Thread Options 
|
#112509 - 09/05/03 06:20 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Dec 2000
Posts: 3,455
The Pennant Race
|
What income did you rely on when making the loan? If it was the income of the proprietorship, then I think you use that figure. If you made the loan without placing reliance on an income figure, then I think you use NA.
_________________________
The opinions expressed here are personal and do not represent opinions of my employer.
|
|
Return to Top
|
|
|
|
|
#112511 - 09/05/03 09:42 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
|
You're right, use the previous revenues of the business. The change in legal status isn't really a factor here. If it's the same guy, doing the same business, but under a corporate umbrella, it's really a known entity in your eyes, not a new business, despite the corporate issue.
The lender had to doc it like a new business, so they're probably confused. Revenues of the previous sole-proprietorship are in file I'm guessing, and would be the source of repayment.
_________________________
Dawn Coursey VP/CRA Queen
CRA Rating is in...Oh who cares...I'm home with the baby.
|
|
Return to Top
|
|
|
|
|
#112512 - 10/22/03 09:05 PM
Re: REVENUE CODE ON CRA LOAN
|
Anonymous
Unregistered
|
Why would you use N/A for start-ups? I interpreted the Q&A to say that you wouldn't use projected reveues for a startup, but even if it's $0, wouldn't that be "less than $1MM" vs. n/a?
|
|
Return to Top
|
|
|
|
|
#112513 - 10/22/03 09:21 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
|
Probably because projected revenues for start ups are normally so far off base they're not used in a credit decision. IE. We're going to make $30,000,000 in the first six weeks when my Amway pyramid takes off. I only need to borrow $12,000 to inventory up....
Projected revenues are a guess, and not a figure to be relied upon for repayment. IF there wasn't a contract in hand with a guaranteed revenue stream attached, there wouldn't be a real revenue figure to rely on, and therefore the n/a would be the more appropriate figure.
0 means "no" revenues, which, while being less than a million, also would not give you any revenues to base a credit decision on, therefore, you get lead right back to the n/a, verses a code 1 for less than one million.
_________________________
Dawn Coursey VP/CRA Queen
CRA Rating is in...Oh who cares...I'm home with the baby.
|
|
Return to Top
|
|
|
|
|
#112515 - 10/23/03 01:57 PM
Re: REVENUE CODE ON CRA LOAN
|
Anonymous
Unregistered
|
Okay, here's the quote. This is what I interpret as being a "1", not "N/A". It says "including 0", well, that's less than a mill! I have questioned my examiner, but to no avail. They quoted the same! That's not giving me an answer.
|
|
Return to Top
|
|
|
|
|
#112516 - 10/23/03 06:35 PM
Re: REVENUE CODE ON CRA LOAN
|
Junior Member
Joined: Sep 2003
Posts: 43
West Coast
|
I agree with Anon. It says to use the actual revenue to date including 0. If it is 0 that is less than 1 million.
_________________________
These opinions are my own and may or may not be the opinions of my employer.
|
|
Return to Top
|
|
|
|
|
#112519 - 10/23/03 09:16 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: May 2002
Posts: 3,608
Near the Land of Enchantment
|
I agree - as long as we have docs in file supporting that the start-up doesn't have any revenues yet. But if the officer just blew it off and collected info only on the guarantors - wouldn't you be forced to use the 3?
_________________________
Opinions my own.
|
|
Return to Top
|
|
|
|
|
#112521 - 10/23/03 10:49 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
|
Remember though, while it might not give us the most favorable numbers, the figure we're suposed to rely on is the revenues used in the loan decision. If the business had none, and you gave them a loan on a wish and a prayer...heck use the 1, but if you relied on income from the business owner, you would be forced to use the 3. If you want to support to your examiner that you gave a loan to someone with 0 revenues, but took NO OTHER REVENUES or income into consideration...go for it, but remember, good for CRA...sucks for Safety and Soundness  As was pointed out, normally they have some amount of revenues, (six months, etc.) and these might be the basis of your credit decision. If that's the case, use the appropriate code. We do some medical practice loans. The future revenues and frankly the income earning potential of the doctors is the factor in the loan decision, not the revenues. For this reason, they end up with a 3. Sure the next year they're a 2  but we report correctly in year one. For me, when I review the portfolio for data integrity, I expect to see just a few 3's. For every 3 out there, I check the file and make sure it's accurate. Most of the time they're not, the lender is relying on the revenues of another company for repayment. Some banks might have a lot more, due to lending based on credit scores for the small deals.
