Is it correct that a broad blanket security agreement can pull in a residential property as collateral and put a potential CRA loan in category 3?

If you didn't take the house directly (via a deed) don't worry about the security agreement. Keep it where it belongs given the structure of the deal without the house.

Think in terms of how you'd report this deal on your call report. A broad agreement is covering pretty much everything the guy/gal owns, business or otherwise. You wouldn't be able to split the deal up into several categories on the call report right? It wouldn't make sense. Same thing for CRA.

I'm going to choke when I say this...(and that only makes sense if you've read my posts before) but here goes....

Think of that security agreement in terms of an abundance of caution. It's a general statement, but it does not specifically attach via deed to the house, so ignore it.

that hurt...I hate ABC (abundance of caution) deals

Dawnie, as much as I know you hate ABC deals, I'm glad you brought this up so I don't have to provoke you with it on my own. I thought that if we had some ABC residential RE on a loan that it wouldn't put it in the category of the call report that is residential RE so then assuming everything else pointed to a CRA loan, we could report it as a type 1. Well, I went back and reread and the reg and Q&A's state only as other loans...not type 1.

It has to be a REAL abc deal to call it a type one Shannon. And to determine how to report you'd go to your call report guidelines. There is a line in there that says you determine reportability based on the perponderance of collateral, purpose and borrower. It further states that some loans are difficult to call, but go with the perponderance of the three.

So how do you look at a deal that is a commercial warehouse, long term take out, under one million, borrower is a closely held corporation and the lender felt he should take the house as ABC?

You have to do one of two things. Be conservative and call it a type 3, which I do.

Or put on your lender hat and decide if that REALLY is an ABC deal. Compare the rates and terms to other similar borrowers and look to the repayment (ie is there enough value in the warehouse if it defaults tomorrow?) etc.

You can make a case, by doing the above that a deal really is an ABC deal and according to call report instructions, call it a type one. But are you going to do this will all of your loans secured by residential realestate? I've hashed thish through with examiners many times, and all have agreed, taking the conservative road and calling the deal type 3 is the safest way to go.

We have taken a further step here. ABC deals are not allowed without senior management approval. Funny....we used to see so many of them from junior lenders wanting to skip appraisals...now we see none

Did I answer your question Shannon or blather on too far because ABC is my favorite soap box?

Thank you - you answered my question and I think I have been taking the conservative road and not counting them but my short term memory at this point is a bowl of mush so I need reinforcement. I definitely do not have a lender hat so type 3 is for me!

I have a lender hat and it's not worth the time Besides, I know all the lazy lender tricks LOL One thing I find is abc is used to avoid appraisal quite often, hence our not allowing it. While I am responsible for CRA, I can't stand to see any other regulations slip under my nose on a file review. (Which the lenders love me for mind you) heh heh

If the borrower is a corporation and the owner of the residence is not the corporation, then the only way you can lien the property is via a guarantee from the residential property owner whose guarantee is secured by the residential property. This means the loan is indirectly secured by the residential property. There is a Q & A which addresses this situation and explains that the loan is reportable under CRA under these circumstances. The abundance of caution approach that previous writers alude to is another situation where the loan would be reportable. Don't forget you can get into trouble for not reporting loans you should report as much as for reporting loans that you shouldn't report. So the so-called "conservative approach" is not always classifying the loan as Fed Code 3.

To clairfy the "conservative approach" discussed:

When you have a choice, via the loose way the reg is written, you can take two approaches. You can stack your numbers by including everything, even if it's on the fence as a type 1 or 2, OR you can take the conservative approach, which is smarter, and place the stuff on the fence on the safe side of reporting and report as a 3.

Conservative is not equal to wrong, it's conservative. It's no different than reporting a loan as a revenue code 2 because you found a tax return in the file from last year at $3 million, but the lender said it's a 1, didn't get financial statements and has left the bank. There might be a reason the lender thought it was a 1, something that we don't know, but we do know that a couple of years ago the business was a slam dunk 2, so you call it a 2 to be "conservative". No examiner worth their salt is going to argue with this approach.

Under reporting is not the same as a report full of errors or over reporting. You'll often see notes in PE's that say "the bank takes a conservative approach to reporting and it is therefore this examiners belief that their lending activity is higher than the numbers included in the lending analysis". This is not the same as a statement that says the examiner was unable to review a years worth of data because the data was found to have significant errors and was therefore left out. The first statement won't hurt you, the second won't be followed by an "outstanding" in any cases.

First, the loan circumstances as described refer to a "broad blanket security agreement". Security agreements don't secure real property. They are one of the instruments that secure personal property and the security interest must be perfected under the UCC, Article 9. A true real estate loan would involve a mortgage that would be properly recorded (if it were "desk drawer" collateral, it probably would be considered under the abundance of caution rule), otherwise the loan is not really secured by the real estate. Second, the Q & A pertaining to "Reporting loans with a business purpose that are secured by residential real estate", actually distinguishes between institutions reporting under Call Reports and those under Thrift Financial Reports and how they should report or not report these loans. Third, there is some debate about the implications of the distinction between real estate securing a loan and securing a guarantee of the loan. It has been argued that technically, in many small business situations where residential real estate is taken as collateral, more often than not, the real estate is collateral for the personal guarantee and not the loan (the corporation is the borrower and the owner is the guarantor). Hence, the real estate does not "directly" secure the loan. This "indirect" method of securing a loan with real estate was made a critical distinction with respect to whether a "refinancing" under the revised HMDA should be reported. The FFIEC has said that both the new and the old obligation must be directly secured by a dwelling and that a loan guarantee secured by real property does not constitute direct security and, in the case of a refinancing, would not be reportable under HMDA. This same reasoning would suggest that only loans directly secured by residential real estate would render a small business loan as not reportable. I have seen conflicting interpretations by field examiners, although my memory tells me there was a Q & A related to this technical distinction.

We take the conservative approach now, after being critized by the auditors at the last CRA audit. Lenders could not backup their assertion that the residential re was ABC in most cases. Looked to the auditors that the lender or loan committee would not have approved the loan without the residential re.