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#1882135 - 12/31/13 03:18 PM To Gross Up or not to Gross Up Non-Taxable Income
Terry Fraser Offline
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We make first lien RE loans for both portfolio and for sale to the agencies. The agencies allow for grossing up the non-taxable income of the applicant. However, for portfolio loans we do not want to gross up the non-taxable income.

Do you see any Fair Lending issues with our different treatment of this issue? I am concerned since typically the borrowers will be mid to lower income, relying on SSA or disability benefits.

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#1882168 - 12/31/13 04:29 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Tesla Offline
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Yes, I do see a problem with this. My old bank was criticized for this exact same thing when the examiners did individual interviews with lenders. Lenders who mainly did portfolio loans did not know lenders who did secondary market loans were grossing up and couldn't explain why we were not on portfolio loans. Then we had to go back and determine if we had grossed up the income on portfolio loans to see if they would have qualified for the secondary market and potentially better rates. It was a nightmare, but fortunately no one would have been in a better situation had we grossed up, so all we had to do was change our practice and gross up.
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#1882283 - 12/31/13 08:45 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Terry Fraser Offline
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Thank you Tesla. I agree, your experience tells me our hunch was correct, this is disparate treatment.

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#1882321 - 01/01/14 01:38 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Rocky P Offline
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Not treating all the same can cause fair lending issues. As you know the buying power of tax free income is substantially greater than taxable income, and the applicant should get credit for the increased purchasing abilities.

I forget the bank (many years ago), but they were criticized by the regulators for only grossing up non-taxable income when the need came up. If the applicant met the income (DTI) requirements, they did nothing else. If they did not meet the income requirements then they would gross up non-taxable income, if any. Regulators indicated the bank was inconsistent in application of underwriting.
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#1893739 - 02/05/14 03:37 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Rocky P
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Originally Posted By: Southern Banker
Not treating all the same can cause fair lending issues. As you know the buying power of tax free income is substantially greater than taxable income, and the applicant should get credit for the increased purchasing abilities.

I forget the bank (many years ago), but they were criticized by the regulators for only grossing up non-taxable income when the need came up. If the applicant met the income (DTI) requirements, they did nothing else. If they did not meet the income requirements then they would gross up non-taxable income, if any. Regulators indicated the bank was inconsistent in application of underwriting.


Yes, the reg says the creditor "may" gross up income - meaning the underwriting policy may allow for untaxed income to be grossed up, but probably not on a loan-by-loan, case-by-case basis. In practical terms, assuming loan terms don't differ depending on DTI, there would be no negative impact on a borrower if he already qualifies for a loan without grossing up his untaxed income. However, as we know it's all about assembly line mortgage loan originating these days - processing, underwriting, originating, settling, servicing, collecting, and foreclosing each loan exactly the same way. It's even more of a challenge now to gross up under the new QM standards, as Appendix Q now requires the lender to figure out and document what tax rate the borrower paid last year and use that factor to gross up income.

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#1893850 - 02/05/14 05:40 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Rocky P Offline
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One issue may be for consistency. What if the pricing in part was based on debt to income? By not grossing up some incomes, it may mean the borrower paid a higher price for the loan.
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#1893888 - 02/05/14 06:46 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Rocky P
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Originally Posted By: Southern Banker
One issue may be for consistency. What if the pricing in part was based on debt to income? By not grossing up some incomes, it may mean the borrower paid a higher price for the loan.


That's what I was referencing in my statement "assuming loan terms don't differ depending on DTI".

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#1895269 - 02/10/14 01:12 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Mike Baker Offline
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I have found inconsistencies in what lenders elect to "gross up." In some cases, it is the amount of the direct deposit; in others it is the total amount per the reward letter; in still other cases it is the difference between lines 20a and 20b. The latter seems to be the most technically correct. In all cases it seems that the factor selected is 1.25...but if the tax return shows a different tax percentge, should that not be what is utilized [in accordance with bike4life's comment above]? And with regard to the tax percentage,should it be the total tax, line 61, divided by adusted gross income, line 37?
Are the mechanics of the process spelled out in detail anywhere?
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#1895348 - 02/10/14 04:10 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
hgliii Offline
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You will not find anywhere that it is written down. I attended a HUD seminar in which the HUD presenter indicated the proper percentages to gross up were: Social Security income @ 115%, because the award letter would include SS. All other net incomes should be grossed up 125%.
That was from the Atlanta HOC and there was nothing in writing only verbal.

