My CRA Officer and another Compliance Specialist are backing up the CRO on this...It is hard to believe that the reg is open to such broad interpretation and can change on the whim of an examiner

Makes me wonder if next exam we would get slammed. However, our bank has been sold so I doubt that I will be the one getting the bruising.

Boatin, sorry if I missed this earlier, but who is your regulator? KC, the problem is that it doesn't say right in the regulation not to use personal income (please cite if it does). It just says to use gross annual revenues and then never defines what those are.

From the Q & A

§ __.42(a)(4) – 4: When collecting and reporting the gross annual revenue of small business or farm borrowers, do institutions collect and report the gross annual revenue or the adjusted gross annual revenue of its borrowers?
A4. Institutions collect and report the gross annual revenue, rather than the adjusted gross annual revenue, of their small business or farm borrowers. The purpose of this 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.
The regulation does not require institutions to request or consider revenue information when making a loan; however, if institutions do gather this information from their borrowers, the agencies expect them to collect and report the borrowers’ gross annual revenue for purposes of CRA. 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. If an institution does not collect gross annual revenue information for its small business and small farm borrowers, the institution would not indicate on the CRA data collection software that the gross annual revenues of the borrower are $1 million or less. (See § __.42(a)(4)


§ __.42(a)(4) – 1: When indicating whether a small business borrower had gross annual revenues of $1 million or less, upon what revenues should an institution rely?
A1. Generally, an institution should rely on the revenues that it considered in making its credit decision. For example, in the case of affiliated businesses, such as a parent corporation and its subsidiary, if the institution considered the revenues of the entity’s parent or a subsidiary corporation of the parent as well, then the institution would aggregate the revenues of both corporations to determine whether the revenues are $1 million or less. Alternatively, if the institution considered the revenues of only the entity to which the loan is actually extended, the institution should rely solely upon whether gross annual revenues are above or below $1 million for that entity. However, if the institution considered and relied on revenues or income of a cosigner or guarantor that is not an affiliate of the borrower, such as a sole proprietor, the institution should not adjust the borrower’s revenues for reporting purposes

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No were in the regulation does it state or discuss personal income. If you collect information that could show that number (income from rental properties) you should use that number. I think to many times the compliance staff is left to reunderwrite the loans

That's great how they completely ignore the topic of personal income in the Q&A's.

I have MANY of these types of loans where the loans are in the names of borrowers who are using these funds for business purposes, but the borrowers are LOADED and in no way are these for small businesses based on the individual borrowers.

And on the other hand, the $1 MM limit should be reviewed and maybe add another tier of $2 MM. Small businesses in my area such as contractors can easily blow right by $1 MM and still be small businesses. An example would be a contractor who builds 3 houses a year where each house is $400k (about average here), yet based on the current income limits, he's a big business.

Yes, I've read all of that before. All of the examples given refer to businesses. Revenues are never specifically defined to exclude personal income and there is no guidance as to what to do when you have a small business or farm loan where there is no specific business that is being lent to.

It's not that I don't understand where you're coming from, or that I think it doesn't make any sense. It's just that the guidance is nowhere explicit on this and my bank's regulators have always guided us in a different direction (and I've got it in writing now). Like Boatn Shasta, I have to wonder if someday we aren’t going to get smacked in the side of the head for doing it this way, but I suppose the other option is to undergo a massive re-training effort in all of our loan departments and then get cited because our regulators think we should be adding income.

MB I think you are correct 1 million is too small. Jaeger I guess I take the simplistic approach. The reg and the Q&A speak to business even having a Q&A that addresses Gross Annual Revenue vs. Adjusted Gross Revenue.

Now I can understand where the regulators are coming from. If there is no revenue they cannot use that loan to review the distribution of loans among tract characteristics. Which may throw off your numbers, so it is a catch 22 if you use personal income you could be sited, if you don’t you may not be accurately showing the distribution of your loans.

Small business loans with revenues over 1 million are generally excludeed from analysis by examiners. and you do not receive CRA credit. If you look at your CRA Lar there is a seperate category for CRA Small Business loans with revenue's over 1 million dollars.

So I wouldn't get carried away adding a lot of "income" to a borrowers "revenue" I would certainly ask my examiner if by adding income I started having a lot of revenue codes 2 how that would effect my exam.

The incone vs revenue has been rule of thumb and one that got started here on BOL several years ago by an insistant BOLER who also quoated an OCC examiner. Although some argued the point it was kind of out voted and as Bonnie M used to put it another BOL phantom rule came into being.

It was better than nothing and frankly it was better to be consistant as regulators were all over the place and everyone was confused back then

Well I guess we all agree that we are damned if we do and damned if we don't. All I know, if you are examined by the OCC in the KC region, do NOT include any personal income in the revenue totals or you will be scrubbing all your loans.

Maybe in the next revision the Fed will try and tell us what they really want.

Well, all I can contribute is a (paraphrased) conversation between myself and an Atlanta FRB examiner during our most recent CRA exam (March of this year):

Ex: Why do you have so many loans reported with an "03" revenue code?

Me: Because the lenders used personal income either of the principal or the guarantor instead of getting business revenue information.

Ex: Oh, OK. Well, you might want to suggest they not do that, it makes us have to toss out those "03" loans for analysis purposes.




Therefore, I will continue our reporting based on specific business revenues only and not include any personal income. Stinks though - those loans relying on personal income are often the most truly SMALL business/farm loans....

Yep when they start tossing out Small Business loans with revenue codes 02 and 03 it can have a real effect on an exam. To many 03's can get a re scrub if it appears it was because the bank was just lax in its efforts.

While there has been no official rule, what has been unofficially stated here on BOL has worked pretty well, and IMO worth sticking with.Its simple and doesn't have 50 different ways to apply. If you start trying to apply income and revenue numbers without it you will have utter confusion and no consistency at all. That's how this phantom rule was developed in the first place. If its working for you now IMO I wouldn't go changing anything

My examiners tried to tell my boss that it wouldn't affect us to report the loans "correctly" as NA. I looked at her stunned. How can it not? Of course he is going to believe what she says and not change the way we do things. By that I mean, not encouraging loan officers to document the revenues so we can count them.

Jaeger, We are regulated by the Feds in San Francisco.

This is interesting, it seems that we all have some sort of pitfall no matter what our individual rule of thumb is...there seems to always be some way to get burned!

Since when do the examiners have to have it in the Reg to make it so. I found out the have their own little communication stream (internal bullitin boards etc) where they discuss stuff and then they enforce what they have decided. I asked how I could get access to the same info and was informed I couldn't. A fellow banker was told by the same examiner group that he needed to attend seminars, conferences and use sites like BOL to know what the examiners are doing.

How frustrating.

Boatn, my FI is west coast FDIC as well. I'm actually only a couple of hours north of you, in OR.

Hmmm....maybe it's a West Coast thing??