Title 12 — Banks and BankingRelease 119-73

§1831bb Capital requirements for certain acquisition, development, or construction loans

Title 12 › Chapter CHAPTER 16— - FEDERAL DEPOSIT INSURANCE CORPORATION › § 1831bb

Last updated Apr 6, 2026|Official source

Summary

Federal banking agencies may only force a bank to treat a high-volatility commercial real estate (HVCRE) exposure as higher risk for capital rules if that exposure is an HVCRE ADC loan, using the term as defined in 12 C.F.R. 324.2 as of October 11, 2017, or a successor term in a successor rule in effect as of May 24, 2018. An HVCRE ADC loan is a loan secured by land or improved property that mainly pays for buying, developing, or building the property, is meant to turn the property into income-producing real estate, and depends on future income, a sale, or refinancing of the property to be paid back. Loans made before January 1, 2015, and loans already reclassified as non-HVCRE ADC loans are not HVCRE ADC loans. Certain kinds of loans are excluded. These include one- to four-family homes, community development investments, agricultural land, and loans for existing income-producing property or improvements if the property’s cash flow is enough under the bank’s underwriting. Commercial projects are also excluded if the loan-to-value is at or below the agency’s maximum, the borrower put in at least 15% of the “as completed” appraised value in allowed forms before major advances, and that contribution must stay in the project until reclassification. Property contributed by a borrower is valued by an appraisal under the standards in section 3339 at the time the loan is made. Reclassification to non-HVCRE ADC happens when construction is largely done and the property generates enough cash flow to cover debt and expenses. Agencies still keep their supervisory and enforcement powers to protect safe banking.

Full Legal Text

Title 12, §1831bb

Banks and Banking — Source: USLM XML via OLRC

(a)The appropriate Federal banking agencies may only require a depository institution to assign a heightened risk weight to a high volatility commercial real estate (HVCRE) exposure (as such term is defined under section 324.2 of title 12, Code of Federal Regulations, as of October 11, 2017, or if a successor regulation is in effect as of May 24, 2018, such term or any successor term contained in such successor regulation) under any risk-based capital requirement if such exposure is an HVCRE ADC loan.

(b)For purposes of this section and with respect to a depository institution, the term “HVCRE ADC loan”—

(1)means a credit facility secured by land or improved real property that, prior to being reclassified by the depository institution as a non-HVCRE ADC loan pursuant to subsection (d)—

(A)primarily finances, has financed, or refinances the acquisition, development, or construction of real property;

(B)has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and

(C)is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility;

(2)does not include a credit facility financing—

(A)the acquisition, development, or construction of properties that are—

(i)one- to four-family residential properties;

(ii)real property that would qualify as an investment in community development; or

(iii)agricultural land;

(B)the acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the institution’s applicable loan underwriting criteria for permanent financings;

(C)improvements to existing income-producing improved real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the institution’s applicable loan underwriting criteria for permanent financings; or

(D)commercial real property projects in which—

(i)the loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the appropriate Federal banking agency;

(ii)the borrower has contributed capital of at least 15 percent of the real property’s appraised, “as completed” value to the project in the form of—

(I)cash;

(II)unencumbered readily marketable assets;

(III)paid development expenses out-of-pocket; or

(IV)contributed real property or improvements; and

(iii)the borrower contributed the minimum amount of capital described under clause (ii) before the depository institution advances funds (other than the advance of a nominal sum made in order to secure the depository institution’s lien against the real property) under the credit facility, and such minimum amount of capital contributed by the borrower is contractually required to remain in the project until the credit facility has been reclassified by the depository institution as a non-HVCRE ADC loan under subsection (d);

(3)does not include any loan made prior to January 1, 2015; and

(4)does not include a credit facility reclassified as a non-HVCRE ADC loan under subsection (d).

(c)For purposes of this section, the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property as determined under standards prescribed pursuant to section 3339 of this title, in connection with the extension of the credit facility or loan to such borrower.

(d)For purposes of this section and with respect to a credit facility and a depository institution, upon—

(1)the substantial completion of the development or construction of the real property being financed by the credit facility; and

(2)cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property,

(e)Nothing in this section shall limit the supervisory, regulatory, or enforcement authority of an appropriate Federal banking agency to further the safe and sound operation of an institution under the supervision of the appropriate Federal banking agency.

Reference

Citations & Metadata

Citation

12 U.S.C. § 1831bb

Title 12 — Banks and Banking

Last Updated

Apr 6, 2026

Release point: 119-73