_________________________
Dawn Coursey VP/CRA Queen
CRA Rating is in...Oh who cares...I'm home with the baby.
|
|
Return to Top
|
|
|
|
|
#112522 - 10/23/03 10:52 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Dec 2000
Posts: 3,455
The Pennant Race
|
Dawn, this is one of those things that can be driven by your exam team as well. Our compliance EIC just told us that if it's a start-up, use "1," period.
_________________________
The opinions expressed here are personal and do not represent opinions of my employer.
|
|
Return to Top
|
|
|
|
|
#112523 - 10/23/03 11:30 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Jun 2001
Posts: 8,272
Where the heart is
|
This is what gripes me - when examiners and community groups grill banks about small business lending, the stat commonly thrown around is the percentage of businesses in an area that have revenue of $1MM or less. On it's face, it's a very daunting stat as it is usually in the 90% range. But there is no "qualification" to determine how many of these small busineses are REALLY small business.
So when examiners thow out the Revenue category "1" based on these arcane technicalities, then it just makes that 90% statistic look like utter sophistry.
If you review the Q&A on this subject, the part about what we "rely" on really only comes into play when we rely on revnues from a parent corporation or a subsidiary of that parent corporation.
§ __.42(a)(4) – 1: When indicating whether a small business borrower had gross annual revenues of $1 million or less, upon what revenues should an institution rely?
A1. Generally, an institution should rely on the revenues that it considered in making its credit decision. For example, in the case of affiliated businesses, such as a parent corporation and its subsidiary, if the institution considered the revenues of the entity’s parent or a subsidiary corporation of the parent as well, then the institution would aggregate the revenues of both corporations to determine whether the revenues are $1 million or less. Alternatively, if the institution considered the revenues of only the entity to which the loan is actually extended, the institution should rely solely upon whether gross annual revenues are above or below $1 million for that entity
Further, this is what the Q&A says on "other" guarantors:
However, if the institution considered and relied on revenues or income of a cosigner or guarantor that is not an affiliate of the borrower, such as a sole proprietor, the institution should not adjust the borrower’s revenues for reporting purposes.
The Q&A then goes on to say this about revenue information:
The regulation does not require institutions to request or consider revenue information when making a loan; however, if institutions do gather this information from their borrowers, the agencies expect them to collect and report the borrowers’ gross annual revenue for purposes of CRA. The CRA regulations similarly do not require institutions to verify revenue amounts; thus, institutions may rely on the gross annual revenue amount provided by borrowers in the ordinary course of business. If an institution does not collect gross annual revenue information for its small business and small farm borrowers, the institution would not indicate on the CRA data collection software that the gross annual revenues of the borrower are $1 million or less.
I read this to mean if I COLLECT the information, then I report it. The revenue figure would only be adjusted IF I RELIED on the revenue of a parent corporation or affiliate. Personal guarantors are not parent corporations nor are they affiliates.
Finally, here is the question on start ups:
§ __.42(a)(4) – 3: What gross revenue should an institution use in determining the gross annual revenue of a start-up business?
A3. The institution should use the actual gross annual revenue to date (including $0 if the new business has had no revenue to date). Although a start-up business will provide the institution with pro forma projected revenue figures, these figures may not accurately reflect actual gross revenue.
