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#2043694 - 10/09/15 08:25 PM CRA - Affiliate Clarification
Breeco Offline
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Breeco
Joined: Aug 2014
Posts: 93
Nebraska
This is complicated, so let me lay this example out for you:

Borrower X is a real estate LLC - one of many LLC a particular parent company has. The parent company is not our borrower or guarantor.
The two individuals that guaranty the loan provided their tax returns and Borrower X's tax return.
Borrower X has a negative number on its tax return and the only income on the guarantors tax returns are for other properties or other company's.
The parent company has over $33MM in revenue, but it was not considered part of the credit decision - only the guarantor's liquidity was looked at for the deal.

(1) Can the sales/gross rents from the other companies shown on the guarantors tax returns be used for the GAR?
(2) Or do we have to use a "3" revenue code, because the individuals don't meet the definition of an affiliate?
(3) Or do we have to use a "2" revenue code, because we know the borrower is part of large holding company?

Sorry to hurt your brain for a Friday.

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#2043729 - 10/09/15 09:56 PM Re: CRA - Affiliate Clarification Breeco
Kathleen O. Blanchard Offline

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Individual guarantor income does not count.

You want gross sales of borrower X...how much was earned from products sales to customers...no adjustments for expenses. How big is the company?
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#2043734 - 10/09/15 10:09 PM Re: CRA - Affiliate Clarification Breeco
Breeco Offline
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Breeco
Joined: Aug 2014
Posts: 93
Nebraska
Yes, not looking at income - Looking at Schedule C/Es for guarantors.

The LLC [borrower] was formed to handle a piece of property until it's sold, so it won't show any or very little revenue until sold. It's part of a very large parent company, but the parent company was not considered for the credit nor do we hold the parent company's business.

Ultimately the question is can we use revenues from Schedule C/Es of the guarantors, who are individuals, in order to determine GAR or do we have to exclude those dollars and code as a "3", because we don't have anything for the borrower?

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#2043742 - 10/10/15 09:42 AM Re: CRA - Affiliate Clarification Breeco
Kathleen O. Blanchard Offline

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You can use any source to obtain gross revenue (sales) of the borrower.....you don't want the individual guarantors.... including asking the borrower.
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Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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#2043930 - 10/13/15 05:39 PM Re: CRA - Affiliate Clarification Breeco
Darth HMDA, CRCM, CAMS Offline
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Darth HMDA, CRCM, CAMS
Joined: Dec 2013
Posts: 1,387
CA
As KayBee said you can only include the revenues of the borrower. Personally, I struggle with the "affiliate" rule. If the parent company was occupying the building, if they weren't a guarantor, you still cant use their revenue. Seems pretty counterintuitive to me, but that's the letter of the law.

Use the revenue of Company X only - Based on your description I would most likely code this as a revenue code 1. Always ignore individual guarantors. We have a lot of comm/buss loans that are underwritten to the personal strength/liquidity of the individual guarantors. Although that is sometimes the PSOR, we cannot ever include their personal revenues.

sigh...
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#2043937 - 10/13/15 05:50 PM Re: CRA - Affiliate Clarification Breeco
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
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You don't have to have a guarantee of a parent or affilliate. The bank could have said "we will make this loan because the parent, XYZ, is highly profitable and is the main tenant.".

Now, good practice would want XYZ as a guarantor, but the rules do not say there has to be a guarantee to have "considered" the parent/affiliate.

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.
_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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#2043947 - 10/13/15 06:29 PM Re: CRA - Affiliate Clarification Breeco
Princess Romeo Offline

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Posts: 8,272
Where the heart is
Yes - so even though the company is treated as a "small business" for purposes of Regulation B (notification requirements and record retention), CRA would treat the company as a "large business" because of the financial consideration given to the parent/affiliate.

I think that's what has many compliance people flummoxed is that you have to abide by all the small business rules for Reg. B, but you don't get the small business benefit for CRA.
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Regulations are a poor substitute for ethics.
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#2043950 - 10/13/15 06:37 PM Re: CRA - Affiliate Clarification Breeco
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,281
Banks should not try to apply definitions across regulations.
_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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#2044057 - 10/14/15 11:54 AM Re: CRA - Affiliate Clarification Breeco
Princess Romeo Offline

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Princess Romeo
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Posts: 8,272
Where the heart is
Kathleen - I agree, but the irony is not lost on me.
_________________________
CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

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#2054752 - 12/17/15 06:21 PM Re: CRA - Affiliate Clarification Breeco
Breeco Offline
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Breeco
Joined: Aug 2014
Posts: 93
Nebraska
'Ultimately the question is can we use revenues from Schedule C/Es of the guarantors, who are individuals, in order to determine GAR or do we have to exclude those dollars and code as a "3", because we don't have anything for the borrower?"

Going back to this question above and just to be clear based on your response. We cannot use any Tax Return Schedule C/D/E [gross rents/sales] revenue from an individual guarantor for CRA revenue calculation, correct. [i.e.owner of the borrower who is an individual. Where we don't have revenue for the borrower, but we have a schedule from the owner showing the borrower's gross receipts/rents.]

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#2085947 - 06/29/16 06:25 PM Re: CRA - Affiliate Clarification Breeco
Soccerdad Offline
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Soccerdad
Joined: May 2004
Posts: 80
IL: Will
You could use the revenues from Schedule C/E, if they show the revenues for borrower X.

You could also use a schedule from the owner showing borrower X's gross receipts/rents.

Why is it that no information is available on Schedule C/E for business X? Is it a start-up?

Couldn't you document that and report revenues as Rev Code 1 instead of 3, if a start-up?

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