New Basel III Requirements are Having a Dire Impact on Profitability of Commercial Loans at Banks

The Profitability of Commercial Loans at banks seem to be taking a direct hit from the new Basel III Requirements that are placing severe new limits on commercial construction and development loans made by banks and developers of commercial real estate. The Office of the Comptroller of the Currency’s (OCC) Comptroller’s Handbook booklet, “Commercial Real Estate Lending,” which provides guidance on commercial real estate lending for bankers and bank examiners, states that commercial construction and development loans are a significant source of revenue and profit for banks, but also carry significant risks due to the illiquidity of property that is often used as collateral in these types of loans.

According to a recent article in the online journal, Origination News, new regulations that are designed to decrease the risk associated with these loans, the Basel III Requirements, actually harm the ability of banks to offer profitable commercial loans for development and construction by restricting credit availability.

Under the new requirements, borrowers will now have to have at least 15% equity to avoid their loan being placed into a new category termed High Volatility Commercial Real Estate. When a commercial real estate development and construction loan meets the definition of this new category, it must now meet a 150% capital requirement, and the loan can no longer go over 80% of the estimated value of the project at the time of its completion.

These new requirements are making commercial construction and development loans more expensive for both the borrower and the lender, as developers are more likely to turn to nonbank lenders for these types of loans, and traditional banks face a higher hurdle to meet their profitability requirements as they lose a significant portion of the revenue they earned by originating these types of loans.

To counteract the effects of these increased requirements, banks and other lenders absolutely need to lower their costs and increase their profitability by using an automated, online loan pricing model that offers consistent and reliable results that allow lenders to easily see how they can use slight changes in the structure of the commercial loan to make the loans that they offer more competitive to borrowers while increasing their productivity and profitability.

Contact us today and ask us how our PULPS loan pricing model can help your organization to be able to continue offering competitive commercial loans in this environment of increased regulation.