For our loans on NOO cash flow properties, we have been requesting on an annual basis the customers tax returns so we can re-analyize their cash flows on the subject property each year. This was not a written condidtion in our agreements years ago, but we have included it as a condition of the loan for the last few years.

We often end up receiving generally the, PFS's, schedule E's of the subject properties, or a self made, or accountants prepped P/L statement. Seasoned customers, and some who simply do not care because it is not expressly written in our agreement, who did not have this condition have generally blown us off.

So upon a recent examiner visit, they made it very clear that we need to be obtain the FULL tax returns of these peeps annually.

So then:

Where is it stated that we need to obtain full annual tax returns on these customer? Is there a guidance that we are missing? Is their an interpretation we are not understanding?

Are there any exemptions for seasoned customers where we have not had any payment issues with their loans for say the last 10-15 years?

If we have not conditioned for it in the past, what teeth do we have to get it now? Simply saying because the FDIC says so is not going to phase these people.

Suggestions and guidance are appreciated.

bump.

We have not had that conversation (yet ...), but what they are looking for are more "global" analyses, rather than simply focusing on the property(ies) that you may have financed. Getting a full TR plus all schedules is likely covered under "all other information we may require" in your current documents. In my case, those borrowers that ask about the need to submit more, I just state that we need to look at the bigger picture. As usual, most will comply, some will not.

Well that is part of the issue... it it not well enough discussed in older agreements, and the customers are not willign to comply with our "new" requests or requirements.

I would assume the majority of these are "commercial" loans. Most older commercial notes have an "on demand" clause in them. You can always exercise that clause, if present, and you most certainly can refuse to extend the maturity date or payment, renew, loan new money or refinance any existing loan until they provide the requested information.

It's also your option to suspend any other "privileges" they might enjoy that are not contractual. Such as paying overdrafts, waiving servicing fees, pre-approving an equipment purchase etc.

Also look to see if there's a "change in terms" clause that may give you the ability to change the terms.

Good leads, we will have to review that closer.

I think the bigger issue we are dealing with though is where is it spelled out that we have to be doing more than we are. We are open to improvement and doing as asked by the examiners, but we are having trouble finfding where it says we have to obtain full annual tax returns on these customer? Is there a guidance that we are missing? Is their an interpretation we are not understanding?

Are there any exemptions for seasoned customers where we have not had any payment issues with their loans for say the last 10-15 years?

We prefer to understand where we are wrong, or not followign the rules before we proceed swinging our sticks.

Ask the examiner for their reference, or refer to the following.


http://www.fdic.gov/news/news/financial/1995/fil9549.html

From the PDF attachment page 35679:

D. Credit underwriting. An institution should establish and maintain prudent credit underwriting practices that:

4. Establish a system of independent, ongoing credit review and appropriate communication to management and to the board of directors;

Without obtaining the full tax returns you cannot do a comprehensive credit review. They may show a profit on a specific schedule relating to your "rental" property but another schedule could show a substantial loss that would not necessarily show on the schedule for rental property, therefore greatly putting your credit at risk. And simply because a customer has paid you as agreed for the last 10 or 15 years doesn't mean that within the next 90 days they don't run into some sort of a problem that a comprehensive credit review may have been able to curtail.