At TCA, we’ve already been fielding calls from clients confused about gross revenue under 1071.
It is a key factor when identifying small business loans for the count of originations for the prior two years. Under 1071, a small business is defined as one with a gross revenue of $5 million or less.
Financial institutions first need to understand the difference between gross revenue and income. Gross revenue is the total dollar amount earned from business sales, which is known as gross revenue or gross receipts listed on the business income statement or cash flow statement.
Income represents the business’s net dollars after all expenses are deducted, including salary and wages, cost of goods, raw materials, and taxes.
Financial institutions with readily accessible gross revenue information can use this to determine whether its originations of covered credit transactions were to small businesses. The data used for credit decisions should be sufficient to determine whether applicants for business credit had gross annual revenue of $5 million or less.
What to do when gross revenue is unavailable
If a financial institution does not have readily accessible information on gross revenue to determine the number of small business loans, Section 9.2 of the CFPB’s Small Business Entity Compliance Guide provides various examples to assist the institution in determining the reasonable method to use for calculating the count of small business loans for the prior two years.
Another question for financial institutions is how they will handle a new startup business for reporting purposes where gross revenue is unavailable. Section 3.14.2 of the Small Entity Compliance Guide states that typically startup businesses will not have gross annual revenue for the first fiscal year preceding when data is collected. In that case, a covered financial institution reports the applicant’s gross annual revenue in the preceding fiscal year, which is zero (i.e., “0”). The covered financial institution must not report projected revenue figures because these figures do not reflect actual gross revenue.
In addition, if gross revenue is unknown or the financial institution is unable to collect or determine gross annual revenue, the financial institution reports it to be “not provided by applicant and otherwise undetermined.” – see Section 3.14 of the Guide.
The final rule requires financial institutions to develop procedures and processes to identify, collect, and record the required data fields of the small business loans.
For example, revenue procedures could state that verified gross revenue is used for the credit decision and estimated gross revenue provided by the applicant may be used on loans that are denied early in the process. Procedures should note the source document that contains the gross annual revenue and the corresponding field in the financial institutions system where this information should be recorded. Procedures should also define who is responsible for determining gross annual income and who is responsible for documenting the result so that this is done consistently, and the correct revenue is reported.
Many Institutions record revenue in their core system so they can generate reports for monitoring and reporting purposes.
Is your institution recording revenue in your core or some other system?
TCA recommends you get the answer to that question sooner than later so that processes can be put in place to record this information well in advance of your required reporting date.
As always, we are here to help! TCA shows you “A Better Way” to comply with the intricacies of Small Business LAR compliance.
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