We are having an examination soon and as part of the preparation, they have asked us for a list of all business loans. We sent them a list and they replied with some concerns that we have a lot of loans to businesses where the gross revenues are $0. This is mainly because we have done loans to an LLC (for example) - which is a real estate holding company that has no income - and used the personal income of individual guarantors to underwrite the loan.

We are not a CRA reporting bank (yet) and I suppose I need to get used to explaining this to examiners.

Has anyone else dealt with this? If so, what kind of explanation did you provide? And, were you criticized in any way?

I recently went through an internal compliance audit and was written up for this. This is how it was explained to me; see if you agree.
$0 is only to be used for start up entities that have no year to date revenues.
RE Holding Companies receive rent from some source; either an operating company or, if an investment property, from the company leasing the property.
If an operating company leases the building (meaning the entities are related), then you must report the revenue of the operating company.
If an investment property, you must report the rents received from the companies leasing the building.
You never report personal income, and never report $0 unless they haven't started receiving rents yet (investment property). I had to rescrub my file and make corrections.

So, would it be correct to report $0 for a real estate holding company formed for the purpose of holding a specific property (single-asset entity) where no rents have been collected and the primary repayment of the loan is from the sale of that property? Loan was underwritten with individual gurantees so financial strength relies on the guarantors. Thanks!

Yes, because you do not combine the guarantors.

From pages 13 and 14 of the 2010 Guide:


Generally, an institution should rely on the revenues that it considered in making its credit decision when indicating whether a small business or small farm borrower had gross annual revenues of $1 million or less. 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.

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, it should not adjust the borrower’s revenues for reporting purposes.

For a start-up business, the institution should use the actual gross annual revenue to date (including $0 if a new business has had no revenue to date). Although start-up businesses will provide the institution with pro forma projected revenue figures, these figures may not accurately reflect actual gross revenue and therefore should not be used.

I was thinking that since we relied on the guarantors' cash flow in making the loan, we may need to report the gross income for the guarantors. As always, thanks Kathleen:-)

How did you you capture the GAR for each borrower for the regulators as CRA submisssion only requires a revenue category of 1, 2, or 3?

I guess what I am suggesting is why capture the actual GAR in a file when you only have to capture a category. We currently capture GAR and then convert to a GAR category, which it sounds as if you may do something similar. We are looking at a new lending platform that allows the lender to select the GAR category and not imput the actual GAR. I can see many pros to capturing ONLY the Revenue Category.

What do others think?

Regulators are asking for the actual revenue so they can check your coding without rooting through files. They are asking for spreadsheets with all sorts of codes...class, call, purpose, collateral, actual revenue.

I am seeing this frequently at all size banks.

At our last exam, they asked for our revenues AND verified them to the files.

We have separate data integrity visits that pretty much go on year round...

That must be a joy.

What it amounts to is....make sure you can back up the code you selected...whether you submit or not! It is not just a number.

Are Small Business/Small Farm Loans with a GAR over a million CRA reportable? Or are we supposed to only submit those SB/SFL with a GAR of under a million?????

You report all loans that meet the definition of small business/small farm regardless of revenue. You code the revenue appropriately:

1 = revenue less than or equal to one million
2 = revenue greater than one million
3 = revenue not known

Thank you!