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No Financial Analysis on Renewals Under $250K

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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 less) 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.

This is a complex question that is not easily answered in a couple of sentences. Whether you use the information for underwriting or not, the regulations require that you gather required information. As far as what to report, I would refer you to the CRA FAQ:

§.42(a)—5: Should institutions collect and report data about small business and small farm loans that are refinanced or renewed?

A5. An institution should collect information about small business and small farm loans that it refinances or renews as loan originations.

§.42(a)(4)—1: When indicating whether a small business borrower had gross annual revenues of $1 million or less, upon what revenues should an institution rely?

A1. Generally, an institution should rely on the revenues that it considered in making its credit decision. 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, the institution should not adjust the borrower’s revenues for reporting purposes.

First published on 01/29/2017

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