As reported in a prior Client Alert, financial services reforms enacted into law on May 24, 2018, clarified the treatment of acquisition, development, and construction (ADC) loans characterized as high-volatility commercial real estate (HVCRE) exposures under the capital rules. Classification as an HVCRE exposure requires ADC loans to be risk-weighted at 150% under the capital rules, rather than the 100% risk-weighting accorded to other commercial loans. The new legislation provides that, to be subject to the 150% risk weight, HVCRE exposures must meet a new, narrower definition of “HVCRE ADC loans.” In other words, unless an HVCRE exposure meets the HVCRE ADC loan definition, it is subject to a 100% risk weight (unless it would carry another risk weight by reason of other circumstances, such as being in default).

On July 6, 2018, the federal banking agencies provided guidance on the impact of the legislative changes to the definition of HVCRE exposures (the “Guidance”). The Guidance is timely as the federal banking agencies have not had time to conform regulations or call report instructions to the new legislation. By reason of the Guidance, banks now know that they can rely on the new law for characterizing HVCRE exposures in their June 30 call reports, which are due by the end of this month.