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#2119662 - 02/27/17 07:48 PM Debt to Income Ratio
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
Covered loans to natural persons for business purposes do not appear to be exempt unless I've missed something. For business purpose covered loans we use Debt Coverage Ratios (DCR) even if the loan is to an individual. Will we have to convert the DCR to a DTI, or since we do not in essence use a DTI for these loans can we report NA?
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#2119669 - 02/27/17 08:03 PM Re: Debt to Income Ratio Dan Persfull
Peach Offline
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What if you 40% debt ratio the personal debt, then use the excess for the business request DCR. Vice versa if personal request and income all from business then you 1.25 CR the business debt then the excess can cover your personal debt ratio. That way a totally self employed with both business and personal debt can be calculated. Notating the combined in each case as well. A lot of the time the debt ratio is high while the CR will be acceptable. I am sure this is individual to each institution. In your case the debt ratio would be 40%.

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#2119686 - 02/27/17 08:43 PM Re: Debt to Income Ratio Dan Persfull
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This is coming from 4(a)(23) "Commenters explained that financial institutions usually consider the cash flow of property, such as the debt service coverage ratio, rather than the income of the applicant when evaluating a multifamily loan or loan to a non-natural person".. they also mentioned some commenters expressed uncertainty about whether financial institutions would be required to report the debt service coverage ratio or other cash flow analysis for loans to non-natural persons or multifamily properties. "The final rule will not require the financial institution to report the debt-to-income ratio for such loans." Further, a financial institution may report that the requirement does not apply if the applicant and co-applicant, if applicable, are not natural persons and for loans secured by, or proposed to be secured by, multifamily dwellings. Hope this helps! Was just reading this particular part in the new rules so perfect timing!
Last edited by Yeager; 02/27/17 08:44 PM.
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#2119690 - 02/27/17 09:00 PM Re: Debt to Income Ratio Dan Persfull
Dan Persfull Offline
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Yeager, thanks for posting the above section from the preamble but my question is not related to non-natural persons but rather to an individual for a covered business purpose loan.

Peach, I'm not quite sure what you are getting at when you say, "What if you 40% debt ratio. . . .".

The type loans I'm talking about are business purpose loans to individuals that are not incorporated, a partnership, etc. The individual comes in to purchase a new piece of equipment and refinance an existing dwelling secured loan to do so. We do a DCR instead of a DTI due to the business purpose nature of the loan and the business income being relied on. As long as the total DCR is within guidelines we don't look at the DTI. That's why I'm saying for these loan types we do not use a DTI and under the guidance if a DTI is not used you can report NA.

So my question remains; since we use the DCR, which is a form of a business DTI, will we have to convert it to a DTI for covered business loans to individuals? My inclination is no we will not, but right now it's not a strong enough inclination to stand on a box and shout it out.
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#2119697 - 02/27/17 09:12 PM Re: Debt to Income Ratio Dan Persfull
RR Joker Offline
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We do the same, Dan, quite a bit for individuals who purchase 1-4 family rentals... I will be following this sitch.
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#2119704 - 02/27/17 09:26 PM Re: Debt to Income Ratio Dan Persfull
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Interesting....Dan, i know you've read this, but i think i'd rely on:

4. Transactions for which no debt-to-income ratio was relied on. Section 1003.4(a)(23) does not require a financial institution to calculate the ratio of an applicant's or borrower's total monthly debt to total monthly income (debt-to-income ratio), nor does it require a financial institution to rely on an applicant's or borrower's debt-to-income ratio in making a credit decision. If a financial institution made a credit decision without relying on the applicant's or borrower's debt-to-income ratio, the financial institution complies with§ 1003.4(a)(23) by reporting that the requirement is not applicable since no debt-to-income ratio was relied on in connection with the credit decision.

and say that the bank did not calculate/use the DTI, therefore, one wasn't reported.
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#2119713 - 02/27/17 09:46 PM Re: Debt to Income Ratio Dan Persfull
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To me, "DTI" is an accepted term and calculation that gives you a formatted number anticipated by the writers of the regulation--the DCR isn't in that format and isn't calculated by the method anticipated by the regulation. That's why i'd say the bank did not calculate or use a "DTI".....but i do understand the 'grayness' of the matter.
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#2119714 - 02/27/17 09:48 PM Re: Debt to Income Ratio Dan Persfull
Dan Persfull Offline
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Raitch, that is what I am basing my inclination on. I guess where I may be over analyzing is since the loan is to an individual would they consider a DCR that is being relied on to be a DTI. I don't think so and really don't see how they could, but I've been fooled before.
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#2119715 - 02/27/17 09:50 PM Re: Debt to Income Ratio Dan Persfull
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I agree that it's an area that the writers of the regulation either didn't anticipate very well, or didn't go a very good job of explaining/clarifying.
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#2119761 - 02/28/17 03:20 PM Re: Debt to Income Ratio Dan Persfull
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Where the two don't meet in the middle to me is this. DCR may have zero to do with gross income of the borrower. Generally, it's specific to the income generation of the property being underwritten. [gross rent vs PITIM] Therefore, to convert the 'revenue' used in calculating a DCR would nowhere near have anything to do with the individuals actual income and would therefore become not useful in whatever analysis the consumer advocates intend to use this info for. smirk
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#2119906 - 02/28/17 09:17 PM Re: Debt to Income Ratio RR Joker
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Dan, for underwriting purposes I like to use both Debt ratio and coverage to look at what income would be supporting what debt. Personal or business and where is this business or person leveraged the most in relation to the request. So my what if 40% does not apply to the question at hand. If I keep reading where you are going then I agree with not reporting the debt ratio if you used the coverage ratio. Just in case I misread, I agree with your position.

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#2120177 - 03/02/17 02:06 PM Re: Debt to Income Ratio Dan Persfull
Dan Persfull Offline
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Thanks everyone for taking the time to respond.

After discussions with fellow CO's and a response from Kathleen in the HMDA Academy the consensus is the DCR will not have to be converted to a DTI under this loan scenario and NA will be reported for the DTI data field.
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