For several years, my understanding on what income to use for a personal loan is to use the adjusted gross income and then for business/commercial loans we use the sales, receipts, etc. Now, I am hearing that we are to use Total income instead of adjusted gross income on personal loans. Which one is the correct income to use?

Whatever figure you use in your underwriting analysis.

2013 GIR, Appx A, pg A-6

I just got this question this morning from the loan department, so we are questioning this also: We had a negative income, and according to the GURU's on here, there is no such thing as negative income, so how do we report this?

Self-Employed Borrower earns $900,000 gross profit on business tax returns, however has $1,000,000 in business expenses therefore having a net profit (or loss) of ($100,000) for the tax year; in this example there is no deprecation or interest to add back. We deny based on income because there isn't any verifiable income (it's in the red) - HMDA says we are to report the gross profit of $900,000 not the negative ($100,000) used to make the decision?

I would do N/A.
I don't believe the ffiec software lets you do '0'

There's no such thing as negative income.

Your expenses my exceed your gross income giving you a negative cash flow but you do not have a negative income.

So in this scenario, would you use the $900,000?

So in this scenario, would you use the $900,000?

Based on the above example that is the gross income you used to make your decision.

I just listened to HMDA - Soup to Nuts (thank you David! Great presentation and training!!). The one thing I'm trying to change in my shop (that I thought I had enough support from threads here and other trainings I've attended/listened to) is Gross Annual Income. We began using the income section of our ATR worksheet for HMDA reporting, BUT sometimes it includes losses in the calculation (i.e. Capital Loss, Net Rental Income (loss), etc..). The question often comes up, how do I report a negative income? The answer in Soup to Nuts was 'numerous field examiners recommend that bank's just report a '1'. I'm feeling defeated I had sectioned off the income portion with another column if the amount was a negative (loss) and asked for the GAI for HMDA to be reported on the positive amounts only. Today's training makes me think I could have some trouble on my hands. If, on the income section of our ATR, we have positive Wages, positive Bonus Pay, Positive Interest/Dividends, Positive K1 Distribution, but a Net Rental Income Loss, should we look at the loss as an obligation and not include it in the HMDA GAI? Or should we calculate the loss into the GAI figure for reporting?
I'm looking at an example specifically where positive income was about $93,000 monthly ($1,116,000 annaul) and they took a loss on their tax return for their rental properties in the amount of almost $189,000. Should we report $1,116,000 or $927,000? Thank you in advance for your help!

IMHO the gross income used was $1,116,000.

The regulation requires you to report the gross income used, it does not say to use the net (adjusted) income/loss used. As I've said before if I have $100,000 in gross income but I have $150,000 in expenses/losses by cash flow is a negative $50,000 but my gross income used to calculate that cash flow and make the credit decision is $100,000.

I also will stick by my opinion that no one has a negative income. They may have negative cash flow but how can one have a negative income?

Thank you Dan. That was the road I was going down, trying to retrain my shop to see losses as obligations until they were a positive income source (for HMDA reporting purposes).

First, thanks for your kind word Colorado Girl.

Second, I can't argue with Dan as he's quoting the reg regarding "gross income". But I can explain: The issue is many lenders don't rely on gross income. They rely on net. In the rare occasion that someone does have a negative net income, I used to recommend grossing it up, but then that looks odd as all other income reported on the LAR is net and there's a few with gross income. This is especially odd when the reason for denying the person is "income". Recently, several local examiners have told me they are okay with reporting a "1" for income in this situations. I like this as 1) it's obvious to all that the income is low; and 2) it keeps the applicant in the same "low income bucket" for fair lending analyses.

This came up during a discussion about HMDA income and Ability to Repay (ATR). The examiners said "we expect these to be the same". I agree. If you're using an income # for ATR, why wouldn't you report that income for HMDA? That's the # you relied upon to make the credit decision - which is what HMDA wants.

As I said in the webinar training (and in the written Q&As), this is an "unofficial" guidance and you should discuss this with your local field examiners.

Colorado Girl: The short answer to your question is, "report whatever income the loan officer relied on." I don't care what income they used - just tell me what is was.

Dan: It is possible to have a negative NET income. If you're using NET, instead of gross to make your ATR calculation, I think you should report the net income. For example, as Colorado Girl explained, when relying on rental income. Many times rentals don't cash flow and that's the income the loan officer is relying on. Another fact is that many people use credit cards to supplement their income. For the past several years, the census bureau reports that the average person has spent 103% (or another # greater than 100%) of their income.