Note again that the business OWNER is not a parent corporation nor is he or she an affiliate. So if I RELY on the business owners personal income for a start-up, I'm still going to show REVENUE as $-0-
On the other hand, if XYZ Widgets, Inc. is starting up a subsidiary called Widgets-R-Us, and I RELY on the revenue of XYZ Widgets to make the deal, then I will report the revenue based on XYZ.
_________________________
CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'
|
|
Return to Top
|
|
|
|
|
#112524 - 10/24/03 12:04 AM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
|
Paul, your EIC is frankly wrong. Which is proven out in Bonnie's comment. The revenues relied on for repayment are what would be reported, not a blanket 1. I'd argue myself blue in the face with him/her Well that is if I did much start up business We do occasionaly do deals for very very very large corps that start new lines of business for specific projects. Reporting them as a 1 on a blanket policy would frankly be skewing my CRA figures dishonestly when I know they're multi million or multi billion dollar firms and should receive a 2, since we relied on the huge company for repayment. Bonnie...I read this just a little different. Quote:
Generally, an institution should rely on the revenues that it considered in making its credit decision. For example, in the case of affiliated businesses, such as a parent corporation and its subsidiary, if the institution considered the revenues of the entity’s parent or a subsidiary corporation of the parent as well, then the institution would aggregate the revenues of both corporations to determine whether the revenues are $1 million or less. Alternatively, if the institution considered the revenues of only the entity to which the loan is actually extended, the institution should rely solely upon whether gross annual revenues are above or below $1 million for that entity
I don't think that the rely issue "only" comes into play when it's a parent company etc. The first line of that statement says: "Generally, an institution should rely on the revenues that it considered in making its credit decision."
I read the second portion as an example of when you wouldn't report the revenues of the business you're financing, but it's only for example purposes.
Am I talking in circles? Or reading in them?
_________________________
Dawn Coursey VP/CRA Queen
CRA Rating is in...Oh who cares...I'm home with the baby.
|
|
Return to Top
|
|
|
|
|
#112526 - 10/24/03 12:24 AM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
|
I think we're saying the same thing Bonnie, but I'm not absolutely sure LOL I wouldn't add in the income of a co signer or guarantor(Non affiliate of the borrower) when determining a revenue code, but if the income of the guarantor or sole proprietor were used, and the business wasn't open yet, I'd make it a 3. If the business had been open a month or two, well I could accept a 1, but not if it hadn't been in operation. If it hadn't been in operation, the revenues wouldn't be zero, they wouldn't be anything, non existant businesses have non existant revenue Most start ups come to the bank when the idea is perceived, with little more than the idea, and perhaps some formation papers. They're not actually operating a business, taking orders, etc, they're just thinking about the business. If we don't give them the loan, the "business" never existed and reporting it as a 1 would not jive with my little brain. I would change a lenders 1 to a 3 in that scenario. I suppose that's the issue with CRA that drives us all nuts. There is room to move on both theories. I feel my thinking (in the last example) is sound, and fits within the regulatory statement. I just feel that you have to have the ability to generate revenue to report revenue. I can see your side of the 1/3 issue on start ups though. We just need a couple of hat racks I guess I do completely agree though that we wouldn't ever add in cosigner or guarantor income.
_________________________
Dawn Coursey VP/CRA Queen
CRA Rating is in...Oh who cares...I'm home with the baby.
|
|
Return to Top
|
|
|
|
|
#112527 - 10/24/03 04:35 AM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Jun 2001
Posts: 8,272
Where the heart is
|
Quote:
Most start ups come to the bank when the idea is perceived, with little more than the idea, and perhaps some formation papers. They're not actually operating a business, taking orders, etc, they're just thinking about the business. If we don't give them the loan, the "business" never existed and reporting it as a 1 would not jive with my little brain. I would change a lenders 1 to a 3 in that scenario.
Dawnie, that wouldn't be a loan, that would be a donation! 
