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#2007329 - 04/10/15 02:18 PM BASEL III and CRA
Flyboat Offline
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Flyboat
Joined: Jan 2006
Posts: 40
Is anyone aware of a community development/CRA connection to Basel III capital requirements?

I was asked whether CRA qualified construction loans were exempt from certain provisions. While we agreed on what constituted a CD loan, I was baffled that where would even be a connection. This is not my forte, my curiosity is piqued, but I have no answers.

Help and clarity appreciated.

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#2007336 - 04/10/15 02:32 PM Re: BASEL III and CRA Flyboat
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
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There is the exemption from HVCRE is if a acquisition/development/construction (ADC) project qualifies as a community development investment.

High volatility commercial real estate (HVCRE) exposure means a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property, unless the facility finances:

(1) One- to four-family residential properties;
(2) Real property that:
(i) Would qualify as an investment in community development under 12 U.S.C. 338a or12 U.S.C. 24 (Eleventh), as applicable, or as a “qualified investment” under [12 CFR part 25 (national bank), 12 CFR part 195 (Federal savings association) (OCC); 12 CFR part 228(Board)], and

12 USC §338a. Investments to promote public welfare and community development; limitation on investments
A State member bank may make investments directly or indirectly, each of which is designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families (such as by providing housing, services, or jobs), to the extent permissible under State law. A State member bank shall not make any such investment if the investment would expose the State member bank to unlimited liability. The Board shall limit a State member bank's investment in any 1 project and a State member bank's aggregate investments under this paragraph. The aggregate amount of investments of any State member bank under this paragraph may not exceed an amount equal to the sum of 5 percent of the State member bank's capital stock actually paid in and unimpaired and 5 percent of the State member bank's unimpaired surplus, unless the Board determines, by order, that a higher amount will pose no significant risk to the affected deposit insurance fund; and the State member bank is adequately capitalized. In no case shall the aggregate amount of investments of any State member bank under this paragraph exceed an amount equal to the sum of 15 percent of the State member bank's capital stock actually paid in and unimpaired and 15 percent of the State member bank's unimpaired surplus. The foregoing standards and limitations apply to investments under this paragraph made by a State member bank directly and by its subsidiaries.

12 USC 24 (Eleventh.) To make investments directly or indirectly, each of which is designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families (such as by providing housing, services, or jobs). An association shall not make any such investment if the investment would expose the association to unlimited liability. The Comptroller of the Currency shall limit an association's investments in any 1 project and an association's aggregate investments under this paragraph. An association's aggregate investments under this paragraph shall not exceed an amount equal to the sum of 5 percent of the association's capital stock actually paid in and unimpaired and 5 percent of the association's unimpaired surplus fund, unless the Comptroller determines by order that the higher amount will pose no significant risk to the affected deposit insurance fund, and the association is adequately capitalized. In no case shall an association's aggregate investments under this paragraph exceed an amount equal to the sum of 15 percent of the association's capital stock actually paid in and unimpaired and 15 percent of the association's unimpaired surplus fund. The foregoing standards and limitations apply to investments under this paragraph made by a national bank directly and by its subsidiaries.


(ii) Is not an ADC loan to any entity described in [12 CFR part 25.12(g)(3) (national banks) and 12 CFR 195.12(g)(3) (Federal savings associations) (OCC); 12 CFR 208.22(a)(3) or 228.12(g)(3) (Board)], unless it is otherwise described in paragraph (1), (2)(i), (3) or (4) of this definition;
(3) The purchase or development of agricultural land, which includes all land known to be used or usable for agricultural purposes (such as crop and livestock production), provided that the valuation of the agricultural land is based on its value for agricultural purposes and the valuation does not take into consideration any potential use of the land for non-agricultural commercial development or residential development; or
(4) Commercial real estate projects in which:
(i) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio in the [AGENCY]'s real estate lending standards at [12 CFR part 34, subpart D (national banks) and 12 CFR part 160, subparts A and B (Federal savings associations) (OCC); 12 CFR part 208, appendix C (Board)];
(ii) The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15 percent of the real estate's appraised “as completed” value; and
(iii) The borrower contributed the amount of capital required by paragraph (4)(ii) of this definition before the [BANK] advances funds under the credit facility, and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project. The life of a project concludes only when the credit facility is converted to permanent financing or is sold or paid in full. Permanent financing may be provided by the [BANK] that provided the ADC facility as long as the permanent financing is subject to the [BANK]'s underwriting criteria for long-term mortgage loans.

