Risky Underwriting Habits. Habit 5- Reviewing ONLY the Last Three Years of the Borrower’s Compliance History
Diligence in underwriting can be the difference between a successful lending relationship and one that ends up in default. This is the fifth installment in a series of 6 regarding improving underwriting habits to protect the lenders collateral. This is the fifth in the series but may be the most critical.
Bad Habit #5. Reviewing ONLY the Last Three Years of the Borrower’s Compliance History
A proper review of a borrower’s compliance history is not only what you do see but more importantly what you don’t. In a professional review of the compliance history should contain all of the following;
➡️ Initial Tax Liability Risk Assessment
Lenders want to know both the initial and future potential risks before funding a borrow. As part of our Tax Liability Risk Assessment (LTRA) (See Sample Below), we perform an analysis looking for any liabilities, outstanding returns/form, unused deposits and provide a compliance requirement. More important to the Lender is the Risk Score and Summary of Risk.
➡️ Risk Score and Risk Summary
At the top of our Tax Liability Risk Assessment (LTRA) is a Risk Score and Risk Summary. The risk score determines the overall risk to the lender in funding this borrower. The Risk Summary is a convenient summary of the most important areas that make up the lenders risk. A risk scoring key is provided with each report so the lender may determine how the Risk Score was determined.
➡️ Liabilities
As part of the liabilities section of the Tax Liability Risk Assessment (LTRA) we contact the IRS on behalf of the borrower to determine any current outstanding liabilities and the level of risk that it presents to the lender. We also determine if the taxpayer has entered into an installment agreement for any of the liability periods. Even more important for the lender, we determine if the taxpayer has been a Trust Fund Recovery Penalty, which indicates that they have been accessed personally for any payroll tax liabilities.
In this section of the Tax Liability Risk Assessment (LTRA) we determine any outstanding returns/forms. Outstanding returns/forms are an indication of a potential future problem and/or additional assessments.
Unused deposits section of the Tax Liability Risk Assessment (LTRA) point to a potential solution, but they can also be an indication of a deeper problem.
In the compliance requirements section of the Tax Liability Risk Assessment (LTRA) , we indicate the necessary items required for the taxpayer to be in compliance with the IRS.
Looking at a three-year compliance history exposes the lender to considerable risk. Give that the IRS’ Statute of Limitation on the collection of debt is TEN years, doing a compliance check of ONLY the last three years is dangerous. A lender should be reviewing not only their current exposure but MORE IMPORTANTLY, THE FUTURE EXPOSURE.