I have a borrower that has W-2 wages and also farm income. I am looking at schedule F on the tax return (Profit or Loss from Farming). I need to determine which figure off of this schedule to add to his W-2 wages to come up with gross annual income for HMDA. I believe that you use the net farm profit or loss (this has expenses subtracted out)and add back in depreciation.

On the other hand, if this were a small farm loan for CRA and I was trying to calculate gross annual revenues I would use part 1 of schedule F and include all income before any costs or expenses were taken out.

Is that an accurate way to view the difference between calculating the gross annual income of an individual vs. the gross annual revenue of a business?

First question...Sure, this is an ok way to calculate income, but is that the way the lender did? The income that you relied on for repayment should be reported. The farm income could have been annualized over a three year period, two year period, extrodinary expenses removed or added....Find the lender worksheet.

Second. YOU WOULD NEVER INCLUDE INCOME IN CRA REPORTING. Sorry I got carried away there REVENUES are reported for CRA purposes, not income. Income is not added to revenues to produce a figure nor is it subtracted. Line 1 of the schedule would give your your REVENUES to be determine the code to report. GROSS is your option, nothing removed, hence line 1.

As to the "accurate way" your bank should have an "accurate way" determined in their procedures. While you would look to it for data integrity procedures you need to also put yourself in the minds of the lender. If your calculations come out different than theirs, you need to look to their worksheet to determine what they used. There are MANY ways to work through income and even revenues can be tricky if another business is involved. Income is the toughest, as the lender has some opportunity to play with the figures to make a reasonable assumption as to repayment. Gross revenues are just a matter or reporting line one...but who's line one is an issue if another company in playing with the borrower.

Dawnie, I'm glad you answered my post. I have read several of your posts in the past. The reason my question came up recently is because during a HMDA data integrity review I came across a home loan refinance that was approved by a commercial lender. The annual income reported didn't match anything off the tax returns. It is possible the borrower provided this figure before tax returns were obtained. We decided to recalculate based on the tax return but commercial lenders are used to thinking CRA and gross revenues and I'm trying to explain that there is a difference when you need to report gross annual income for HMDA.

I know that you take into consideration what the lender used in making the credit decision but realistically (and I'm not a lender) there are so many variables the lender considers that sometimes it seems like the "gross revenues" or "annual income" are just figures they are trying to come up with to please the government but they may not mean that much to the lender. Or it may just be a terminology issue i.e they are definately looking at repayment ability but they may not call it "annual income". I'm thinking of the commercial area mostly.

I don't know how to explain to the commercial lenders the difference between gross revenues and gross income. That is why I hoped my example of the farm income made sense. Basically I am trying to say that the gross revenue of the farm operation is not necessarily all income to that borrower. Unfortunately, I'm not a lender so that is my simplistic version.

A Commercial lender doing a home loan doesn't happen very often so I suggested they ask a residential lender how they would normally calculate annual income in this situation and report it that way to be consistent.

If you have any advice on the difference between the terms "income" and "revenue" I would appreciate the help. Thanks!

Consider not allowing your commercial lenders to do home loans. They're not only not reporting the income correctly many times, but they also can really get you beat up on HMDA. We don't take the risk. They whined, but they no longer do them. This keeps your income calculations in line throughout the bank. If you will let them do these, force them to fill out the same income calculation forms your mortgage folks use.

I have been a lender so I understand both their terminology and the stuff we're stuck to. Let me share part of my "you screwed up the revenue code" email I send out once a year as part of my data integrity review (they have to review 100% of all loans for revenues annually)

The criteria for determining Gross Revenue Codes is as follows:

On each Commercial Loan Information Sheet, under the heading CRA GROSS REVENUE CODE: you are asked to choose one of three options. (1) =< $1 million (equal to or less than); (2) > than $1 million (greater than) or (3) Revenue Unknown.

