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#2247331 - 01/07/21 06:55 PM Meaning of "revenues that the bank considered..."
Learned Hand Offline
New Poster
Joined: Feb 2019
Posts: 17
Our procedures currently state that if we have the borrower's gross annual revenue on file, even if it wasn't collected specifically for the new loan/renewal in question, we need to report revenue code 1 or 2 as appropriate and not 3. I believe that this is based on the idea that if we know the borrower's GAR, it must have been part of the decision-making process. In other words, it wouldn't make sense to say: "sure, we knew that the borrower's GAR was $1.5MM, but we removed that fact from our minds, made our credit decision, and then remembered it again."

This issue came up when dealing with a slew of rev code 3 values for renewals, so I went looking for support for that procedure, and couldn't find it anywhere. Is this something that we made up, or is there some sort of official/quasi-official thing out there somewhere about the presumption of consideration if a bank has GAR information on file? Thanks!

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#2247379 - 01/08/21 04:23 PM Re: Meaning of "revenues that the bank considered..." Learned Hand
Len S Offline
Diamond Poster
Joined: Oct 2004
Posts: 1,785
Connecticut
You are not required to collect GAR information for CRA purposes, but you are required to report it if you did collect it and rely on it and report code "3" if you did not collect it and rely on it. Technically, the regulation speaks of income you "relied on" when making the credit decision, but the purpose of collecting and reporting the information is to determine how much of your small business lending actually was extended to truly small businesses. So if you have collected the information, but didn't rely on it for making the credit decision I still would report the GAR because it is useful for analyzing and breaking out your lending activity by the "borrower characteristics" (meaning size of business measured by GAR) Test.

I can't imagine examiners criticizing a bank for reporting an important lending factor (that examiners are required to analyze under the borrower characteristics test) just because a bank didn't rely on it. The size of the business borrower is still an important consideration in the context of CRA performance analysis, so collecting the GAR is helpful even if it is not technically required to be reported because a bank didn't rely upon it when making the credit decision.

Frankly, if a bank extended a relatively large volume of business loans without taking into consideration the income of the business I would wonder about safety and soundness issues since business loans are usually paid from cash flow which is related to revenues.
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#2247429 - 01/11/21 05:31 AM Re: Meaning of "revenues that the bank considered..." Learned Hand
Lori01 Offline
100 Club
Joined: Jan 2007
Posts: 129
VT
Thank you for your thoughts on this Len. I have been struggling with the same issue. We started a program two years ago for smaller $ loans and for many of them under a certain amount we don't really consider revenue at all. We may, or may not, capture it at application time but even if we do capture it we don't consider it in approving the loan. We usually don't get any backup documentation for the credit file. Again these are smaller loans, to known customers and usually for specific equipment purchases.
Similar to what you said, if I see it written down somewhere I'm reporting it. Otherwise I'm going to end up with a very large number of code 3s, which doesn't reflect the fact we are doing a large number of loans to small sized businesses.

Exam starts next week so well see how that goes over.

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#2247446 - 01/11/21 03:44 PM Re: Meaning of "revenues that the bank considered..." Learned Hand
Inherent_Risk Offline
Gold Star
Joined: Jan 2017
Posts: 307
Check the PPP guidance on revenues. I do think their guidance there is exandable to CRA loans in general.

Question 7
"Generally, a bank should rely on and report the gross annual revenues that it
considered in making its credit decision. Loans for which the bank did not collect
revenue information may not be included when evaluating a bank’s performance
in lending to businesses and farms with gross annual revenues of $1 million or
less unless the small business or small farm provides supplemental information
or the bank has another source demonstrating the borrower’s revenue, such as
information on existing customers. Banks that have access to an applicant’s
gross annual revenue information may, but are not required to, report that
information."

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#2247770 - 01/16/21 08:40 PM Re: Meaning of "revenues that the bank considered..." Len S
Learned Hand Offline
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Joined: Feb 2019
Posts: 17
Thank you for your guidance, Len. I was thinking the same thing about it being a good idea to do it, and not getting hung up on the "relied on" issue. Quick follow up: in your opinion, how old would the information need to be for it to be no longer useful in this context? My first thought was some sort of two-tiered system based on how close the company was to the $1MM threshold (if it was within $100k, it would need to be no more than 2 years old; otherwise, we could use it as long as it wasn't more than maybe 5 years old). That seemed overly complicated for the processors, though, so I was leaning toward something like a 3-year limit. I realize that there will be no hard-and-fast rule, as we are going way beyond what is in the reg, but I'd appreciate your perspective. Thanks!

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#2247771 - 01/16/21 08:44 PM Re: Meaning of "revenues that the bank considered..." Inherent_Risk
Learned Hand Offline
New Poster
Joined: Feb 2019
Posts: 17
Thanks, Inherent_Risk. I thought the same thing when I read the answer to that question. If merely having "access" to the information is enough to report it for PPP loans, it seems like it would be inconsistent to say we couldn't report it for non-PPP CRA loans.

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