CRA and Income Reported for Start-Up Business

Issue/Inquiry

The Bank is making a commercial loan to purchase a commercial building. No rentals have been received yet. For CRA purposes, what should be reported? Should the code for “Less than $1MM” or “Unknown” be used? If the address of the business is different than the address of the property, which address should be used?

Response Summary

If the borrower is a start-up business with $0 in revenues, it would use code number “1” for “revenue less than or equal to $1 million” since it knows the revenue and knows that it is less than $1 million. The location would either be the address of the borrower’s main business facility or that of the property being purchased; however, the Bank should be consistent in its choice.

Response Detail

Under CRA reporting rules, a financial institution would generally rely on the revenues that it considered in making its credit decision. For an existing business, it would consider the gross annual revenue of that entity. For a start-up business, however, it should use the actual gross annual revenue to date, including $0 if a new business has had no revenue during that period. FFIEC, A Guide to CRA Data Collection and Reporting (2015).

The revenue code numbers for the CRA Loan Register are:

1 = revenue less than or equal to $1 million

2 = revenue greater than $1 million

3 = revenue not known

If the Bank knows that the revenue is $0 for a start-up business, then code number “1” should be used since the revenue is known to be less than $1 million.

For CRA reporting purposes, a small business loan is located in the geography where the main business facility is located or where the loan proceeds otherwise will be applied, as indicated to the borrower. 12 CFR §228.12(o)(3).

For example, if a small business loan was made and the proceeds were applied to a variety of locations, the institution would either report the address of the small business’s headquarters or the address where the greatest portion of the loan proceeds was used, as indicated by the borrower. Interagency CRA Q&A, Section ______.42(a)(3) – A1.

In this case, the Bank would have the choice of reporting either the address of the main business facility of the borrower or the address of the commercial building being purchased. Whatever it chooses, the Bank should be consistent.

This entry was posted on Monday, September 17th, 2018 at 6:00 am.