Since the point of reporting the revenue code is to determine the size of the business, when would revenue code "3" be used?

I've discovered this is being chosen to report revenue for a startup business with zero revenue. I believe these should be "1" and want to provide direction as to when a "3" should be used.

As far as I know...GAR code '3' is used when revenue was not considered, not collected or not known.

If revenue information was collected then it must be reported. You can also use code 3 for employee or cash secured loans too.

Code 3 is used if you did not collect revenue, otherwise use code loan types 1 and 2. Cash secured loans are coded under these rules as well.

For consumer loan types (they are not submitted) the income itself is gathered and the bank can list “0” in the income field on consumer loans made to its employees when col­lecting data for CRA purposes, as would be allowed under HMDA. The revenue code for consumer loans is 4. Actual revenue is not collected for the small business small farm loans.

For "other small business" you should break revenue out into codes 1, 2 or 3 but the FFIEC software requires code 4 like consumer...an odd glitch. You should change it if presenting that data for examiners. I inquired about that and got an "oh that is odd" response.

Thank you for clarifying KB - I'm fortunate in that we don't originate any consumer loans....If we did, there isn't enough wine on this planet that would calm my nerves.

CRA would be the least of your problems!

KB - would GAR code type 3 also be used if the bank uses borrower "stated information?" Rental income is considered in making the credit decision but the tax documents aren't required by the underwriter. GAR information used by the underwriter isn't verified. Would this scenario also call for GAR type "3?"

The information from "Getting It Right" below leads me to believe I can still use GAR codes '1' or '2' for loans where tax documents aren't collected and credit decisions were made on information the borrower attests to:

"The CRA regulations similarly do not require institutions to verify revenue amounts; thus, institutions may rely on the gross annual revenue amount provided by borrowers in the ordinary course of business."

Exactly. I have heard of individual examiners requesting "proof" of annual revenue, but they are wrong. This isn't about the math, it is about the size of the business.

In cases where a newly formed business entity has zero revenue, the loan decision is usually based on the guarantor's income. These types of borrowers have formed LLCs and report "business revenue" on their personal tax return (1040, Schedule C). Do we use the income figure on Schedule C to report GAR?

My lenders have it engrained that the GAR is not the figure used to make the credit decision. But, it could be, right?

Bump

You use code 3 for a newly formed entity, not the guarantor's personal income.

CRA coding is gross revenue/sales in order to sort borrowers by size of the business. The guidance is poorly worded; you want the gross revenues of the borrower whose financial performance was used in the credit decision and you do NOT report on guarantors.

If the LLC had no sales, report 3.

Thanks for clarifying the guarantor issue.

My confusion with the statement below from the CRA Reporting Guide is whether zero income for a new business translates to less than $1 million (code 1) or not known/not considered (code 3). We've been inconsistent, so we will use code 3 going forward.

"For a start-up business, the institution should use the actual gross annual revenue to date (including $0 if a new business has had no revenue to date). Although start-up businesses will provide the institution with pro forma projected revenue figures, these figures may not accurately reflect actual gross revenue and therefore should not be used."

If you requested their revenue and they said there have been no sales, report code 1, revenue less than one million.

If you did not request the revenue, report code 3. 3 indicates no knowledge of the sales, not sales of 0.

If you read further in the guidance it says that if you are aware of the revenue/sales, you are expected to use it to properly code the loan. Which leaves you with no knowledge/code 3.

This is the key for me......

"3 indicates no knowledge of the sales, not sales of 0."

Thanks Kathleen!

[i]Not to muddy the waters, but the following Q&A would seem to suggest that if you do not collect revenue information, then the small business/small farm should NOT be reported. Any thoughts? Thank you. The CRA FAQs say that a bank is not required to collect financial information. §ll.42(a)(4)—2: If an institution that is not exempt from data collection and reporting does not request or consider revenue information to make the credit decision regarding a small business or small farm loan, must the institution collect revenue information in connection with that loan? A2. No. In those instances, the institution should enter the code indicating ‘‘revenues not known’’ on the individual loan portion of the data collection software or on an internally developed system. [b]Loans for which the institution did not collect revenue information may not be included in the loans to businesses and farms with gross annual revenues of $1 million or less when reporting this data.[/b] §ll.42(a)(4)—3: What gross revenue should an institution use in determining the gross annual revenue of a start-up business? A3. The institution should use the actual gross annual revenue to date (including $0 if the new business has had no revenue to date). Although a start-up business will provide the institution with pro forma projected revenue figures, these figures may not accurately reflect actual gross revenue and, therefore, should not be used[/i]

No, that means that the EXAMINERS may throw them out of your performance data if you do not have data on revenue, because they cannot classify the loans into the revenue categories of <=$1MM or >$1MM.

The bank does not get the option to just not report those loans.

Banks who do not have revenue data can run into issues if those loans make up a large part of their data...some have come very close to (and some may have actually received) a less than satisfactory rating just because of this issue. All of those loans were discounted.

Got it. Thank you as always!