Often examiners recommend adding a “Credit Memo Lag” ineligible to a prospect or existing client’s borrowing base. It seems that just as often this recommendation is argued against by the borrower and/or the account manager. Usually the argument goes something like “credits are the major component of dilution and as long as they are captured in dilution, then a reserve is not needed.” Other times the recommendation is adjusted to reserve for only the lag up to the eligibility period (i.e. 90 days). This post will discuss and illustrate why this is not a good idea. We will also discuss some of the variations we’ve seen used to calculate this reserve and the merits of the various treatments.
There are basically two ways to measure credit memo lag: Continue reading