Skip to content
BOL Conferences
Thread Options
#309531 - 01/27/05 09:51 PM Secondary collateral is R/E, CRA Type 1?
Creditcopper Offline
100 Club
Creditcopper
Joined: Sep 2004
Posts: 203
Michigan
How is everyone treating loans or lines where the primary assets are business, inventory, machinery, Eq, A/R but the owner also provides a second on his home. We don't call it an abundance of caution per se, but we routinely ask for real estate. Often, it is more a physcological lien than anything else but the owner puts a 2nd on his home. Purpose is working capital, fund future work projects, etc., borrower is definitely biz, and $ meets small business definition. Collateral sort of throws a kink into it. We have it as a note type commercial loc 4A00 C&I. Does this make sense??
_________________________
Is it cocktail time yet? Make mine a double!

Return to Top
CRA
#309532 - 01/27/05 10:01 PM Re: Secondary collateral is R/E, CRA Type 1?
HRH Dawnie Offline
Power Poster
HRH Dawnie
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
IF you take the deed, it's a type 3 There is not a % of collateral test associated with CRA. Take the residence, and you've got a type 3 on your hands.

If you're taking residences just for giggles, consider not doing that. If you are relying on them to provide loans, well then you're making sound credit decisions in some cases.

If this lowers the number of loans you are providing (type 1 and 2) then analyze your type 3's and show them to the examiner when they come a callin
_________________________
Dawn Coursey VP/CRA Queen

CRA Rating is in...Oh who cares...I'm home with the baby.

Return to Top
#309533 - 01/27/05 10:43 PM Re: Secondary collateral is R/E, CRA Type 1?
Creditcopper Offline
100 Club
Creditcopper
Joined: Sep 2004
Posts: 203
Michigan
Quote:

IF you take the deed, it's a type 3 There is not a % of collateral test associated with CRA. Take the residence, and you've got a type 3 on your hands.

If you're taking residences just for giggles, consider not doing that. If you are relying on them to provide loans, well then you're making sound credit decisions in some cases.

If this lowers the number of loans you are providing (type 1 and 2) then analyze your type 3's and show them to the examiner when they come a callin




Okay, that helps me with what I need on CRA. Would this still be a problem for call report since they have it as 4A00? Would you code it as 1C2B other 1-4 Family Junior residential lien or leave it as a 4A00 commercial & industrial?
_________________________
Is it cocktail time yet? Make mine a double!

Return to Top
#309534 - 01/31/05 07:07 PM Re: Secondary collateral is R/E, CRA Type 1?
Len S Offline
Diamond Poster
Joined: Oct 2004
Posts: 2,084
Connecticut
In many small business situations, the borrower is a corporation and loans to it are almost always supported by the guarantee of the principal(s). Frequently, those guarantees are secured by a lien on the residence of the principal. In those cases, the loan itself is not secured by the residential real estate. Therefore, the loan would be reportable under CRA. If, on the other hand the business is unincorporated and the loan is to the principal dba XXX, the borrower is the principal and the residential collateral would directly secure the loan. In that case, the loan would not be reportable, but you can record it as Fed CRA type 3, and you may choose to include it and all other type 3 loans in a CRA performance exam.
_________________________
CRA Exam Preparation, CRA Performance Evaluations, Key Performance Benchmarks, & maps

Return to Top
#309535 - 01/31/05 07:07 PM Re: Secondary collateral is R/E, CRA Type 1?
Len S Offline
Diamond Poster
Joined: Oct 2004
Posts: 2,084
Connecticut
In many small business situations, the borrower is a corporation and loans to it are almost always supported by the guarantee of the principal(s). Frequently, those guarantees are secured by a lien on the residence of the principal. In those cases, the loan itself is not secured by the residential real estate. Therefore, the loan would be reportable under CRA. If, on the other hand the business is unincorporated and the loan is to the principal dba XXX, the borrower is the principal and the residential collateral would directly secure the loan. In that case, the loan would not be reportable, but you can record it as Fed CRA type 3, and you may choose to include it and all other type 3 loans in a CRA performance exam.
_________________________
CRA Exam Preparation, CRA Performance Evaluations, Key Performance Benchmarks, & maps

Return to Top
#309536 - 02/01/05 04:52 PM Re: Secondary collateral is R/E, CRA Type 1?
Don_Narup Offline

Power Poster
Joined: Jul 2001
Posts: 3,708
Las Vegas Nevada
"In those cases, the loan itself is not secured by the residential real estate. "

IMO While a person might be a guarantor the collateral pledged is in the banks name to support the credit advanced. This is not a seperate transaction from the loan. Guarantor or not the bank has SFR as collateral.

