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#21818 - 06/25/02 04:10 PM Grossing up non-taxable income
CalifDreamin Offline
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Does anyone happen to have a regulatory citation/article/advisory that discusses grossing up non-taxable income when doing credit analysis? Related to this, can you specifically ask how much of someone's income comes from SSI if they are over 62?
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Lending Compliance
#21819 - 06/25/02 05:41 PM Re: Grossing up non-taxable income
Andy_Z Offline
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OCC B-94-30 Policy Statement on Discrimination in Lending 5-94 It is used as an example.
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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#21820 - 06/25/02 06:27 PM Re: Grossing up non-taxable income
CalifDreamin Offline
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Far from Calif
Thanks Andy!
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#21821 - 06/25/02 06:47 PM Re: Grossing up non-taxable income
Lucy Griffin Offline

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Lucy Griffin
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When an applicant states income, you can always ask and verify its source. Doing so with SSI doesn't constitute discrimination based on age as long as you routinely verify all income.

The only special income rule relates to marital status. That rule allows the applicant to withhold information about receiving that income (and therefore not rely on it) if they choose not to reveal the income and the related marital status issue.

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#21822 - 06/26/02 02:48 PM Re: Grossing up non-taxable income
KimC Offline
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Minnesota
It was recommended to us after an exam six years ago to include grossing up non-taxable income in our loan policy. We us 15% when grossing up income and rely on the applicant to show us what portion of their income is non-taxable.

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#21823 - 06/26/02 03:13 PM Re: Grossing up non-taxable income
CalifDreamin Offline
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Far from Calif
Thanks K. Carter! That's what we did at the bank I used to work at, and I seemed to recall quite a few lenders that used the 15%...just wasn't sure if that was a business decision to choose that particular %, or if that was the amount recommended/required by regulators. The policy statement Andy gave reference to helped, but again, no specific requirements which is what they like me to produce here. Appreciate all the input.
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#21824 - 06/26/02 03:27 PM Re: Grossing up non-taxable income
Dan the man Offline
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Dan the man
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I AGREE WITH THE 15% RULE BUT I WOULD LIKE TO ADD THAT BACK WHEN I OWNED AND OPERATED A MORTGAGE BANKING OPERATION AND WE CLOSED LOANS WITH THE SECONDARY MARKET, BOTH CONFORMING (fhlmc) AND (freddie) AND NON-CONFORMING, WE WERE ALLOWED TO GROSS UP 125% OF THE INCOME FOR SSI, DISABILITY, VA, OTHER GOVERNMENT WELFARE PAYMEMTS, ETC...CHEESE, ETC... THIS WAS THE RULE TO QUALIFY AN APPLICANT. THIS COULD BE IN THE ACTUAL FHLMC AND FANNIE MANUALS, BUT I HAVE NOT LOOKED SPECIFICALLY.

HOW DO YOU CALCULATE?

MY APPLICANT HAS $614.00 ON HIS/HER AWARD LETTER.
614.00 x 125% = $767.50 OR YOU CAN TAKE $614.00 X 1.25 = $767.50. THE $767.50 IS THE GMI (GROSS MONTHLY INCOME)
WE NEVER HAD AN UNDERWRITER CHALLENGE THIS.
IF YOU USED THE 15% IT WOULD BE $614.00 x 115% = $706.10.
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#21825 - 06/27/02 01:55 PM Re: Grossing up non-taxable income
KimC Offline
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We decided on 15% because that is the lowest tax bracket the applicant would be in. Typically if you are needing to gross up the income to qualify the applicant will most likely be in the lowest tax bracket. We were told by the FDIC that this was an acceptable % to use. The only way to be truly accurate is to know what tax bracket your customer falls in, so a consistently used % is acceptable.

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#21826 - 06/28/02 06:21 PM Re: Grossing up non-taxable income
Anonymous
Unregistered

In our most recent exam, the Fed was using 25% for grossing up non-taxable income.

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#21827 - 06/28/02 06:41 PM Re: Grossing up non-taxable income
CalifDreamin Offline
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CalifDreamin
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Far from Calif
Interesting. Given FDIC seems to say 15% and Feds are saying 25%, would be nice to have them all come to an agreement.
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#21828 - 06/28/02 06:49 PM Re: Grossing up non-taxable income
Bartman Offline
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Springfield
Nice, yes - and if wishes were fishes we'd all be wet!

Seriously though, kcarter nailed it with 'consistently' used. Whether you gross up at 15% or 25%, the key is to ensure that every single lender grosses up at the same percentage, every single time.
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