Basel III Definitions - ADC Loans and HVCRE

April 2015 | Article

What are Acquisition, Development and Construction (ADC) Loans and how is High Volatility Commercial Real Estate (HVCRE) identified?

An institution's ability to properly identify ADC loans and HVCRE will be one of the more challenging and time consuming reporting requirements established under Basel III.

Acquisition, Development and Construction (ADC) Loans
ADC loans include the acquisition of land, the development of land and the construction phase on the land, prior to conversion to permanent financing. ADC loans do not include the acquisition of a completed commercial building that is amortizing and written to the institution's normal underwriting standards.

High Volatility Commercial Real Estate (HVCRE) Exceptions
HVCRE will generally include ADC loans reported in Schedule RC-C, Part 1, Line 1.a (2), but certain exceptions do exist, which are defined in the instructions for Schedule RC-R, Part II, Item No. 4.b (and also apply to Item No. 5.b). Loans secured by land for developing or constructing 1-4 family residential properties (including bare lots zoned for 1-4 family residential properties), real property classified as an investment in community development under applicable regulatory guidelines, and land to be used for agricultural purposes are not considered HVCRE. In addition, certain commercial ADC loans may also be excluded from HVCRE classification if they meet certain requirements, such as minimum supervisory loan-to-value (LTV) ratios and adequate capital contributions from the borrower.

The LTV ratio is determined at the origination of the loan based on the LTV guidelines established in Appendix A to Subpart A of Part 365 - Interagency Guidelines for Real Estate Lending Policies. Therefore, if the value of the collateral subsequently declines and the LTV changes, the loan does not need to subsequently be reclassified as HVCRE. 

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