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#1034827 - 09/04/08 06:57 PM material change in financial condition
agent99 Offline
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Some of our consumer loan documents use the phrase "material change in financial condition" in discussing the right for the bank to restrict, limit or terminate a line of credit. I'm looking for thoughts on what that "material" may mean to you.

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Lending Compliance
#1034844 - 09/04/08 07:07 PM Re: material change in financial condition agent99
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
The attachment in the following should give you some guidelines:

http://www.fdic.gov/news/news/financial/2008/fil08058.html
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#1034878 - 09/04/08 07:31 PM Re: material change in financial condition agent99
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We had to deal with this exact thing and quite honestly, it's tough because my idea of a material change is different from the bank President's, so we asked our compliance consultants for advice, since there isn't a lot of guidance from regulators, and they basically said in a nut shell....you need to come to an agreement on what you think is a material change and be sure to apply it consistently across the board.

For example, a 25 point drop in their score might be a material change, or 50...that's for you to decide, or perhaps 2 or more 30-day lates on the bureau within the past 180 days (but be careful.....what if the creditor reported the borrower late in error, so we didn't use that as a measure), or maybe if they have 2 or more 30-day lates with your institution within the past 180 days.

These are just suggestions...and I welcome the advice of the gurus. We have suspended lines for reduction of property value and for material change in financial condition and I PRAY that we have implemented this correctly because examiners are coming on Monday!!!

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#1034924 - 09/04/08 07:58 PM Re: material change in financial condition Many Hats
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
Quote:
For example, a 25 point drop in their score might be a material change, or 50...that's for you to decide, or perhaps 2 or more 30-day lates on the bureau within the past 180 days (but be careful.....what if the creditor reported the borrower late in error, so we didn't use that as a measure), or maybe if they have 2 or more 30-day lates with your institution within the past 180 days.


These are not material changes in the borrower's financial condition. These are changes in how they are handling their existing debt, which is a factor you can use to establish reasonable belief the borrower cannot fulfill their obligations to you.

However, if you read the Commentary to 226.5b(f)(3)(vi)(7) you will see that there are two condition that have to be met.

IMO you have only met one of those conditions, the reasonable belief. You have not documented there has been a material change in the financial condition such as a significant reduction in income. The drop of a credit score does not show a material change.

In 2005 within a 60 day period I bought a new truck and new boat. Do you not think that dropped my credit score, but with the money I had as a down payment my financial condition was not materially affected.
Last edited by Dan Persfull; 09/04/08 08:33 PM.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#1034954 - 09/04/08 08:19 PM Re: material change in financial condition Dan Persfull
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Orlando, FL
[quote=Dan Persfull The drop of a credit score does show a material change.[/quote]

Did you mean to say the drop doe NOT show a material change?

If so, I relly thing we were advised wrongly. The advice we were given helps us establish the reasonable belief perhaps, but there is nothing that addresses the factual evidence of a material change.

For example, we suspended a line because the borrower's score dropped over 50 points (mainly due to credit card delinquencies); however they have not paid us late since 2005 and they have never paid late on their mortgage. I don't think we have enough evidence to substantiate that there's been a material change.

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#1034978 - 09/04/08 08:35 PM Re: material change in financial condition Many Hats
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
Yes I did and I edited the comment. Thank you.

Quote:
I don't think we have enough evidence to substantiate that there's been a material change.


I agree.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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#1034984 - 09/04/08 08:39 PM Re: material change in financial condition Dan Persfull
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Posts: 915
Orlando, FL
Thanks for your help!!!

We have FRB examiners coming on Monday and are wondering if they will want some sort of documentation showing how we arrived at our "magic number" of our definition of significant change in value, which happens to be 15%. Should we have articles or other market data ready to support it?

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#1034988 - 09/04/08 08:42 PM Re: material change in financial condition Many Hats
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,517
Bloomington, IN
I would most definately have my supporting documentation ready.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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