As reported in a prior Client Alert, new federal legislation enacted into law on May 24, 2018 narrows the types of acquisition, development, and construction (ADC) loans that may be subject to a heightened risk weight under the U.S. capital rules. Under the U.S. capital rules, ADC loans characterized as high-volatility commercial real estate (HVCRE) exposures are required to be risk-weighted at 150%, rather than the 100% risk-weighting generally accorded to other commercial loans. Now, under the new law, to be subject to the 150% risk weight, HVCRE exposures must meet a 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 Agencies issued Guidance to the effect that, prior to any further action from the Agencies, financial institutions may rely on the definition of an HVCRE ADC loan in the new law or, alternatively, on the definition of an HVCRE exposure under current regulations. By issuing the Guidance, the Agencies implicitly acknowledged the need to promulgate new regulations to take into account the new law.