Are there any sites that would support the not collateral if taken from a guarantor theory?
_________________________
Compliance Analysis and Research - Software for your CRA/HMDA analysis needs

Return to Top
#309537 - 02/01/05 06:07 PM Re: Secondary collateral is R/E, CRA Type 1?
Creditcopper Offline
100 Club
Creditcopper
Joined: Sep 2004
Posts: 203
Michigan
Quote:

"In those cases, the loan itself is not secured by the residential real estate. "

IMO While a person might be a guarantor the collateral pledged is in the banks name to support the credit advanced. This is not a seperate transaction from the loan. Guarantor or not the bank has SFR as collateral.

Are there any sites that would support the not collateral if taken from a guarantor theory?




I tend to agree with you Don. While our bank takes the lien on the residence and references the loan amount, date, etc. We also make sure the guaranty documentation refences that pledged residence as a way of cross collateralizing the loan.

The call report instructions when they read "Include all loans (other than those to states and political subdivisions in the U.S.) regardless of purpose and regardless of whether originated by the bank or purchased by others, that are secured by real estate as evidenced by mortgages, deeds of truyst, land contracts, or other instruments,.." I take that to mean report the loan as secured by real estate even when it is from a guarantor. We relied on the collateral to protect the loan principal in the event of a default (sound underwriting)since the all asset filing or whatever else the company had was not sufficient to cover the principal. As a new reporter for LB, I am taking the most conservative approach and excluding those loans as CRA type 3 and they are either going to be on call report line 1C2aA or 1C2B Maybe Dawnie can weigh in here??? Her posts to me have been pretty clear, when the lien is taken on residential, it falls from a 1 to a 3.
_________________________
Is it cocktail time yet? Make mine a double!

Return to Top
#309538 - 02/01/05 06:48 PM Re: Secondary collateral is R/E, CRA Type 1?
Terry Offline
Gold Star
Terry
Joined: Sep 2001
Posts: 314
Midwest
Thanks for the expert guidance Don. But I'd like to restate it to make sure I understand. Are you saying that when a personal guaranty is secured by residential real estate, then that loan is considered to be secured by residential real estate making it a type 3 regardless of whether the guaranty is from a principal or an outsider?
_________________________
All statements are my own and not necessarily those of my employer.

Return to Top
#309539 - 02/01/05 06:50 PM Re: Secondary collateral is R/E, CRA Type 1?
CRAatBOK Offline

Power Poster
Joined: Mar 2004
Posts: 6,172
Further South than I wanna be.
That is not how we would report it at our bank. Unless the loan is directly secured by the RE, we don't count it as collateral.
_________________________
Life is not the way it's supposed to be. It's the way it is. The way you cope with it is what makes the difference.

Return to Top
#309540 - 02/02/05 09:06 PM Re: Secondary collateral is R/E, CRA Type 1?
HRH Dawnie Offline
Power Poster
HRH Dawnie
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
I haven't in my experience run across guarantees secured specifically with pieces of property that aren't tied to specific deals. I believe that is what Len is getting at. I've worked for big and small banks, and with each loan, we have a guarantee specific to the loan, and yes, it also has the cross collateral language. If we want additional collateral we take a lien position on the home, referencing the debt in question. If you take a lien position, it's a type 3.

If you cross collateralize, and the lien is on another loan, no new lien is filed on this loan, no, I wouldn't type it a 3 in that case.

And Terry, yes, if there is a residence tied to the deal, owned by the principal OR an outsider, it's still a lien on residential real estate, and would automatically make the loan a type 3.

If ya'll make clients sign blank guarantees, with no lien filed on a home, that just sit around in the bank's vaults with NO TIE to the loan...heck I guess you could say they don't directly tie and not code it a 3, but do clients really sign those???? Not in my experience.
_________________________
Dawn Coursey VP/CRA Queen

CRA Rating is in...Oh who cares...I'm home with the baby.

Return to Top
#309541 - 02/03/05 06:36 PM Re: Secondary collateral is R/E, CRA Type 1?
Anonymous
Unregistered

Dawnie, if a deed is taken but the file is documented that the security was only taken as abundance of caution, would you still code the loan a type 3?

If the loan documentation reflected the loan was based on a cross-collaterization from a lien on another loan, would this loan now be a type 3 even without the direct lien?

