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Reg B Loans - Retirement Contributions as Income
Answer by Jim Bedsole & Andy Zavoina, BOL Gurus
Guru Bios
Question: My question involves Section 202.6(b)(5) of Reg B. When calculating a loan applicant's income, should contributions being made to a retirement plan (401-K, for example) by the applicant be added back as income? An FDIC examiner recently told us that such income is discretionary and that not adding it back to income is a violation of Reg B. If this is true, what about individuals who are required to contribute to retirement plans each pay period, like teachers? In this example, is it truly discretionary income?
Answer from Jim: If you are looking at gross income and not net income, then you are already considering the contributions the applicant is making to the 401-K. I'm presuming that those contributions are either in the form of payroll deductions or are made directly by the applicant from their personal funds (which presumably derived from their income). In either case, you wouldn't add the contributions back to gross income, because they are already included.
Answer from Andy: Reg. B wants to ensure you do not discount an income source in your evaluation.
Mortgage underwriting is more specific, in my experience than consumer loan underwriting, in the formula used. But if your evaluation of the cash flow centers around net income available to repay the proposed debt, the contribution to a retirement account should be shown as a debt, paid from the gross income so long as the applicant intends to continue that contribution. This is not uncommon in some consumer loan underwriting.
If you are considering gross income, as Jim noted it is already there. It starts in the gross income in any instance.
What you absolutely cannot do is fail to include a pension income that is expected to continue as an income source.
First published on BankersOnline.com 11/06/06
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