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#1895440 - 02/10/14 05:35 PM Re: To Gross Up or not to Gross Up Non-Taxable Income hgliii
Rocky P Offline
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Because the effective tax rates are low, I have seen 115% more often than not and consistent.
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#1916723 - 04/23/14 02:14 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Sewanee, CRCM Offline
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I know I'm jumping into this conversation late, but I have a related question. For those of you who have dealt with this issue with your regulators, did you find they wanted income grossed up even for loans that are not real-estate secured? For example, car loans and unsecured loans?
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#1916768 - 04/23/14 03:13 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Rocky P Offline
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Yes for non-taxable income. If not, it would be considered a difference in treatment which affects lower income and elderly borrowers the most.

In many cases, income is not grossed-up on every loan, only those that have non-taxable income and do not qualify because of low income. (Although, I had an examiner say that for consistency, all non-taxable income should be grossed-up, in every case. We said that the bank might consider that - end of story.)
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#1917089 - 04/24/14 01:38 AM Re: To Gross Up or not to Gross Up Non-Taxable Income Rocky P
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Yes, we've had the same recommendation from an outside auditor.
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#1917125 - 04/24/14 01:42 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Rocky P
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Quick question - what type of income documentation do you typically require on those non-real estate secured loans?
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#1917145 - 04/24/14 02:12 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Rocky P Offline
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Sewanee, that would be bank policy, based on the bank's risk appetite. In banks I've been at, it was usually paystubs.
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#1917224 - 04/24/14 04:14 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Sewanee, CRCM Offline
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Yes, this is my totally informal, non-scientific poll as to what different institutions require. smile
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#1926198 - 05/23/14 03:33 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Always questions Offline
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shoot holes in this for me, acceptable or not?

Consistently, across the board do not gross up SSI, disability on ATR applicable loans, solely use the Benefits Awards Letter as gross amount. The amount of non taxable on lines a and b is not much typically and not a big difference using that amount to gross up so as long as we use same standard of the gross amount on Awards letter is that okay? Says "may" do it but doesn't mandate so is it worth it to require TR and calculate for such a small amount?

Next, consistently on all ATR applicable loans, do gross up child support using app Q method of using tax rate on last year's income tax returns.

Lastly, on all non-ATR RE and non real estate loans (that only require copy of net deposit or in some cases in our policy for small non RE loans, no proof),gross up a standard 20% across the board consistently for SSI, Disability and Child Support.

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#1926336 - 05/23/14 06:06 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Rocky P Offline
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I would not do it for 2 reasons:
1 - there may be some cases where it might affect the underwriting decision.
2 - there may be some loans where it might affect the loan rate.

There is an issue of consistency and disparate impact. Since minorities and elderly might have more of an occasion to have non-taxable income, it could be a discrimination issue.
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#1926362 - 05/23/14 06:44 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Always questions Offline
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DTI isn't a contributing factor to our rates, only score but it could affect the decision for sure.

So, what if we did require TR for all SSI, Disability and Child Support dependant borrowers and use the non taxed portion at their current tax rate for all ATR applicable real estate loans only?

And did a blanket gross up on all non-ATR RE and non real estate loans?

Consistent treatment

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#1932037 - 06/12/14 06:39 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
fmissle Offline
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I didn't see this linked above, but the FDIC has a statement of policy on Discrimination in Lending that talks about grossing up.

http://www.fdic.gov/regulations/laws/rules/5000-3860.html
Quote:
Example: In the past, lenders primarily considered net income in making underwriting decisions. In recent years, the trend has been to consider gross income. A lender decided to switch its practices to consider gross income rather than net income. However, in calculating gross income, the lender did not distinguish between taxable and nontaxable income even though nontaxable income is of more value than the equivalent amount of taxable income. The lender's policy may have a disparate impact on individuals with disabilities and the elderly, both of whom are more likely than the general applicant pool to receive substantial nontaxable income. The lender's policy is likely to be proven discriminatory. First, the lender is unlikely to be able to show that the policy is compelled by business necessity. Second, even if the lender could show business necessity, the lender could achieve the same purpose with less discriminatory effect by "grossing up" nontaxable income (i.e., making it equivalent to gross taxable income by using formulas related to the applicant's tax bracket).

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#1960849 - 09/10/14 05:35 PM Re: To Gross Up or not to Gross Up Non-Taxable Income Terry Fraser
Mel in WA Offline
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We sell most of our mortgage loans on the secondary market and each investor has a different percentage for grossing-up. Our initial thought was to establish a percentage (i.e. 20%) for all loans, whether portfolio or secondary market, but it's difficult since the percentages vary. Any advice?

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