If a U.S. Small Business Administration loan is paying as agreed for over 6 months and their credit has improved could you upgrade a loan without obtaining then analyzing updated financials? SBA loans do not have a mechanism in place as conventional lending to be able to require the customer to provide annual financial information to banks.
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A few years ago our credit department stopped doing a financial analysis on renewals under $250K and as a result we have to record gross revenue data on a lot of our loans as a 3 (or NA) because we don’t have financials to go off of. Needless to say, our performance in lending to small businesses with annual revenues of under $1MM is suffering as a result.
A solution we explored was to request that borrowers provide the combined revenues of all entities they have ownership in when financials are not required, use this data as an "indirect" underwriting measurement to identify red flags, and report it for CRA purposes. (This as a way to attempt to incorporate it into the underwriting process so that it could legitimately be stated that we used it to help make the credit decision - a requirement of the regulation.)
Does the process of requesting and using this gross revenue data as an indirect underwriting review without having financials create any risk for the bank?
Without collecting financials and performing a financial analysis, is there a way to help ensure that we collect accurate, consistent gross revenue data?
Here are some concerns:
1. What if a keying error is made and there are no financials to validate the information off of? (Collecting data this way feels ‘sloppy’)
2. What if a business owner inflates revenues in hopes that they will receive better rates?
3. What if we have current financials in the file, we ask for the revenue figure and what we indicate on the underwriting form does not match (roughly) what is on file?
Finally, below is an example of where this can get sticky... and why I'm finding it to be near impossible to collect gross revenue data on more of our loans and feel any sort of confidence that we are getting accurate data. Am I missing an easy solution to this quandary?!
Case Study: Nick is a physician at Surgery Center and has ownership in the practice. Nick received a $100K line of credit in 2014. When underwritten, we considered Nick’s wages (which are recorded as gross revenue of “NA” for CRA purposes). When Nick’s loan renews in 2016, financials were not gathered (because it’s under the $250K threshold). If the Surgery Center had gross sales in 2015 of $900K and Nick’s wife started a spa in 2015 that had sales of $200K, what number should our indirect underwriting review capture? Should it be:
A. His wages because we are not relying on Surgery Center revenues to be repaid? (Gross Revenue = NA)
B. $900K, the revenue of the Surgery Center? (Gross Revenue = 1, $1MM or
C. $1.1MM, the revenue of Surgery Center and the spa business? (Gross Revenue = 2, over $1MM)
I think the answer should probably be consistent with the wages or revenues we’re relying on to be repaid – but our admins/lenders will not know this so my fear is that because we are not legitimately relying on it for underwriting, we won’t get an accurate record of information for CRA purposes.
If you have a packaging fee that is charged to the customer on SBA loans would that be a fee that falls under FASB? Basically the fee is an origination fee but the SBA calls it a packaging fee.
When deciding which revenue to use for a CRA small business loan for an individual who files a schedule E-partnerships with passive and non passive income, and also receives K-1s for that company, how do I decide which revenue to use? Do I use line 30 or 31 as appropriate, and add the K-1 distribution back, or do I just use the K-1 distribution amount?
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