Carol H Tucker Passionate about knowledge management and organizational development, expert in loan servicing, virtual world denizen and community facilitator, and a DISNEY fan
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beladona Memorial Be warned:in this very rich environment where you can immerse yourself so completely, your emotions will become engaged -- and not everyone is cognizant of that. Among the many excellent features of SL, there is no auto-return on hearts, so be wary of where your's wanders...
We can thank the great emancipator himself for income tax and the IRS -- yup, it was honest Abe who started the whole shebang back in 1862 because he needed to finance the War Between the States [AKA the Civil War or the War of Northern Aggression, depending on where you live].
And you can thank DC for the extra couple of days to file -- Friday, April 15 is Emancipation Day [the freeing of slaves in DC] this year. By law, DC holidays impact IRS tax deadlines. Just remember if you are filing for an extension that you have to pay an estimation of what you think you will owe. Of course, there are those who have figured out how to game the system so that they don't pay any taxes at all, so today doesn't mean anything to them. Or maybe you are one of those folks who have already filed and you have your refund in hand so today is just another day for you.
For those of us in commercial lending, this means that we have to start dunning people for copies of the tax return, or proof that they filed for an extension, in accordance with the terms and conditions of the loan documentation so that we can continue to assess the level of risk inherent in the loan. Some folks send in their return right away, some piddle fiddle around, some get intransigent and we have to threaten to raise the rate on their loan. I had one customer in the past who absolutely refused to give us his personal return -- told us that it was none of his business and an invasion of his privacy. We ended up moving him out of the bank, the auditiors/examiners/regulators dinged us so hard on his loans and forced us to downgrade the risk ratings to the point where it was no longer profitable to keep him.
You see, risk ratings really matter to the lending insititution because the higher the risk rating, the more money has to come out of income and get put into the Allocation for Loan Loss Reserves. What makes your loan riskier?
If you aren't making your payments on time, especially if you skip payments or go past due on a regular basis
can't tell what your current financial situation is because there isn't an updated personal financial statement and tax return
the collateral goes down in value
the economic conditions in your area or your industry change
What this does to the bottom line is simple -- there are standard percentages that come into play at every level of risk rating. Risk rating system are usually pretty involved with multiptle layers and changing allocations based on the historical experience of the lender, but basically a "pass" credit doesn't take that much of a bite out of income -- say 1% of the current principal balance outstanding. But when you get into the watch list, things start to get pricey. The idea behind reserving more and more is that the lender is no longer certain that they will get back the entire amount of their principal, much less the interest that is owed:
watch -- still considered a pass credit, but the loan is showing signs of weakness. The reserve allocation is probably around 15%
special mention -- Deterioration of repayment is in its earliest stages. Potentially weak primary repayment source. Past due 60 days; constant supervision - the reserve allocation is probablly around 30%.
substandard -- loans that are getting really past due and go on non-accrual [this means that the bank is only able to recognize income after all the principal has been paid back]. Reserve allocation is 50%.
doubtful -- at this point the lender has probably already done a new appraisal and charged off a portion of the loan. Reserve allocation is 75%
loss -- 100% of the outstanding balance is taken out of income
What is the primary source of repayment? Cash flow -- you the borrower. And that brings us back to the tax return, neh? That is how the lender is able to prove to the auditors/examiners/regulators that they made a sound loan, that you can afford to pay back the money. You don't give the information and the unholy trio assumes you are hiding a weakness, and even if you are making every payment on time, the lender is forced to lower the risk rating on the loan and take a hit to income. Banks and Credit Unions may love their customers, but hit them in the income and they get really surly....
The customer who wouldn't give me his tax returns because it was too private? He left C&F and went to another lender, who made the exact same demand.
CEOExpress