Thank you David for your explanation, I really needed some outside thoughts thrown at this topic for us.
I still am not sure why we would look at a business (or other, capital loss?, etc...) loss in the same category with the income. I'm not saying that it shouldn't be evaluated and included in the credit analysis, I'm just trying to understand why some say it's ok to adjust the income figure for reporting and some say it's not ok. Yes, it will lower the total income of the applicants as long as it's taking a loss (or structured in such a way for tax reporting as to show it as a loss), but so too does a mortgage, credit cards, or any of the obligations they have.
I really like the Fair Lending implications that Kathleen brings up in another post on here when reporting net versus gross. I think that makes the most sense to me when reporting income for an apples to apples approach. Not how do they use the income they make, but more, how much do they make total, before adjustments.
I don't want to make it harder than it has to be for anyone, I just want to get it right; is that possible with HMDA?!

David you offer a good explanation of your opinion but I have to still take exception that the regulation requires reporting the gross income used in making the decision.

If the examiners are allowing "net" income to be used then they are wrong IMHO, just as they were wrong in saying I had to report an income figure for withdrawals instead of NA.

. . . you should discuss this with your local field examiners. . . .

I totally agree with David's statement here and highly advise that you do so.

Dan: Just to clarify - the regulation CLEARLY states to use gross income. I'm not disputing that. The "push" is that most lenders don't. They use net. This is not something I've ever seen cited (in my years as an examiner and 23+ as a consultant). The problem is the software doesn't allow 0 or negative numbers to be entered. Thus, lenders were forced to gross up income when they encountered the rare case with a negative net income - which is inconsistent. I like the solution of entering "1", but also want to clarify this is not official guidance. It's a possible solution if your examiners agree.

Thank you both so much for your time and expertise! I really appreciate it!

The whole point of HMDA. Income reporting is to classify people into income categories for fair lending. That only works correctly with gross income before adjustments. If you use net after adjustments you could have middle and upper with lots of adjustments mixed with moderate with minimal adjustments.

I agree. If you report a "1" for income, it will make it very clear that this applicant is low income. That's what I stated in my first post to this string.

I disagree with your comment stating "That only works correctly with gross income before adjustments." If you report net income consistently, you can classify applicants for fair lending BETTER than using gross income.

Loan officers don't care about gross income. As a previous S&S examiner and as a prior loan officer, I can tell you first hand that gross income is a game. People making credit decisions want to know what you have left to make payments. Not what you can show on paper.

Let me step back: This is interesting as I'm the first to acknowledge the regulation says to use "Gross income". But the real world doesn't AND I never see citations of it. Hence, the examiners even struggling with telling a bank they have to gross up the negative net income. Add the ATR rules to this and the logic that you should report the same income used in your ATR as the income for HMDA and this makes the "net vs. gross" issue more interesting.

If you report a "1" for income, it will make it very clear that this applicant is low income.

I have to disagree.

I can show you people that drive brand new cars/trucks, live in $300,000 - $500,000 or higher priced homes and have net worths over $1 million, but yet due to the deductions and expenses they get to take for tax purposes they show a operating loss even with allowable add backs (or a negative income as referred to in these threads). And in these cases these people are most definitely not "low income" borrowers.

David, I was a lender and managed credit policy and risk for many many many years. What I am saying is that, in my opinion, you report the gross income from which you derived the income you used in your credit decision/debt to income analysis. The net income will naturally be lower because it is net after all, but to truly compare borrowers for fair lending, gross income is needed. Write offs, etc. all impact net and cause comparisons between people with vastly different actual gross income.

Now I have to get back to work, on HMDA, CRA, and quite a few other things!

Interesting thread!

So, I am probably using a similar vendor to Colorado Girl. We also have an ATR worksheet that is produced.

Scrubbing my HMDA-LAR for the quarter got me thinking about this topic (ATR income vs. Gross Income). Our shop has always reported Gross Incomes from the Tax Return. The theory is that this is the gross derivative of the net income used in making the credit decision. It also provides a consistency across all loans.

Thinking about how I would defend not reporting the ATR figures... If my ATR worksheet uses gross monthly income for the current year, should I be annualizing that to come up with a 12 month figure, or could I get by with continuing to report the previous year tax figure (gross income)?

This stinks!