Well here we are. It’s almost May. Traditionally, May 1st is marked in many ways around the world, including the related International Labour Day. For us in SBA lending, May 1st is a special day indeed. It’s the 120th day after the close of the previous year. We know what that means. It’s the day our borrowers’ financial statements are due!
Yearend Financial Statements Due May 1st. SBA requires borrowers to submit yearend financial statements for all borrowers and operating companies to you within 120 days of the close of the borrower’s fiscal year. Usually the fiscal year ends December 31. So: May 1st. Note that the requirement is not tax returns. Tax returns are nice, but they sometimes take forever. SBA wants lenders to be able to assess the borrower’s performance in a timely manner, and not sit around waiting nine months or more after the close of the year. Thus the requirement for financial statements.
Risk Rating in Our Time. Of course this year’s risk rating will be different. Granted, you will be risk rating your loans for the most part as of December 31, 2019, so you might be tempted to say that all was fine and dandy. No Adverse Change in your portfolio, thank you very much. But let’s not kid ourselves. Closing the economy because of Covid-19 had a material impact on your borrowers. That’s why they asked you for a deferment, and that’s why Congress passed relief act after relief act. Your borrowers are hurting. The ability to repay has been threatened. It happened after yearend 2019. But it should be taken into consideration as a “subsequent event” when you do the risk rating.
Automatic Adverse Rating in the Offing? Not So Fast. Before you change all your risk ratings from 3 to 7, take a deep breath. Yes, you must recognize the risk in your portfolio. Yet you can take some solace in the fact that even the Federal Regulatory Agencies told examiners to use judgment, and not to automatically adversely risk rate a loan that was prudently modified.
Your loan was performing well, and the borrower was paying on time as it had for years. Taxes were paid, insurance was current, management was controlling expenses and growing the profit. Then: Bam! Lockdown! You and SBA deferred. Regulators are telling banks that the risk rating of the loan doesn’t have to change automatically. And neither does your prudent modification require a downgrade. In this case, the borrower’s cash flow problems in these difficult times are temporary. Time will tell how quickly the economy recovers so we can see how the deferrals work.
Here’s hoping that next year you can risk rate your loans with the pandemic no longer a “subsequent event.”
Richard Jeffrey
Senior Associate, CDC/504 Programs
richard@jrbrunoassoc.com