How do you teach tax-return analysis at the bank?

Libby Sharman
June 5, 2014
Read Time: min

During an April 2014 webinar, RED Flags and GREEN Lights in Tax Return Analysis: Don’t Get Your Signals Crossed, Sageworks polled 277 bankers to determine how junior lenders and new hires within the bank learn tax return analysis and underwriting standards at the institution.

Overwhelmingly, the poll found that bankers use on-the-job training in order to instruct new hires in tax return analysis and, consequently, loan approval. Seventy percent of respondents answered that on-the-job training, which includes taking on new accounts with peer review and frequent checks with senior lenders, is their primary method of instruction.

Another 17.3 percent indicated new hires and junior lenders learn by copying what has been done before, which means replicating the spreads from previous borrowers and applying similar calculations. These two answers, on-the-job training and copying previous work, are strongly intermingled – if you are doing one, you are likely doing the other.

Source: Sageworks webinar, 4/2014

The webinar was hosted by Linda Keith, CPA, and it addressed what “red flags” in a prospective borrower’s tax returns should cause you to halt and take note when you see them.

A red flag does not necessarily mean the loan application should be declined, but it tells an experienced lender that additional questions may need to be asked or additional covenants put in place. An example Keith provided was Line 7 – Wages on the W-2. She advises: “If the wages have taken a huge jump over last year and there was no change in jobs, you may want to determine that this is a normal amount of overtime or bonuses for this borrower. In that case, you may wish to use only the base wages.”

Keith pointed out that these red flags create two inherent problems with on-the-job training. First, a banker has to eventually stumble across a red flag in their portfolio of loans before the lender can learn about the problem. They would lack foresight, which makes it difficult to anticipate or recognize the red flag when it arises or know what extra precautions are necessary.

The second problem with on-the-job training is that such training encourages young bankers to learn what to do in certain situations without ever discovering the “why”. They may be good with the execution of tax-return analysis but may not understand how a red flag impacts the creditworthiness of the borrower or impacts the bank. In that situation, if the new lender comes across a similar but slightly different scenario, they may not know the appropriate response or may execute blindly with a few missteps.

To fill the gap and help teach the “why”,  webinars like RED Flags and GREEN Lights or more formal training programs can be used to supplement real-world lending experience.

For more information on red flags in tax returns, listen to the webinar recording, RED Flags and GREEN Lights in Tax Return Analysis: Don’t Get Your Signals Crossed.

About the Author

Libby Sharman

Libby Sharman is a Vice President of Marketing at Abrigo.

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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