High Volatility Commercial Real Estate and Loan Policies
A common question we have started seeing from the community banks we work with, is an increased effort to identify High-Volatility Commercial Real Estate (HVCRE) loans in their portfolio.
Since the BASEL III regulatory capital rule changes were initially incorporated in 2015, there is an updated concept of how these HVCRE loan types are risk-weighted for Call Reporting purposes. Before this change, these loan types were always assigned a risk rating of 100%; the loans are now assigned a risk rating of 150%.
As such, these loans may have a tremendous impact on a community bank’s capital ratios. In general, any loan used for the acquisition, development or construction of real property, before the conversion of permanent financing, will be classified in the HVCRE category for Call Report purposes unless certain criteria are met.
Community banks have already been required to identify and record these loans for the past few years. As a result of these changes, we have seen that the overall best practice is for every Bank to establish internal guidelines to properly define these loan types and the Bank’s respective policies surrounding how these loans will be appropriately reported. Per our experience, Safety and Soundness exam teams are additionally making it a point of emphasis to monitor. If you, or personnel from your Bank, have any questions or would like any assistance in reviewing your Banks internal loan policy related to HVCRE loans, please feel free to contact us.