For that kind of start-up, their best place to go for capital is the Bank of F&F.*
*Family and Friends
_________________________
CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'
|
|
Return to Top
|
|
|
|
|
#112528 - 10/27/03 08:09 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: May 2002
Posts: 3,608
Near the Land of Enchantment
|
I'm gonna jump in here and ask for some more clarification (or sympathy, or whatever is appropriate). I've read and reread the q & a on start-ups and all things GAR. Typically, when we loan for a start-up, we have ultra-strong guarantors/principals. We're not making unsound credit decisions, believe me. Let's just say that no one has ever accused us of liberal lending standards. Also, typically, we're not dealing with one corporation and another LLC - we're dealing with individuals and possibly one business entity. We base our loan decision on those principals personal incomes. According to the definition of affiliate that I'm told to use however, an individual person can never be one - only business entities. Therefore, if we make such a loan - the GAR is a 3 (can't use sole prop revenue - only 'affiliate'). For example, on a loan to an LLC to hold a medical office building, and all the signers and owners of the LLC are the doctors whose offices will be in the building, we must report the GAR as 3 if this is a new venture - even though we're making the loan (basically) to multi-million dollar producing doctors. In subsequent years, the LLC might have a few thousand pass through in income, but we don't collect those statements - because our loan is based on the doctors who own the LLC and inhabit the building. Still a 3. Seems to circumvent the purpose of reporting GAR at all - doesn't it? In my mind, this example should be a 2 because of the revenue we considered in making the loan. Many more times, the individual(s) behind the business have GARs of 1 - but we still gotta report the 3 if we didn't rely on or collect the business entity's revenue info. Is this how y'all understand this? It's given me a month-long headache. 
_________________________
Opinions my own.
|
|
Return to Top
|
|
|
|
|
#112529 - 10/27/03 08:57 PM
Re: REVENUE CODE ON CRA LOAN
|
Power Poster
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
|
Two things Lestlie (you know me, it will actually be five things, but don't count)  I agree with your use of the 3 code. But I'd throw in a couple questions before I'd call any deal a 3, especially your example. If the doctors were already in practice, but formed a LLC together, the lender would probably be using the revenues of the doctors to make the decision (after all, on a doctor, how can you end up with income without considering revenues on a closely operated clinic?). If the revenues of the clinic were taken into consideration (in the file basically) than I'd code to those revenues as appropriate. If they were start up doctors, or doctors working for another doctor or hospital, moving out on their own, the 3 code would be appropriate and their income, as well as income potential would be the relied upon source. In your last paragraph you mention the "individuals behind the business have GAR of 1". Remember, in the eyes of CRA and HMDA, individuals have income, not revenues (GAR). Only businesses have revenues so if the individuals INCOME was what you used to make the decision, 3 is always the correct code. Believe me, we don't have a reputation for giving cash away on a whim either. We either have guarantors who know god and the location of his vault or we're dealing with existing clients doing startups in relation to their businesses. That's an overstatement of course But we're pretty conservative ourselfs. I don't see many 3's on the LR 
_________________________
Dawn Coursey VP/CRA Queen
CRA Rating is in...Oh who cares...I'm home with the baby.
|
|
Return to Top
|
|
|
|
|
#112530 - 10/28/03 10:25 PM
Re: REVENUE CODE ON CRA LOAN
|
Anonymous
Unregistered
|
I recently tried to clarify this with an OCC examiner who told me that if we are loaning to a newly formed LLC (such as in your example of doctors forming a LLC to own commercial real estate), then we would use 1 the first year because it is a start-up.
|
|
Return to Top
|
|
|
|
#112531 - 10/29/03 01:07 AM
Re: REVENUE CODE ON CRA LOAN
|
Anonymous
Unregistered
|
I am going to beg forgiveness first because this may be a dumb question. If we are to only report small business loans less than $1 million in revenue, then when would we use code 2 which is = to or greater than $1 million? I'm noticing a lot of loans with a 2 revenue code and I am a little confused. Also, just to confirm if we have a small business who is in the business of purchasing 1-4 family dwellings, would we be correct to geocode the business address? Appreciate your insight.
|
|
Return to Top
|
|
|
|
|
|
Previous Thread
Index