Return to Top
#309542 - 02/03/05 07:28 PM Re: Secondary collateral is R/E, CRA Type 1?
Don_Narup Offline

Power Poster
Joined: Jul 2001
Posts: 3,708
Las Vegas Nevada
Yes it would be a type 3 if you take a sfr as collateral as an abundance of caution.
_________________________
Compliance Analysis and Research - Software for your CRA/HMDA analysis needs

Return to Top
#309543 - 02/03/05 09:44 PM Re: Secondary collateral is R/E, CRA Type 1?
corkygirl Offline
Power Poster
Joined: Sep 2004
Posts: 4,241
middle of the country
We tried one year to convince a regulator that the SF was only abundance of collateral and it was impossible!! Does not help when the officer can't really justify that. We just choose to report all those loans as a "3", much safer and easier on the CRA officer and me when the regulators are in!!!!
_________________________
Treading water in a hurricane

Return to Top
#309544 - 02/03/05 09:55 PM Re: Secondary collateral is R/E, CRA Type 1?
Len S Offline
Diamond Poster
Joined: Oct 2004
Posts: 2,084
Connecticut
The revised HMDA regulations Q& A's specifically cite a parallel situation and clearly distinguish when residential property is directly securing a loan or indirectly securing the loan when it comes to a refinance. Those Q & A's state that a mortgage refinance doesn't not qualify as a refi under HMDA if the new loan is not secured by residential property but a guarantee of that loan is secured by the residential property. Moreover, the Field Review Examiner for the Federal Reserve Boston Area confirmed this distinction in writing to questions pertaining to this specific situation. In other words, the Fed has issued official interpretation that clearly distinguishes between residential real estate as direct collateral versus indirect collateral when it comes to HMDA and refi's. I can not find anything in writing when it comes to CRA, but a Federal Reserve lawyer confirmed to me that a similar distinction would apply with respect to CRA. So we believe that residential real estate as collateral for a guarantee of a loan does not disqualify it as reportable under CRA.
_________________________
CRA Exam Preparation, CRA Performance Evaluations, Key Performance Benchmarks, & maps

Return to Top
#309545 - 02/03/05 10:59 PM Re: Secondary collateral is R/E, CRA Type 1?
HRH Dawnie Offline
Power Poster
HRH Dawnie
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
Anon do a search for my name and comments on Abundance of Caution loans...or ABC deals as I like to call them. You'll see I'm not a huge fan of the darned things. I will paste from one recent rant

Let’s have a philosophical discussion of abc just for giggles shall we?

First: abc is a Dawnie term, which does not exist in the real world, but it’s one Dawnie likes. Kind of my “Paris Hilton” It’s Hot! catch phrase.


Loans secured with ANY collateral on an Abundance of Caution basis, IF IT’S REAL abc are considered when reporting as if this collateral, specifically addressed as abc does not exist.

Now let’s take a stroll down lender lane: Lenders can avoid some reporting requirements (appraisals specifically) if they take property as abc. Lenders often do this if you don’t put some reins on them. This is why we require senior management approval for any collateral taken as abc. Funny thing…we don’t seem to take much abc collateral anymore. Most banks don’t have this type of review in place.

You then are forced to determine if the deal really is abc. To make this determination you have to start looking at all loans with similar collateral and borrowers, and compare the terms. What was the rate, ceiling, floor, term, loan fee, etc? If the loan is secured with an abc home is it priced the same as an unsecured deal of the same dollar amount? Read the write up, is the home referenced as a repayment source? My favorite line: Primary source of repayment…Income. Secondary source, Sale of Home. Then on lien status it says “abc”. (Where is that eye rolling emoticon?) What other collateral was taken? How does the loan compare to similar loans with this type of collateral? Did they provide the financing at 110% of the value of AR’s? Do you EVER collect 110% of AR’s? etc. You can’t do this review with just one loan; you need to look at all of them to show that your bank and bankers REALLY understand abc. If you can do this, and support your abc status, feel free to ignore the abc collateral and report accordingly.

If you’re like 98% of the banks out there though, you’ll see that abc collateral is really collateral that is relied on for repayment, with concessions given based on the collateral taken, despite the use of the term abc. If you fall into this group, you do NOT ignore abc collateral. Report as if the collateral taken was not abc and then beat your lenders with sticks (or meet with senior management and explain the fact that there are monetary penalties to filing a false call report) and make sure the term is used appropriately. Until it is used appropriately, take a conservative route and file as if you didn’t see the stupid term. Conservative filing IS NOT a violation of the regulation, it’s smart business reporting.

You can review the Call report terms day in and day out, and I'd be happy to show you a contradictory statement elsewhere in the terms. What they assume is that you really know what abc means and use it correctly. Nifty theory, but reality? I think not.

On your second question: If you don't have a lien in the file, and have done nothing more than secure the deal with a cross collateral line in the docs, no, don't make it a type 3. Only do the 3 if you actually file a lien in reference to the loan.
_________________________
Dawn Coursey VP/CRA Queen

CRA Rating is in...Oh who cares...I'm home with the baby.