FAQs on HVCRE were just released; a few touch on this topic.

http://www.occ.gov/news-issuances/bulletins/2015/bulletin-2015-23a.pdf
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#2007352 - 04/10/15 03:00 PM Re: BASEL III and CRA Flyboat
Flyboat Offline
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Flyboat
Joined: Jan 2006
Posts: 40
Thank you.

So for the most part, the ADC project will only be exempt as a CD qualified INVESTMENT (i.e.LIHTC and other similar facilities), but not as a loan.

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#2007356 - 04/10/15 03:19 PM Re: BASEL III and CRA Flyboat
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
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Posts: 21,293
As I read it, if the project would qualify as a CD investment, the loan can be exempted from HVCRE.

Very circuitous.
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#2007641 - 04/13/15 03:43 PM Re: BASEL III and CRA Kathleen O. Blanchard
fmissle Online
Diamond Poster
Joined: Jul 2007
Posts: 1,016
Pac NW
Originally Posted By Kathleen B
As I read it, if the project would qualify as a CD investment, the loan can be exempted from HVCRE.

Very circuitous.


But that's not the only way to exempt it from HVCRE either.

•CRE construction (commercial purpose or multifamily) loans where:

The LTV is less than or equal to the Maximum Supervisory LTV;
the borrower has contributed 15% of the project equity before any bank money is disbursed (and is contractually obligated to this); AND
none of those contributions is returned to the borrower until the conversion to permanent financing is completed.

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#2007642 - 04/13/15 03:48 PM Re: BASEL III and CRA Flyboat
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,293
No it is not, but the question related only to the CRA specific exemption.
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www.kaybeescomplianceinsights.com

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#2013650 - 05/12/15 08:53 PM Re: BASEL III and CRA Flyboat
gypsybanker Offline
Junior Member
Joined: Sep 2009
Posts: 28
Texas
Can anyone tell me if small banks under $200M are exempt from the requirement?

Thanks

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#2015282 - 05/20/15 07:55 PM Re: BASEL III and CRA Flyboat
Mel in WA Offline
Diamond Poster
Joined: Mar 2013
Posts: 1,265
Thanks for clarifying that it is a community development INVESTMENT, rather than a community development loan. That being said, besides an LIHTC, what are other examples of a CD Investment that would originate through loan channels? This is confusing to me and I'm trying to provide guidance to our commercial lenders.

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#2015326 - 05/20/15 09:31 PM Re: BASEL III and CRA Flyboat
Pale Rider Offline
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Posts: 34,318
under the Lone Star
The other obvious example may be New Market Tax Credits.
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#2017702 - 06/02/15 06:49 PM Re: BASEL III and CRA Flyboat
StellaC Offline
Junior Member
StellaC
Joined: Dec 2009
Posts: 43
El Monte
I am a bit confused now~ I thought the trigger point of exemption is based on whether or not loans have Community Development Purpose.

For Example, if a bank made a construction loan to build a daycare center in Low income area that will offer services to kids from LMI family. Can this be exempted from HVCRE treatment?

Or (I am just thinking out loud now) since captial requirement is all about risks, the exeption has to do with receiving grant from governments? (assuming there are additional source of funding, therefore, it is safer)

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#2022698 - 06/24/15 05:33 PM Re: BASEL III and CRA Flyboat
Moman Offline
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Joined: Jul 2004
Posts: 505
WA
Does the CRA CDL exemption run with the size of the bank? For instance, the CRA threshold for large banks is at $1.221 Bil. If a large bank funded a HVCRE loan, would the exemption only apply to loans at $1Mil or more, similar to the threshold for CDL credit under the CRA lending test?

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#2022925 - 06/25/15 03:59 AM Re: BASEL III and CRA Flyboat
Len S Offline
Diamond Poster
Joined: Oct 2004
Posts: 2,084
Connecticut
Regarding the Community Development exception, the Final Rule contains pretty explicit language that makes it clear that the exception not only applies to community development investments but to community development loans as well as long as "the real property is such that an investment in that property would qualify as a community development investment, then a facility financing acquisition, development, or construction of that property would meet the terms of the exemption". Keep in mind that the definition of community development investment is that found in 12 USC 24 which is pretty much consistent with the CRA definition.
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