CRA questions for small business loans secured by nonfarm residential real estate. I am confused on this and even after reading the CRA Getting it Right Guide and FDIC Call Code guidance, I am still confused. Can someone please help to clarify?
1. Small Business Loan (call code 04A0), new loan for working capital, loan amount is less than $1 million, loan is secured by 1-4 family real estate. Is this CRA reportable as a small business loan for type 3 “loans secured by real estate”?
2. Same type of loan as above, but secured by 1-4 family real estate and UCC all inventory. Is this CRA reportable as a small business loan for type 3 “loans secured by real estate”?
3. What exactly does an “abundance of caution” mean?
We have never reported small business loans that have been fully secured by residential real estate or partially secured by residential real estate on the CRA LAR. Our understanding is that these may be reported as the Other Optional Loan Data that can be submitted to examiners. Are we doing this right?
I would disagree with Kaybee on this one. If the residential real estate residual collateral value is greater than 50% of the value of the loan at origination then it would be a real estate secured loan and would not be a reportable small business loan unless the real estate was taken as an "abundance of caution" (meaning you would have still made the loan on the same terms and conditions with or without the real estate). So you may have a situation with considerable personal property (such as inventory, receivables, etc) as collateral but which also includes residential real estate and it will be disqualified as a reportable small business loan (because of the Call Report definition of "real estate secured loan").
If the RE residual collateral value is less than 50% then you clearly would be talking about a reportable small business loan if it fills all the other conditions of a small business loan.
Thanks for the responses, but just wanted to clarify.
1. If we have a small business loan secured by residential RE and the RE is appraised at a value less than 50% of the loan amount, it would be reported as a small business loan...correct?
2. If we have a small business loan secured by UCC (inventory) and residential RE and the RE is appraised at a value less than 50% of the loan amount, it would NOT reported as a small business loan...correct?
3. Basically anytime the loan is secured by residential real estate and UCC (inventory, receivables, etc.) it would not be CRA reportable...correct?
4. So to me it seems pretty rare now a days to have a small business loan secured only by a resdential real estate where the appraised value is less than 50% of the loan amount to be CRA reportable since banks are requiring a higher collateral...right?
Am I interpreting these correctly? Thanks so much for your input.
Loc: Highland Park IL
We have been told by our FED examiners that loans that have residential real estate that is greater than 50% (net) of the loan amount would not be considered as aboundace of caution.
One other point our examiner made to us was you first have to determine if you have a "real estate" secured loan. The collateral percentages will determine this. It will then be the purpose of the loan that will then dictate if it is reportable.
So if the collateral is business assets and residential real esate and the residential real estate minus any liens is greater than 50% of the loan amount the loan would not be reportable. Regardless of the purpose.
If the collateral is comercial real estate and residential real estate and the residential real estate is greater than 50% of the loan amount and the purpse of the loan is business purpose (other than a HMDA related Purpose) you have a small buisness loan (1.e).
if the collateral is Business assets and Residential real esate and the residential real estate minus any liens is less than 50% of the loan amount the loan would be reportable small business loan (4.a).
"truth does not occur in the database" - Actual search result on a goverment website
After re-reading the CRA Interagency Q&A's, it seems to me that small business loans secured by residential real estate (not an abundance of caution) are not CRA reportable as small business loans (See Q&A below). Am I interpreting this right?
Are loans secured by nonfarm residential real estate to finance small businesses ‘‘small business loans’’?
A3. Applicable to banks filing Call Reports: Typically not. Loans secured by nonfarm residential real estate that are used to finance small businesses are not included as ‘‘small business’’ loans for Call Report purposes unless the security interest in the nonfarm residential real estate is taken only as an abundance of caution. (See Call Report Glossary definition of ‘‘Loan Secured by Real Estate.’’) The agencies recognize that many small businesses are financed by loans that would not have been made or would have been made on less favorable terms had they not been secured by residential real estate. If these loans promote community development, as defined in the regulation, they may be considered as community development loans. Otherwise, at an institution’s option, the institution may collect and maintain data separately concerning these loans and request that the data be considered in its CRA evaluation as ‘‘Other Secured Lines/Loans for Purposes of Small Business.’’
The problem is that not all small business loans "secured by residential real estate" are secured by residential real estate as defined in the Call Report. For that to occur, the residual collateral value of the real estate would have to exceed 50% of the loan value at origination. If you read the examples in the Call Report they explain a situation in which residential real estate is taken as part of the collateral and the collateral value is less than 50% of the loan value and they say the loan should be reported as a C&I loan, not a real estate secured loan.
I just spent many hours today explaining this. If not more than 50% of the loan proceeds are secured by residential real estate, the loan is reported as a C&I loan and is therefore small business type 1 for CRA. Everything goes by Call Report definitions.