The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law July 21, will undoubtedly impact commercial real estate lending. But with so much rule-making yet to come, it may be years before the Act’s impact will be fully felt.

The Act directs federal agencies to issue nearly 200 rules to implement the law and gives them the authority to act on up to 350 provisions, according to the Financial Services Roundtable and U.S. Chamber of Commerce. So regulators are still in the information-gathering stage, trying to reconcile the Act’s principles with real-world rules and regulations.

For multifamily borrowers, there are two specific provisions that may impact access to both construction loans from banks and CMBS loans from conduit lenders.

One provision requires banks to keep higher capital reserves to protect against losses, though just how much they’ll need to set aside remains unclear. The second requires conduit lenders to retain some risk, or “skin in the game,” for any CMBS loans they close and issue. Then again, they may not.

“The bill creates more uncertainty,” says Dan Fasulo, managing director of New York-based market research firm Real Capital Analytics. “They’ve given so much power to the regulators to create rules, and now it’s going to take years to figure out what rules they’re going to come up with.”

1. Banks require higher capital reserves.
One primary focus of the bill is to ensure that banks are more highly capitalized to prevent the kind of failures that kicked-off this recession. Intuitively, this means that there will be less money at a bank’s disposal to lend.

If recent regulatory guidance is an indication of the potential capital reserve requirements, it’s a cloudy picture. Last October, the FDIC offered guidance basically allowing banks to extend and amend loans without triggering higher capital reserve requirements. The guidance applied to performing loans hurt by either a weak local market or the lack of liquidity available on the market to refinance.

In theory, this should have let banks breath a sigh of relief. But in practice, bank examiners have not been as flexible as the guidance suggested.

“If the examiners’ response to that guidance is an indication of how the banks are going to respond to the regulatory reform framework, we’ve got a long way to go until bank credit becomes more available,” says David Cardwell, vice president of capital markets for the Washington, D.C.-based National Multi Housing Council. “There’s a gap between politics, policy, and implementation, and that gap is apparently pretty wide.”

Any multifamily firm that’s attempted to score some construction debt from a bank this year understands this dynamic. “The administration is talking about how they want the banks to make more loans, and then the examiners come in and beat the crap out of the banks if they even dare think about making construction loans,” says Joel Altman, CEO of Boca Raton, Fla.-based Altman Cos.

2. Conduit lenders need more "skin in the game."
For conduit lenders, the buzz is all about the new “skin in the game” provisions, a possibility that the industry has been fighting since the Obama administration floated the proposal last year.

As originally written, the Act required originators and issuers of CMBS to retain 5 percent of a loan on their books, increasing their capital set-asides. This would have limited access to—and increased the cost of—CMBS loans to the borrower. The idea is that conduits would make more conservative loans if they had some stake in the loan’s performance.

Originally, the Act treated all asset-backed securities—for commercial mortgages, residential mortgages, credit cards, student loans, and the like—exactly the same. But one size doesn’t fit all. The retention of risk is already an important part of the CMBS industry—third-party investors take the first-loss position and negotiate to purchase the risk.

Trade groups—including the Commercial Real Estate Finance Council, the NMHC, and the National Apartment Association—helped to amend that provision to allow regulatory flexibility for CMBS. While no rules have yet been made around this provision, the expectation is that third-party investors will satisfy that 5 percent requirement for most CMBS loans.

3. Additional provisions affect the multifamily industry. 
There are two more granular provisions buried deep within the bill that may have an effect on the multifamily industry beyond liquidity.

The Act directs the Department of Housing and Urban Development (HUD) to create a program to provide new equity to “at-risk” multifamily properties, and create a long-term sustainable financing program for those properties based on current rental income and operating and replacement reserves.

Basically, HUD would be able to facilitate the sale of a distressed property to ensure that properties with significant levels of deferred maintenance would get into the hands of a more liquid owner. It will probably be years before this program is fully funded and running, though.

And in a move that’s being applauded by the multifamily industry, the Act also directs banking regulators to establish “reasonable” interchange fees for credit card transactions. The bill allows apartment owners to pass these fees on to residents, letting them set different rents and fees for cash, debit card, automated check handling, and credit card transactions all within the same payment portal or channel.

In the past, firms had to process credit card payments through one portal, and cash or checks through another, since existing law prevented them from charging different fees based on payment type. “The fees associated with credit cards are significant, and you couldn’t have a different cash price and credit price, so you’d have to send renters to different channels,” Cardwell says. “A number of owners removed the payment terminals in the resident offices and only took checks, and if you wanted to pay online you had to go back to your unit.”
So owners will now be able to take different types of payments through the same payment channel, and can charge different cash price and credit price, “so they can accommodate those that want to pay by credit card without having to eat 100 percent of the fee,” Cardwell adds.