Photo Credit: FDIC By: Aneel Eijaz, Senior Credit Risk Specialist

Loans in general rely heavily on current financial information of the Borrower to determine the repayment capacity of the Borrower. Current Tax Returns, Rent Roll (if applicable), Personal Financial Statements and supplementary documentation are some of the more common forms of financial information used banks. When a Commercial loan is initially approved, banks are easily able to get the information they need from the Borrowers to make a decision. However, the real challenge for most banks is to obtain current information on an ongoing basis for their periodic reviews. Not having current financial information impacts the risk rating of the particular loan because without current financial information, the Bank is not able to adequately assess the changes, if any, in the Borrower’s financial condition and the ultimate ability to repay.   As we have all learned from recent credit crisis that prior payment history is not always indicative of future performance. It is not only important to stay current on the Borrower’s financial position but it is also important to review the information to ensure that it is complete and accurate.

Most Commercial loan closing documents include a requirement that the Borrower must submit to the Bank current financial information on an annual basis. The Borrowers sign-off on the document containing this statement but unfortunately forget about it after the loan is disbursed and the transaction is complete. When Banks request current financial information they face a lot of difficulty. One reason for the difficulty is that many community banks have only recently (in the past 5 years) been insisting on requesting this information in a consistent manner.  This insistence has been an as a result of more stringent regulatory requirement to do so. Therefore the response that many banks receive is one of resistance from the borrower whereby they ask “how come no one requested this before?”

During our visits to various Community Banks, we have observed many ways they are trying to get the borrower to provide current tax returns/extensions, PFS, etc. Some banks remind the borrower that they have signed a loan document, which indicates they have agreed to provide current financial information annually. Another method is to use the signed IRS Form 4506 “Request for Copy of Tax Return”, which can be time consuming as the request can take up to 75 calendar days. Some banks that have faced greater difficulty have started imposing penalties in the form of default interest rate or monetary fine for not complying with the loan terms. These penalties are now included in the new loan documentation. As effective as these methods may be, imposing penalties can impact the relationship of the borrower with the bank and the borrower may look to refinance with a competitor. The best practice to ensure a healthy and positive response from the borrower is to encourage the loan officer to maintain an on-going relationship with the borrower. This can include periodic calls or site visits, which also has a potential of cross-selling other products that the borrower may need. The relationship can result in positive response when current financial information is requested.

Personal Financial Statements, Rent Rolls and supplementary documentation require additional attention, which includes the bank staff checking the statements for accuracy. During our loan reviews, a common mistake observed is that the borrower has not signed and/or dated the financial statement certifying that the data is complete and accurate. Some borrowers leave various fields blank such as the total in the balance sheet, expenses on the rent rolls, etc. This makes the financial information incomplete/non-current and sometimes cannot be used for cash flow analysis.  

If a bank establishes a process and continues this practice to obtain current financial information in an ongoing basis, review for accuracy and completeness, and do annual reviews, than the borrowers know what to expect and there are little to no issues with the requests. A bank needs to be current on the borrower’s financial information and its review in order to maintain a performing loan’s “Pass” risk rating.        

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