section.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This Section cites H.R. 2148 as ``Clarifying Commercial 
Real Estate Loans.''

Section 2. Capital requirements for certain acquisition, development or 
        construction loans

    This Section amends the Federal Deposit Insurance Act to 
prescribe capital requirements as related to certain 
acquisition, development, or construction loans. This Section 
requires Federal Reserve, Federal Deposit Insurance Corporation 
(FDIC), and the Office of the Comptroller of the Currency (OCC) 
only subject a depository institution to higher capital 
standards with respect to an HVCRE exposure (as defined under 
section 324.2 of title 12, Code of Federal Regulations, as in 
effect on October 11, 2017, and any successive regulations 
after the date of the enactment of this section) if such 
exposure is an HVCRE ADC loan.
    This Section also clarifies the definition of an HVCRE ADC 
loan to include secured real property loans that primarily 
finances, has financed, or refinances ADC, and where repayment 
is dependent upon future income and sale proceeds of such 
property.
    This Section adds an exemption from HVCRE classification 
for loans that finance one to four family residential 
properties; projects that qualify as community development 
investment and loans to businesses; agricultural loans; 
refinancing or acquiring an existing, income producing property 
so long as it is producing sufficient income to cover debt 
service payments; CRE projects in which the loan-to-value ratio 
is less than or equal to the applicable maximum amount, the 
borrower has contributed capital in the form of cash or 
unencumbered readily marketable assets of at least 15 percent 
of the project's as completed value, and the borrower has 
contributed the amount of capital required above before the 
lender advances funds, and such capital contributed by the 
borrower, or internally generated by the project, is 
contractually required to remain in the project throughout the 
life of the project (concluding only when the loan is converted 
to permanent financing, is sold or is paid in full); and loans 
made prior to Jan. 1, 2015.
    The appraised value of any real property, including land, 
may count towards the 15 percent contributed capital 
requirement, as long as it meets statutory requirements 
prescribed pursuant to section 1110 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989.
    An ADC loan may be deemed a non-HVCRE ADC loan once the 
project is completed and cash flow being generated by the real 
property is sufficient to support the debt services and 
operating expenses of the real property, and the project meets 
underwriting requirements for permanent financing.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italic and existing law in which no change is 
proposed is shown in roman):

FEDERAL DEPOSIT INSURANCE ACT

           *       *       *       *       *       *       *



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
          (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.

                                  [all]