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  • Lender’s Reasonableness Test: 389 Miles to East

These last two days I have had as much fun as is fair to have while working with 17 lenders to improve their tax return analysis. We had several asset-based seasoned lenders ramping up their cashflow analysis skills. Credit Union lenders focused on consumer lending. Several commercial lenders recently moving from one bank to another with the maelstrom that is our current economy. But fun we had.



The fun started the day before when I picked up my rental car. There was a button that said ‘info’ and I pressed it. The readout on the dashboard said ‘389 Miles to E’ so I informed my passenger: “Oh, we are 389 miles to East.’
I put the car gear, turned on the lights, opened the sun roof and was about to put it in drive when I stopped. “Wait a minute,” I said. “How could we be 389 miles to East?”

Or Empty?


It may have been obvious to you it meant 389 miles to Empty in the gas tank. But I accepted what I thought it meant without critical thinking.

Mistakes were made…

A lender did this in training yesterday, and it happens to me all the time. She started with about $69,000 taxable income and made a few adjustments that only offset each other by a few thousand dollars. When she added it up, though, she ended up with cashflow of about $19,000. If she had thought about it she would have realized that the answer she got did not make sense for the calculation she just made.

But the calculator gave her the answer and she accepted it without critical thinking.

Critical thinking

In a conversation with a senior lender last week, we were talking about the new approach with the bank that just bought his. They have credit analysts now and the lenders don’t do their own analysis. He is concerned the lenders will lose their ability to critically consider whether the answer the analyst or the software comes up with is reasonable for the information provided.

Software and worksheets won’t give us the right answer if we mistype when we enter a number, add instead of subtract or put it on the wrong line.

Financial Statement and Tax Return Analysis rule for the day:

Give every answer the ‘reasonableness’ test. Does it make sense for what you started with and the inputs you gave? Do this if you are the one inputing the date. And especially do it if someone else is.

By the way, I have had the rental car for four days now and am getting closer. I am only 349 miles to East!

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.