Here's another scenario...

Line of credit to an individual who owns an accounting firm. He plans on using the funds to support short term commercial real estate investments.

If you can't use the income do we use the revenue from the accounting firm??

Isn't this fun??

You won't use his personal income. If you used the income of the accounting firm in the credit decision and it is considered and affiliate of the real estate investment business (proabably so since both are owned by the borrower), then you would use the revenues from the accounting firm. If you didn't the income from the accounting firm to make your credit decision, the you would report NA or Rev. Cat. as your revenues.

Thanks again KC

KC, do you really think that they could be considered affiliates just because they are owned by the same individual? Doesn't there need to be a business "legal" ownership between the two businesses to be considered an affiliate? That is the conversation that I had with our examiner during our last exam.

We have A LOT of these investment-type loans by individuals with other businesses that will be given "3" codes due to the structure. It makes me sick thinking that we're not going to get credit for these loans if what our examiner told us previously holds true. That is going to be another conversation sometime in the near future....

I was refering to a situation where they were actually affiliates. This is addressed in the reg.

We are in the same boat. We have probably trippled our "3" codes because they don't look at many of our LLPs as individual new start up businesses. they say they are existing borrowers just using a different name. If the write up doesn't show that they looked at the big company's revenues then we have to code them a "3". At least the is the interpretation at this exam. Who knows what it will be next time.

If you emphasize the word "annual", you do not have "annual" revenues unless you have been through a year end cycle, do you? In my post above, the entity started up in February '06, and we had revenues through November '06, not through a year-end (assuming their tax year ends 12/31).

I still believe that you should use the partial year revenues if you used those to make your credit decision. In the case where the business is not a startup then you would be looking for a full year's revenues. In other words, you make the loan in July to an established business, you would use the previous year's GAR. If it is a startup, you don't have the previous year's revenues.

The whole issues of not being allowed to use personal income in gross annual revenues (which I've already admitted that we do) has come up enough times that my superviser (who'se at the ABA Compliance conference in Georgia where it came up again) had me e-mail our contact at the FDIC. Below is what I wrote and his reply.

(I Wrote)
"Regarding gross annual revenues for CRA, at the conference one of the speakers stated that an individual's income should never be considered for gross annual revenues. When we first started collecting CRA information, we were told to use for gross annual revenues whatever we had used in underwriting our loan decision. In the case of a corporation or busies entity, gross annual revenues are easy to determine. In cases of small business or farm loans to individuals where the loan is for business purposes but there is no specific entity (such as with a line of credit to a high net worth individual, secured by commercial property, used to purchase or improve commercial property) we have been including in gross annual revenues all sources of income used to underwrite the loan including salary income if there is any. Is this acceptable practice?

"Revenue" is never defined in the regulation and the CRA Guide to Reporting only gives examples of revenues for loans to business entities. I have never been able to find where making a small business or farm loan (as defined by CRA) to an individual without a clear business entity is addressed. If we are consistent in our practice, will we be okay? Or do we need to change our procedures? Thank you for your help!"

(He wrote back)
"I do not understand this speaker's reasoning for saying that. You bring up some very valid points which I wish this speaker could have been asked.

I view is, based on your explanation in your email, that how you are collecting this information is correct."

So in light of these last few posts, how would y'all handle this situation:

High net worth borrower's declared line of business is "entrepreneur," and "income" is derived from multiple businesses, partnerships, investments, etc. Borrower wishes to obtain one general use line of credit in his personal name to use amongst these various projects at his discretion. IF - and this is a big IF - we are provided with actual revenue information from his multiple business projects, do I aggregate the revenues for CRA reporting purposes? Or do I just use 3 since technically the LO is basing repayment on "income" and no specific source of revenues has been designated?

Thanks.

Oh, FWIW - I typically report these loans as a 3 since the LO very rarely bothers to get actual revenue info. Usually all we'll have is a personal financial statement and some vague notation in the write up along the lines of "entrepreneur, good customer, high net worth." <need rolling eyes graemlin here>

Becca, I would take the same approach. I had both yesterday like this. As I looked thru the file in one, the income from the various businesses could be found on the borrower's FS but the break down by company was not available. I put NA for revenues. In the other case, I did have the revenues for the companies and it was mentioned in the writeup that there was $X in sales. For that loan, I included those revenues.

JS - the only thing I would caution you about is using the salary income. If you are reporting revenues then you should ignore salary income because there are no revenues that make up salary.

So you would use the aggregate revenue information (if provided) including the partnerships, etc?

If that is what the lender indicates they used in the decision making process. If the others are just garantors then I would not use the revenues. Page 13 of the CRA Guide is not very clear on this, it only mentions parents and subsidiary Corps but I can't help but believe it would extend to partnerships. We see many more LLPs than we do corporations lately.

If I got nothing else out of this exam I did learn that - what the loan officer includes in the write-up about what income sources were depended upon is what you show in your reporting.

Now getting the loan officer to document is another story all together. That is when you pull out your Whack-a-lender mallott.

See, that's where I have issues with my lenders. The loan approval typically just says "business income."

Sorry, I can't help you there. If senior mgmt doens't insist on quality reporting then you just do your NAs until the examiners criticize you for too many NAs.

We're getting there.

Great information, thanks.

As stated earlier, just fyi, my examiner didn't state that we would be penalized for too many N/A's, we just wouldn't get CRA Credit for these loans.

MB, That could be an indirect way of getting penalized. No credit - How do you prove that you are serving the community?

Yes, you're exactly right. I was meaning non-compliance or reporting errors criticism, but either way, your bank is taking a hit.

KC,
I can understand how if you had to do a large scale scrub on the issue that you might be quite emphatic on your position! My only advice to anyone is to be in communication with your regulators and to be consistant. In case anyone isn't sick of the subject already, a link to my favorite thread on the subject is below.

Click Here

The link doesn't work.

Works for me.

The link didn't work for me either.

Actually we were being consistant and were doing the same thing that we were in previous exams. They had just changed the way they look at things and we didn't get the memo. Actually another bank in town had the same situation. The OCC has inside memos on how to do things but don't share the procedures until they come to examine and then they write you up for not doing it the way they think it should be done. Go figure.

Well, after all of this running around trying to get my lenders NOT to use an individual's income, I am told by out Chief Risk Officer that during our last exam (I got this job DURING the exam so I did not sit in on any of the meetings) the regulators (The Feds in San Fran) were very specific stating that if there are no GARs to use the total income of the individual.

So, JS it looks like you are not the only one reporting income.

Bartender, I believe I'll have another drink......

As stated, our Examiner recently told us to use the figure that accurately reflects whether the business is a large business or a small business, as that is the ultimate goal of the question.

For individuals with businesses such as rental property, we were instructed to use the rental revenues from the individual's Schedule E.


Sigh. I think everyone may be hung up a bit on the term "revenue" vs. "income" and missing the point of the question entirely in some cases.

You have got to be kidding. I cannot tell you how many loans we had to changed because our loan officers used income. I cannot (ok, I really can) believe the inconsistancy between the examiners. It says right in the reg not to use personal income. Since it came to you second hand, I think I would call the examiner and verify what you were told. It could have easily been a misunderstanding.