Bank Capital Rules: Impact on Commercial Lending Structures and Documentation

Description

In October 2018, due to the 2018 Dodd-Frank reform bill, the federal banking agencies released rules to tailor U.S. bank capital and liquidity requirements. Capital and liquidity requirements now vary according to which of the four asset categories a bank belongs to. This may impact the cost of borrowing as certain banks may be required to retain more capital and meet liquidity and stable funding ratios concerning specific loan portfolios, and others may not.

Terms and provisions in loan documents can affect certain loans' classification and their treatment under the capital rules. Some loans can be structured to avoid being subject to certain capital rules. Bank counsel must have a thorough understanding of the capital rules' nuances to minimize its impact on profitability in any given transaction.

Distinct requirements for high volatility commercial real estate loans used to finance acquisition, development, or construction (HVCRE loans) increase risk weighting for certain commercial real estate loans, which, in turn, requires lenders to retain more capital. To avoid HVCRE classification, real estate loans must either meet complex LTV and borrower investment requirements or qualify under certain specific exemptions, all most recently revised under the Economic Growth, Regulatory Relief and Consumer Protection Act of May 24, 2018, and a final rule issued by the federal banking agencies on Nov. 19, 2019.

Listen as our authoritative panel of regulatory and finance attorneys analyzes the current and proposed U.S. capital rules, the impact on the commercial lending environment, and how lenders may alter loan structures and loan documentation to minimize its effects.