February 12, 2016 15:29 ET

Understand the HVCRE Regulation to Adapt Your Lending Strategy

Interview With Dev Strischek, Senior Vice President, Senior Credit Policy Officer, Corporate Risk Management, SunTrust Bank

NEW YORK, NY--(Marketwired - February 12, 2016) -  With the improving economy in the US, the amount of spending in commercial real estate lending is beginning to increase. But under Basel III, new requirements have been introduced around High Volatility Commercial Real Estate (HVCRE), requiring banks to hold more capital for loans. However, many banks feel the regulation is unclear and controversial, and they are struggling to come to terms with what the new requirements mean for them.

Mr. Strischek, Senior Vice President, Senior Credit Policy Officer, Corporate Risk Management, SunTrust Bank, recently discussed with GFMI how HVCRE is changing the regulatory landscape for CRE:

Why is HVCRE such a big issue for CRE lenders now?

DS: First, the 150% capital premium makes construction lending more expensive than other kinds of lending. Second, the higher cost of doing construction lending business puts bankers at a competitive disadvantage with non-bank lenders. Third, HVCRE may lead to higher risk because it gives a free ride to residential development at the expense of safer owner-occupied CRE and it seems to discourage long-term real estate owners because of its requirement to use cost instead of market value to determine equity. Higher administrative and funding costs mean higher risk, and higher risk will push up cap rates, and ultimately property values will decline.

What is the difficulty in classifying loans as HVCRE?

DS: The problem begins with the definition of a construction loan. Where does a lender draw the line between true ground-up construction and rehab work? The HVCRE guidance seems to be aimed at ground-up construction, but much of the owner-occupied construction involves improvements to existing structures which the borrower already occupies. Then there is the contradiction in the HVCRE's guidance that HVCRE classification ends only with the end of the construction loan or its takeout vs. the Call Report instructions marking its end with completion of construction or principal amortization, whichever comes first. 

How are strategies changing to remain competitive with non-bank lenders, whilst complying with the current regulations?

DS: Bankers are going to take a much harder look at what constitutes construction lending and what requires construction loan monitoring. Right or wrong, expect to see more cosmetic or minor-rehab construction to be funded out of working capital lines of credit on an unsecured basis or with real estate taken in an abundance of caution. Banks will also pay closer attention to their construction loan management to ensure that construction loans get completed on time and on budget.

What do you expect in the future regulatory landscape for CRE?

DS: As this cycle peaks and moves closer to recession, I expect the regulatory agencies to increase their scrutiny of commercial real estate generally and of construction lending specifically. They will certainly be examining the HVCRE process for accurate identification of HVCRE-eligible loans and any evasive tactics, e.g., funding construction with working capital lines of credit for general corporate purposes or taking real estate in an abundance of caution.

What do you think people will gain from attending this event?

DS: This event offers participants the opportunity to share ideas, exchange views, and compare practices with other individuals actively engaged in day-to-day commercial real estate risk management.

Dev is responsible for developing, implementing, and administering credit policies for SunTrust's wholesale lines of business -- commercial, commercial real estate, corporate investment banking, capital markets, business banking and private wealth management. He also spent three years as managing director and credit approver in SunTrust's Florida commercial lending and corporate investment banking areas, respectively. 

Prior to SunTrust, Dev was chief credit officer for Barnett Bank's Palm Beach market. Besides stints at other banks in Florida, Kansas City, and Ohio, Dev's experiences outside of banking include CFO of a Honolulu construction company, combat engineer officer in the U.S. Army, and college economics instructor in Hawaii, Missouri, and Florida. A graduate of Ohio State University and the ABA Stonier Graduate School of Banking, he earned his M.B.A. from the University of Hawaii. 

Dev will speaking on the topic "Defining HVCRE Loans to Best Meet the HVCRE Regulation" at the GFMI Commercial Real Estate Lending for Banks Conference, April 25-27 in New York City. This meeting will analyze the key issues with understanding the HVCRE requirements. Delegates will learn the best practices to classify loans as HVCRE and how to manage capital to meet the requirements and avoid the HVCRE classification. Case studies will cover the impact of the Basel III regulations on the overall real estate lending market and strategies to best compete with non-bank lenders in this profitable line of business.

For more information, please click here to download the conference agenda or contact Tyler Kelch, Digital Marketing Manager, GFMI at 312-894-6310 or

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