CRA and Income of Guarantor

Issue/Inquiry

The borrower is a newly-created entity that is purchasing a new facility for an existing business that will be guaranteeing the loan. The approval of the loan was based on the revenues of the existing business, and both the existing business and the borrower are owned by the same individual. Should the revenues of the guarantor be reported on the Community Reinvestment Act (“CRA”) Loan Register?

Response Summary

The income of the existing business, as the guarantor, should be reported on the CRA Loan Register, since the Bank relied upon such and the existing business is affiliated with the borrower.

Response Detail

Generally, when indicating whether a small business or farm had gross annual revenues of $1 million or less, an institution should rely upon the gross annual revenue that it considered when making its credit decision.

If the institution relied upon the revenues of the borrower as well as an affiliate of the borrower in making its credit decision, it would aggregate the revenues of both entities in order to determine whether the gross annual revenue is $1 million or less. Under Regulation BB, which implements the CRA, an “affiliate” is any company that controls, is controlled by, or is under common control with another company. 12 CFR §228.12.

Alternatively, if the institution relied upon only the revenues of the entity to which the loan is actually extended, it would consider only those revenues in determining whether the gross annual revenue was $1 million or less.

If the institution relied upon the revenues of a co-signer or a guarantor that is not affiliated with the borrower, it would not adjust the revenues of the borrower for reporting purposes since the revenues of the co-signer or guarantor would not be considered. FFIEC, A Guide to CRA Data Collection and Reporting, pp 13 – 14.

This means that whether an institution is required to report the gross revenues of an entity other than the borrower depends on two factors:

• Whether the institution relied upon the revenues of the entity
• Whether the entity is affiliated with the borrower

In this case, the Bank made a loan to a new business while relying upon the revenues of the existing business, which is guaranteeing the loan. The borrower and guarantor are owned by the same individual, which means they are affiliated. Since the borrower and guarantor are affiliated and the Bank relied upon the revenues of the guarantor, the Bank would be required to report the revenues of the guarantor.

This entry was posted on Monday, July 29th, 2019 at 6:00 am.