The Loan Arranger: Call Report Coding Unmasked

Early in my career I was the Call Report preparer in a small Texas country bank. The young woman who coded the loans was born and raised in the area and she habitually mis-coded loans secured by livestock. Her explanation was that they were not agriculture loans since they were made to ranchers and not to farmers, a clear distinction to her way of thinking. I had to convince her that the folks at the FDIC in Washington didn’t understand the difference, and that we had to go along with their definition.

At 3PR Inc. we occasionally do loan coding reviews for clients. While there is essentially no limit to the number of ways things can get messed up, we have noticed some patterns. Often it is the inconsistency between the different codes assigned to loans that is the culprit. In the Call Report preparer’s perfect world, the core system’s Call Report codes, general ledger codes, type codes, and collateral codes would be perfectly and consistently mapped to each other.

However, banks often display and combine loans on the balance sheet differently than how they must be reported.  This may be due to their preferences for management reporting, or because it was set up that way in 1947 and never changed. If the bank assigns the call code correctly and relies on it for reporting then it usually works out. But it is easy to see how complicated it is for loan operations to keep up with different classification schemes when loading loans to the system.

There can also be a lack of training. The folks who are tasked with loading and coding loans need to be trained on the Call Report and they need to know how to refer to the definitions in the instructions. The first thing they should learn is that if a loan is primarily secured by real estate, then it is a real estate loan to be reported in Schedule RC-C Part I on lines 1.a.1. through 1.e.2. This is true regardless of the purpose of the loan, even if the loan is for an unrelated commercial or personal use.

Of course, there is one exception to this. A loan to a municipality is reported on line 8 even if secured by real estate. Thank you FFIEC!

That said, here are a few other problem areas we have seen:

• Misreporting 1-4 family residential loans to investors. They should be reported as Loans secured by 1-4 family residential properties regardless of whether the loan is to the occupant or for a rental property. Loans secured by multiple 1-4 family properties, including condominium units, are still reported as 1-4 family residential loans.
• Inconsistent reporting of owner-occupied non-farm nonresidential real estate loans. The main criterion for determining owner occupancy is the expected source of repayment. To be considered owner-occupied, the instructions state, “the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or an affiliate of the party, who owns the property.” It is “not derived from third party, nonaffiliated, rental income associated with the property (i.e., any such rental income is less than 50 percent of the source of repayment) or the proceeds of the sale, refinancing, or permanent financing of the property.”
• Failure to change the coding of construction-to-permanent real estate loans. Once the project has completed the construction phase the loan should no longer be reported as a construction loan. This should be done when the construction is substantially complete or the loan is set to begin amortization, whichever occurs first.
• Not including vacant land (other than agricultural land) with Other Construction Loans and Land Development Loans.
  • Confusing the reporting of pandemic related loan modifications (“Section 4013” loans) with PPP loans on RC-CI.M.17.a.-17.b. These are ”Eligible loan modifications under Section 4013, Temporary Relief from Troubled Debt Restructurings, of the 2020 Coronavirus Aid, Relief, and Economic Security Act.” PPP loans are reported in similarly enumerated Schedule RC-M.17.a-17.b. Pandemic restsructings are reportd on RC-CI.M.17 only while in the modification stage. When they go back to their original terms, they are no longer reported here.

   

  Whether your bank lends to farmers, ranchers, butchers, bakers, or candlestick makers, questions on loan classifications can arise. 3PR can help with CallReportResources.com, a digital hotline to expert advice on all things related to call reporting. We invite you to sign up today for a 7-day free trial.