A loan is made to a customer who is a sole proprietorship (carpenter) via a LaserPro consumer revolving line of credit agreement which states the loan is "primarily personal" and is booked as a consumer revolving line of credit, vehicle secured. The loan is actually business purpose and is reported as a CRA Type Code 1 loan. Obviously there are problems here.

The lender insists this is a business revolving line of credit and has good supporting file documentation (completed business application and Schedule C returns). Once we change the loan coding from consumer to business the loan should qualify as a small business loan. Does anyone see a problem with that? Should we be concerned about having a personal purpose statement in the Consumer RLOC Agreement for loans reported as small business loans as long as the fed call code suppports the CRA Type Code 1?

Unfortunately, this is probably more of a practice here than an isolated deal. Lenders like to offer the consumer products to these small businesses because the fees and terms are more attractive.

Anyone have advice on a recommendation to management to address this issue going forward? How do you all do it in your bank?

In the real world, lenders like to fall back on the old mantra "if in doubt, disclose" and right or wrong, they code it internally according to product. This certainly plays havoc with CRA business reporting.

Sole Prop loans are always a fun challenge. You don't monitor use of the funds and must go on the clients word. Most times it's used for both personal and business use, it's the nature of the game.

Consumer deals are less risky than small business deals, hence the easier pricing. Lenders should choose the PRODUCT that the client asks for, not the best priced deal. The bank needs to enforce this and require that small business loans and lines are booked as small business. Consumer are booked as consumer.

If this client came in for a small business line and the lender chose a consumer line, he chose to provide a product the client did not ask for. He exposed the bank to rate risk and data integrity risk. Encourage him to understand that consumer products are for consumers!!! You price your products differently for a reason. He needs to support the bank he works for by offering the appropriate product based on the clients stated need prior to documenting.

Think in the worst case scenario...you book 1,000,000 tiny sole proprietorship loans as consumer. (You do this because your clients figured out you're not as smart as the rest of the banks in town so they apply with you and tell your friends). How is your data integrity exam going to go when the examiners look at the files? And...how in the heck are you going to survive an economic downturn in the small business market that you couldn't even plan for, what with not knowing the full extent of your portfolio in the small business arena?

Oh then there's the Call Report...But we won't go there Messy jail terms, etc...so difficult to sell to the president when he asks why this was allowed and all...

Geez - most compliance officers can only DREAM of commercial lenders who disclose when in doubt!

Should we be concerned about having a personal purpose statement in the Consumer RLOC Agreement for loans reported as small business loans as long as the fed call code suppports the CRA Type Code 1?

Dawnie - in the end, when all is said and done - would you recommend leaving the consumer coding on this one, since it's a consumer product, and not report as a small business loan? I'd like to change the coding and report it as a small business loan.

Also, thanks for your line of reasoning - I'm meeting with management today on this very subject!

Sorry - that sounds like a demanding question! I was trying to use the "quote" function and obviously failed.

Personally I'd change it, but leave pricing as is until renewal. You don't want to end up in court over the deal. If your system would allow that...go for it.

If your system will not allow the deal to stay as is (terms etc.) until renewal, leave it as is and plan on having the lender switch the product (new app. etc.) when it renews.

I'm with Bonnie by the way...I dream of lenders who over disclose Count yourself lucky...but less profitable LOL

I take it you mean print new loan docs (commercial RLOC) and recode the loan as commercial? That is the way I was leaning, I'm checking into the system capabilities. If we can't redo the docs I'll treat it as a consumer loan and pull it from CRA.

By the way, not all our commercial officers disclose when in doubt, just the ones who have been royally burned. A few of them developed a healthy respect for TIL after doing some reimbursements last year.

But it's a real pain in the neck when it comes to CRA reporting.

Yes on the new docs, my only concern being that since the lender booked the deal under one pricing structure, be sure to continue that structure or you'll impact the client in a negative fashion. When making changes I always strive not to cause client inconvenience whenever possible!