OK, here is the situation:

I have two borrowers, both individuals who are borrowing $250k in the form of an unsecured line of credit for cash flow and investment opportunities.

Their combined "incomes" is less than $1MM.

So, do we go with a "3" since they are individuals, or a "1" since their incomes are less than $1MM.

I was thinking "3" but the Reg and FAQs are not clear.....

If the loan is a business loan the you would go with 3 - NA because you are relying on personal income and not the income of a business, therefore you have no revenues to report.

Does this apply to ALL loans to business loans to individuals / sole proprietorships where you have income vs. revenue?

MB,

You will rely on what the lender used to underwrite the loan. If the sole proprietorship provided business tax returns (schedule C) then you will want to use that number. You will only use 3 if revenue was not used in the credit decision, except for start up businesses where you will use revenue code 1.

You will never use personal income to determine a revenue code

Yeah, what he said.

Yeah, thanks. All I am finding are the 1040's of the borrowers because the loans I am looking at are secured by non-residential real estate, the borrowers are individuals using the funds for business loans. This makes me uncomfortable since it's unclear.

MB,
everyone is pretty consistant around here regarding the difference between "income" and "revenues." I'm pretty sure this is based on the fact that the CRA guidance doesn't address busienss loans made to individuals and is also based on extrapolations on the differences between what HMDA asks for (income) vs. what CRA asks for (revenues).

But "revenue" is never actually defined anywhere in Reg. BB and when we first started reporting 5 years ago, our regulator told us to use what we used when making the loan decision. So here's my dirty little secret, my isntitution would report your loan as a 1 under gross annual revenues. Flame away!

Thanks everyone. I have posed this question via email to our examiner so I will report back what her response is.

I would be very careful with this, we ended up scrubbing thousands of loan files because the loan officers used personal income as revenues.

While the reg does not define revenues, it does say not to use income. Revenues by definition are the sales, rents etc. that the business generates that after netting out expenses becomes net income. If a borrower has a 1040 but has business income, they should have a schedule C and the first line of that should reflect the revenues of the business.

KC is corect the reg speaks to revenue. "CRA Getting Right"

Gross Annual Revenues
The regulations do not require
institutions to request or consider
revenue information when making a
loan; however, if institutions do
gather this information from their
borrowers, they should collect and
report the gross annual revenue,
rather than the adjusted gross
annual revenue, of their smallbusiness
or small-farm borrowers.
The purpose of small-business and
small-farm data collection is to
enable examiners and the public to
judge whether the institution is
lending to small businesses and
farms or whether it is only making
small loans to larger businesses and
farms

As KC stated you should be careful in using 1 unless the revenue is less than a million, or a startup company

OK, here goes our conversation via email:

ME:
What do you report on the CRA Small Business Loan Account Register as the Revenue Code for loans to individuals who are using the funds for business purposes?

Do you use a "3" since they have income and not revenues, or do you use the appropriate "1" or "2" depending on the amount of income?

EXAMINER:
The purpose of data collection of business and farm loans is to enable examiners and the public to judge whether the institution is lending to small businesses and farms or whether it is only making small loans to larger businesses and farms.

If the bank has a loan to an individual for business purposes, the business will generally be structured in some way such as sole proprietor, partnership, corporation, S-Corp, limited liability corporation, etc. If an individual engages in business as a sole proprietor, the individual must report gross receipts or sales from a business on Schedule C. If the bank has collected tax returns, you should report the gross receipts
or sales noted on Schedule C. The gross annual revenues can also be found on financials if available. If the bank did not collect the revenue information for the business, (business -- you would not report an individual's income) the bank should not report the revenues; however, keep in mind if the revenues are not reported for a particular loan, the loan will not be analyzed in the lending test for distribution of loans based on revenue of the business. As a result, if there are numerous loans without revenue information, it could affect the results of the data in the lending test and the bank's overall lending based on distribution of loans based on revenue of the business.

ME:
A further question though. The borrowers are individuals who have purchased non-residential properties, however, their business is a rental property for which they earn rental income that is not recorded on a Sole Proprietorship Schedule C Tax Form, but it is recorded on a Schedule E Tax Form.

Does this change the question since it's not really a separate business form? These are truly small businesses for which I would hate to see us lose credit if we record their incomes as "3."

EXAMINER:
As long as the loan is reportable on the Call Report, Schedule RC-C Part II, if the business is rental property, I would take the gross receipts from the rental property off of Schedule E. The main point to keep in mind is that you are looking to report "gross annual revenues or sales" from the business or business activity -- taken from what ever reporting mechanism is used. You do not want to report individual income or salary from employment as one of the main purposes of CRA is to see if the bank is lending to small businesses and small farms.

May I ask what examiner group (FDIC, OCC) did you talk to and out of what office?

I am so glad to see this answer in writing, it is going in my training materials.

The Fed in Atlanta.

Thanks.

Related question on revenue. Business started up on Feb 2006. We did loan in early 2007 and used revenue statement only reflecting 1.6 Mil revenues through 11/30/06 - 2007 taxes were not yet available. Revenues in the start-up year clearly exceeded 1 Mil. In these cases should we still use a code 1 (<1MM)? Also - at what point does a business cease to be a start-up?

No, you would use the actual revenues. The start up language is mainly for those businesses that don't have any revenues yet or have just a partial years revenues.

Thanks, KCGeoQueen. In this case, the borrower only had revenues from April through November on the income statement, but that exceeded 1MM. My FDIC examiner stated they expect to see a "1<1MM". I thought we were justified in this case reporting "2>1MM" since gross revenues clearly exceed 1MM.

I don't know why they would expect to see it coded a 1. The fact is by the time you made the loan the revenues were over a Million and those are the revenues you used in your credit decision. Don't bet me started on revenues and examiners.

You're "Preach'n to the choir"! We're on the same pate - thanks for your comments.

I have a follow up question. For small farm loans, is the revenue rule the same or can you use the income? Since many farmers do have other income that the lenders use, do I use it or the income/revenue from the farm?

Small farm loans follow the same rules as small business loans. You only report revenues. You should look on schedule F of the tax return for the sale of cattle, crops etc and CRP payments. You don't net out the cost of selling the goods. Never use income of the borrower.

That was my thought, but I just wanted to make sure. Thank you

The reason they are saying 1 is that the company was a start up and the bank did not use Gross Annual Revenue (GAR). For start up companies you use 1. Even though logic may dictate the revenue not falling below the 1 mil mark. The reg states use GAR

I think you should have put the emphasis on the annual instead of the gross.

The reg says that for a start up you are to report "the actual gross annual revenue to date (including $0 if the new business has no revenue to date)." I take that as saying you report what you have, and it doesn't have to be a years worth of revenues.

You are correct the emphasis should have been on Annual.