In order to shield lenders from overly risky commercial real estate loans, in 2013 the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation (the “Agencies”) instituted a regulatory capital rule requiring heightened capital reserves for “high volatility commercial real estate” (HVCRE) loans. This HVCRE classification has been subject to regulatory scrutiny and revision since its inception. Due to the severity of the consequence associated with HVCRE loans, which often include increased interest rates, it is important for both borrowers and lenders to follow the continuing development of the HVCRE regulatory framework.
Basel III – Introduction of the HVCRE Classification
Following the global financial crisis of 2007-2008, the Basel Committee on Banking Supervision agreed to and released Basel III, a global regulatory framework which established capital standards for commercial real estate loans. The development of Basel III was a direct response to the significant role risky commercial real estate loans played in the 2007-2008 crisis. Though Basel III itself does not have the force of law, the Agencies adopted a revised regulatory capital rule under the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 to incorporate Basel III into United States law and to impose higher capital requirements on loans categorized as “HVCRE” loans.
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