Return to Top
#309546 - 02/04/05 03:25 AM Re: Secondary collateral is R/E, CRA Type 1?
Len S Offline
Diamond Poster
Joined: Oct 2004
Posts: 2,084
Connecticut
Let me add my 16 years of real life field experience as a former commercial loan officer and senior loan officer with a bank that specialized in making small business loans. In many cases, we secured the loans with liens on the business assets. All loans were guaranteed by the principals and frequently the guarantees were augmented by second mortgages on the residential real estate of the principal. In fact, in the majority of loans that were guaranteed by the SBA, there was a personal guarantee secured by residential real estate. In almost all situations, the collateral value of the residential real estate was relatively modest in comparison to the loan as well as the other collateral. Nevertheless, the residential property was taken because it provided a measure of control over the principals in a highly debt leveraged loan structure if the situation should ever deteriorate into a default or workout. I wouldn't necessarily call it an abundance of caution, so much as a matter of control in potentially adverse circumstances. My guess is that many small business loans made by many banks are made with similar intentions. It is hard for me to believe that large numbers of small business loans made like this would not be reportable under CRA. In my discussions with FDIC and Fed Reserve personnel, I have been told that it would be appropriate to report those loans as small business loans in spite of the cloud created by the residential real estate lien. The rule of thumb should be sound reasoning and consistent reporting of similar situations. In light of the relatively large volume of small business loans that are made with these conditions, it would be nice if the FFIEC would issue a Q & A that specifically acknowledges whether they distinguish indirect residential real estate mortgages from direct mortgages like they explicitly do with respect to HMDA and refinancings. Even the Call Report glossary defining real estate secured loans is obscure when it described real estate secured loans as "wholly or substantially" secured by residential real estate for which the real property is "central to the extension of credit", but then goes on to contradict itself by stating "only transactions where the lien has been taken as an abundance of caution are exempt. In one case, to qualify the real estate must be central to the credit, on the other hand to not qualify the real estate must be irrelevant. What if the real estate falls in between being "central" to the credit and being almost irrelevant? The fact is that the collateral value often is not as material as the "control value" provided by a lien on the principal's home. This would suggest that the inclusion of residential real estate in a transaction has elements that would mandate the reporting of the loan and other elements that would do just the opposite. Since the regs don't define abundance of caution, it leaves it open to the type of debate going on in this thread. Maybe we should start a campaign to the FFIEC asking for written clarification.
_________________________
CRA Exam Preparation, CRA Performance Evaluations, Key Performance Benchmarks, & maps

Return to Top
#309547 - 02/06/05 09:42 PM Re: Secondary collateral is R/E, CRA Type 1?
Princess Romeo Offline

Power Poster
Princess Romeo
Joined: Jun 2001
Posts: 8,272
Where the heart is
Len,
That has always been my quandry. When the loan is secured PRIMARILY by "non-farm/non-residential real estate" or general commercial assets, it is supposed to go on the Call Report as 01E or 04A.

It is my understanding that purpose of the Call Report is to monitor concentrations in portfolio, and in order to do that effectively, the loans must be classified by their PRIMARY portfolio impact.

For example - Let's say we have a $500,000 loan secured by a first lien on commercial building that appraised for $800,000. Then you also took a 3rd TD on the business owner's home. The home is worth $450,000 and there are 1st and 2nd liens totaling $350,000. Can you HONESTLY code that on your Call Report as a loan secured by residential real estate?

The market concerns for commercial vs. residential real estate are different, and if you have this loan pegged as a residential loan, your portfolio risk concentration will be misplaced.

So if you put this on your Call Report as an 01e, why would you NOT report this as a Type 01?

THIS is a prime example where the examiners have gone off their rocker because they found a little technicality to cite bankers and puff up their exam reports with "findings." It's silly and makes no sense. If the loan is correctly on your Call Report as an 01e or 04a, then it SHOULD be reported as a Type 01. None of this "Except when the moon is in the 7th house during a month ending in Y" rule.
_________________________
CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

Return to Top
#309548 - 02/07/05 04:46 PM Re: Secondary collateral is R/E, CRA Type 1?
Don_Narup Offline

Power Poster
Joined: Jul 2001
Posts: 3,708
Las Vegas Nevada
The problem is, we can all agree with the logic, but until examiners come to the same conclusions it doesn't do any good to provide conflicting information. It just causes some folks who are already confused to be more confused.

So, I think we should stick with the way it is.

If anyone has been able to convience an examiner that ABC sfr is OK as cra type 1, it would be a great post so we can all make the change, or raise enough fuss to get it more clearly defined in a Q & A.
_________________________
Compliance Analysis and Research - Software for your CRA/HMDA analysis needs

Return to Top