Banks have been conservative in their construction lending since the financial crisis, but a new bill could encourage more activity.
The Clarifying Commercial Real Estate Loans Act aims to reduce banking restrictions pertaining to high volatility commercial real estate loans.
In particular, the bill aims to highlight exemptions to HVCRE loans, which are deemed of greater risk under the current Basel III mandate — a set of banking regulations that work to prevent banks from damaging the economy by taking on too much risk.
Current regulations require banks to keep more capital on their books for HVCRE loans because of their potential volatility, resulting in higher borrowing costs in comparison to lenders not subject to Basel III, National Mortgage News reports. The Clarifying Commercial Real Estate Loans Act could spur construction lending by banks by easing restrictions, thereby allowing banks to compete with other lenders.
While major banks have remained a trusted source of capital, they tend to be more cautious about their construction loan exposure due to current regulations. Some banks automatically classify construction loans as HVCRE in an attempt to avoid any regulatory issues, NMN reports. This has forced developers to increasingly turn to nonbank lenders, such as foreign firms, private equity funding and debt opportunity funds, for construction loans.
The new bill passed the House on Nov. 7 and will now go before the Senate for approval.
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