Interesting question…and one I cannot answer definitively here. Check with your guidelines. Talk with a senior lender.
I can tell you what I find is common from talking with lenders in my tax return analysis classes.
Consumer and mortgage lenders often say some variation of “I am sorry, Ms. Cheat, but I can only use what I can document from your tax return.” Of course, if then it turns out you have enough qualifying income in the tax return they did file, you can make the loan. Again…this is a general approach. Do talk with someone at your company before you make the loan anyway. And don’t say “Linda Keith says it is okay!” No I did not. ‘-)
Commercial lenders sometimes take a different approach. The dollars in the deal are larger. The collateral is something you really do not want to end up with. Reliance on communication is so key. So a commercial lender may do best to find the way to walk away from the deal.
Then there are commercial real estate lenders. I once asked a group of asset-based bridge loan lenders if they would loan to someone who was not reporting all their income or over-reporting their expenses on their return. From the looks on their faces, it was clear they felt that if they didn’t they would not have a market for their loans. Commercial RE Developers may be the most aggressive taxpayers on the planet. They may not seem to own a single personal vehicle and all their business just happens to take them to the Bahamas and the Hawaiian Islands. Have you ever just wanted to ask: “Do you walk to the grocery store?”
So, consider the type of loan, consider your guidelines, consider how egregious the ‘cheating’, and consider if you know enough about tax returns to even be sure they are cheating.
If you are going to have to decline a loan for this reason, before writing anything in the file, have a talk with your senior lenders. Find out what to write and what to say to protect your company.
Next Post: ‘Stated Income’ does not necessarily mean “Whatever it takes to qualify”.