We are updating our rate sheet and reviewing problem areas that we missed on the last update. We are trying to decide how to determine the purpose for loans that are for the resale of collateral (i.e. motorcycle, vehicle, gold). We have arguments for both sides. How much documentation do you require for a non-consumer purpose loan to prove intent?

Explain "resale of collateral" and the bank's involvement in the transaction.

A customer purchases a motorcycle and states that he will fix it up and sell it in 6 months. The sale of the collateral is not the primary income source for the customer. As the bank we just make the loan as a term loan and wait for maturity. If it does not sell we term the loan as a consumer note.

I consider these "hobby investments" to be consumer loans.

I consider these "hobby investments" to be consumer loans.

I would agree these sound like they are personal investments and would consider them to be consumer loans.

It would be consumer purpose at the time of the original note and at refinance if the motorcycle, etc. does not sell. If they are doing this on an ongoing basis and making money from it regularly, at some point it could be considered a business.

If they are doing this on an ongoing basis and making money from it regularly, at some point it could be considered a business.

I would agree and almost addressed this.

For all business purpose loans we require tax returns. If there is no income being reported for the "hobby" then we will not allow it to be classified as a business loan.

I won't go into the possible SAR consideration for not reporting income to the IRS.

Agreed. And the only reason I posted at all after your post was because it seemed that the bank was considering the first loan business purpose and then, if the collateral did not sell, the second loan as consumer purpose. I wanted to make the point that unless this is a money making venture both loans are consumer purpose.

I agree with everything that has been posted. We have been very sloppy in this area. We have been tracking our loans in detail for the last year to assist us in determining any UDAAP problems. This is a major area of concern for me since looking at the sample of these loans a show, what I feel is, special treatment. I appreciate your comments as they will give me peace of mind as I go after this problem.