Idaho Department of Finance Guidance Statement 2020-04-CFB: Financial Analysis Review

PROTECTING THE INTEGRITY OF IDAHO FINANCIAL MARKETS SINCE 1905 Idaho Department of Finance Guidance Statement 2020-04-CFB THE GUIDANCE IS AN AGENCY INTERPRETATION OF EXISTING LAW AND DOES NOT REPRESENT AN NEW LAW OR LEGAL REQUIREMENT P A G E | 1 Idaho Department of Finance Guidance Statement 2020-04-CFB FINANCIAL ANALYSIS REVIEW Issue Date: July 1, 2020 (Replaces Guidance issued October 4, 2017)
I. Background
The purpose of this Guidance is to provide clarity and direction to mortgage broker and lender license applicants (License Applicants) under the Idaho Residential Mortgage Practices Act (Act) regarding financial analysis requirements for licensure. The federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), adopted by Congress in July 2008 in response to the U.S. subprime mortgage crisis, established minimum standards for the licensing and regulation of mortgage loan originators (MLOs). While the SAFE Act required certain financial standards for MLOs, it did not establish minimum financial standards for the License Applicants that employ MLOs. Idaho Code § 26-31-206(2)(a) requires that License Applicants demonstrate financial responsibility, character, and fitness in order to warrant the belief that the business will be operated honestly and fairly when offering financial services to the citizens of Idaho. To verify that licensees continue to meet this standard, their loan and business records, including financial statements, are subject to periodic examination by the Department. To ensure that License Applicants meet Idaho’s minimum financial fitness standards, they must file unaudited financial statements through the Nationwide Multistate Licensing System (NMLS). Start-up companies will be required to file only an initial Statement of Condition or a Balance Sheet. The reporting criteria and review standards identified below meet recognized Generally Accepted Accounting Principles (GAAP) and are part of the Multi-State Mortgage Committee’s (MMC) examination guidelines.

PROTECTING THE INTEGRITY OF IDAHO FINANCIAL MARKETS SINCE 1905 Idaho Department of Finance Guidance Statement 2020-04-CFB THE GUIDANCE IS AN AGENCY INTERPRETATION OF EXISTING LAW AND DOES NOT REPRESENT AN NEW LAW OR LEGAL REQUIREMENT P A G E | 2 The below standards will be used to evaluate financial statements required to be submitted as part of the application process in Idaho.
II. Financial Analysis Standards
For the purposes of analyzing the financial condition of a License Applicant or licensee, the following criteria will be used:

• Monetary unit must display data in U.S. Dollars.
• Accrual-basis accounting (reporting revenue in period earned not when received; reporting
  expenses in period incurred not when paid).
• Full disclosure principle – requires financial statements to fully disclose all information an
  investor, lender, or private individual might need to assess the current financial state of the business, including any auditor’s or accountant’s notes, as applicable.
• Initial information provided by License Applicants may be taken at face value. However, this does
  not preclude the Department from asking clarifying questions or requesting supporting documentation as needed from the License Applicant. Failure to provide requested information may result in a denied or withdrawn application. The review analysis will initially examine five potentially relevant financial ratios and may be expanded if further information is required for a determination to be made:

1. Current Ratio = Current Assets / Current Liabilities (current means one year or less):
   The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the current total assets of a company relative to that company’s current total liabilities. The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities. The Current Ratio is a good gauge of an institution’s capacity to meet short-term debt obligations. A higher Current Ratio indicates a more liquid institution. Generally, a below average Current Ratio is 1.0 – 1.2, and an Unsatisfactory Current Ratio is below 1.0.

PROTECTING THE INTEGRITY OF IDAHO FINANCIAL MARKETS SINCE 1905 Idaho Department of Finance Guidance Statement 2020-04-CFB THE GUIDANCE IS AN AGENCY INTERPRETATION OF EXISTING LAW AND DOES NOT REPRESENT AN NEW LAW OR LEGAL REQUIREMENT P A G E | 3 Liabilities to Assets Ratio = Total Liabilities / Total Assets (Alternative to Current Ratio): Similar to the Current Ratio, but the calculation also includes long term assets and liabilities. If the ratio is at or greater than 1 it is a cause for concern and may require additional information from the applicant. A ratio less than 1 is generally acceptable.
2. Tangible Net Worth = Total Assets – Total Liability – Intangible Assets:
Tangible net worth (TNW) is most commonly a calculation of the net worth of a company that excludes any value derived from intangible assets such as copyrights, patents and intellectual property in order to help determine the capacity of a company to pay its bills in a few months and assess the real value of a company based on the balance sheet.
3. Net Worth = Total Assets – Total Liabilities:
A negative net worth indicates that if the company were to liquidate on the statement date, some or all creditors may not get paid what they are owed and borrower clients could be left with the inability to obtain a loan. A negative net worth, although not an automatic disqualifier, requires additional information from the applicant on the conditions causing the applicant’s negative net worth and what steps the applicant is taking to improve its financial position.
4. Net Income (Loss) = Revenue – Expenses – Taxes:
The net income (loss) is an important indicator for financial health and long-term business viability. Multiple years of net loss could mean that the business is in trouble and may not be financially viable in the near future. Additionally, a large net loss in a single year may require further evaluation. For start-up companies, it may be common for a start-up company to lose money for several years initially before any profits are made. A net loss trend would be reviewed to determine whether the applicant’s financial condition is improving or deteriorating.

PROTECTING THE INTEGRITY OF IDAHO FINANCIAL MARKETS SINCE 1905 Idaho Department of Finance Guidance Statement 2020-04-CFB THE GUIDANCE IS AN AGENCY INTERPRETATION OF EXISTING LAW AND DOES NOT REPRESENT AN NEW LAW OR LEGAL REQUIREMENT P A G E | 4
5. Equity Depletion Ratio = Total Equity / Net Loss (used if a company registers a net loss):
This ratio measures the amount of time it would take to deplete the value of the company at the current year’s net loss amount. This ratio would be used in combination with observations regarding any net loss trend. An Equity Depletion Ratio of three years or less would be of significant concern and would be elevated for additional review or information. Contact - You may direct comments or requests for additional information regarding this Guidance Statement to:
Bureau Chief, Consumer Finance Bureau
Idaho Department of Finance Telephone: 1-(208)-332-8000 P.O. Box 83720 Facsimile: 1-(208)-332-8099 Boise, Idaho 83720-0031 Email: finance@finance.idaho.gov