In the first two choices, the information would be found by reviewing line one of the Income Statement (Profit & Loss Statement) or line two of a Federal Income Tax Return. Typical titles are, Gross Revenues, Gross Sales, Total Sales, Gross Income, Total Income, Gross Rents, Total Rents, etc. For CRA purposes, the gross figure on these documents is the figure used to determine the revenue code, which should be either a 1 or a 2 in 99% of the loans processed. There should be no adjustments to these figures. The request is for GROSS revenues, not net.

If you are relying on another repayment source for the debt in question, the GROSS revenues of that repayment source would be used.

As an example: ABC Company, is a subsidiary of BCD Corporation with annual revenues of $1 dollar. Obviously with these revenues we would expect the repayment source for the obligation to be coming from another source, in this case BCD Corporation whose annual revenues are $14 million. In this example, although the loan was to ABC Company whose revenues are below a million, the correct answer would be revenue code 2, above one million, as the repayment source is BCD Corporation.

The third choice (revenue code 3) should be seldom used, but would be proper if a new borrowing entity with only proforma revenue information available was approved for a loan. In this case, as noted previously, if the repayment source is another entity, that entities gross annual revenues would provide the information necessary to determine a revenue code. If the ONLY revenue information used in the credit decision is the proforma, (very rare) revenue code 3 would be appropriate.

Thanks for your help. Do you agree with my statement that the gross revenue of the farm operation is not necessarily all "income" for the borrower? I still feel like I'm going to have to explain the difference between "revenue" and "income".

If the loan was to a farmer for farming purposes, then the gross revenues of the farm would be reported in their gross form, but if I'm understanding your question, you're asking about a consumer loan done for non-farm purposes?

In that case, as a lender, yes, I would not use the gross figure for the clients income. If you want a really basic way to describe income, try this:

Income is what you take home at night to buy groceries with.

Revenue is the cash that flows through a business. Gross Revenues are the total cash that flows through the business PRIOR to any deductions for expenses, taxes, etc.

Lenders often use a repayment source of "income" (on commercial loans) which in their mind normally means the income left to pay the debt after all other current obligations and costs are subtracted, basically a net figure. In the case of your farm guy, the "income" to be reported for a consumer loan would be that net figure in most cases, after he's paid the expenses of the farm. Basically what he's got left after all is said and done to feed his family on.

It all boils down to one thing...

In the world of CRA, Income is for people and Revenues are for businesses. The two never mix

Thank you! This has been very helpful!

Dawnie,
Regarding your comments on Revenue codes 1,2, and 3 and when to use them ----- you mentioned a new business entity with proforma revenues, are you talking about a business-start-up? Far as I know, we've still got the special rule for business start-ups. Am I correct in thinking we would report Code 1 if the business start-up had no revenues or the partial year revenues were less than $ million, right?

Yes I was talking start ups. Often folks think that proformas are the source for revenues, which of course is not correct. Proformas are just guesses, often quite far off of reality.

I use either 1 or 3 for start ups. I suppose I could also use a 2 if driven to it. Let me give some examples.

Doctors office, he sets up a new shop, (he's fresh out of school) and hasn't seen a patient, but the doors are open. I'd use a 1

Doctors office, same issue, but he's just coming to me at the very beginning of this idea. He has no shop, he hasn't even made the effort to get a business licence but needs money to get things going. I'd use a 3

Purchase of an existing commercial building. Lease income from the building is factored into the credit decision. Leases are far in excess of $2MM per year, which is documented in the file. New buyer purchases, (he got a deal, the loan is below 1MM ) but leases stay intact. I'd report that new buyer as a 2 even though his LLC is basically a start up to run the building.

I do not hold to reporting all start ups as ones. In the last case, it wouldn't be reporting a true picture of our borrowers business size, and in my mind it artificially inflates my CRA numbers. I also think in the case of doctor number two that using a 1 is not appropriate. We're loaning to him, based on the fact that doctors rarely go bad. He hasn't even opened his doors, and in fact, might not do so. We have no collateral on the business, we have nothing but his degree. I feel a 3 is much more appropriate to that scenario.