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#2076132 - 04/28/16 02:57 PM DTI - Reason for Denial
swiggles Offline
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swiggles
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Am I in overkill mode and being too technical?

For a loan request, we calculate two DTI ratios:

  • Current DTI
  • DTI after adding in the new payment


There are two DTI reasons for denial in our software:

  • Excessive current obligations in relation to income (if current DTI is too high)
  • Income insufficient for amount of credit requested (if DTI after adding new payment is too high)


Sooooo.....if the current DTI is too high, it's a given that the DTI after adding in the new payment will be too. Should we be providing both reasons for denial in this case?
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#2076136 - 04/28/16 03:13 PM Re: DTI - Reason for Denial swiggles
raitchjay Offline
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OK
I would, as the reasons for denial should communicate to the applicant what they need to "fix" in order to qualify. Without both reasons, they might work their current DTI to a manageable state, re-apply, and be quickly denied again for "income insufficient for amount of credit requested". By marking both, you are giving them the complete picture and a more accurate statement of denial IMO.
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#2076145 - 04/28/16 03:43 PM Re: DTI - Reason for Denial swiggles
swiggles Offline
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Thank you for your input. I know that Reg B states to provide ALL reasons for denial....up to that magic stupid number of what?...3 or 4?....I have never understood THAT logic for the very reason you stated above. The applicant fixes the disclosed reasons for denial and comes back, at which time the bank says..."oh wait...well now there's an additional reason for denial.....we couldn't disclose it earlier because the law says we're not allowed to do so...sorry."

But I do hesitant to provide just half the picture! OK....will require both reasons disclosed, if present.
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#2076148 - 04/28/16 03:50 PM Re: DTI - Reason for Denial swiggles
JWills, CRCM Offline
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We have been criticized for using both for the same denial.
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#2076152 - 04/28/16 04:01 PM Re: DTI - Reason for Denial swiggles
David Dickinson Offline
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First, this is an area that I think examiners (& we) overthink too much. Why? Because the examiners criticize for under-disclosing and over-disclosing. The point is to inform the applicant of why they are being denied, so they can fix it and reapply later, if possible.

My opinion is to state only "Excessive current obligations in relation to income" based on the current DTI. If you can't pass that, you can't pass the "Income insufficient for amount of credit requested" ratio. However, you could pass the first DTI and not the 2nd (with the new debt).

Second, concerning the Reg B "magical number of reasons". The Commentary to Reg B states:
A creditor must disclose the principal reasons for denying an application or taking other adverse action. The regulation does not mandate that a specific number of reasons be disclosed, but disclosure of more than four reasons is not likely to be helpful to the applicant [Commentary to ยง1002.9(b)(2) #1].

That doesn't say you can't disclose more than 4 reasons. In fact, it says, the regulation doesn't care, but more than 4 is not necessary. Therefore, I can disclose 5 or 6 or whatever, but I don't have to. I can choose to stop at 4 reasons.

This is a pet-peeve of mine. I've had to "discuss" this with examiners many times for clients and have never lost this discussion once I explain it this way.
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#2076193 - 04/28/16 05:56 PM Re: DTI - Reason for Denial swiggles
swiggles Offline
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Soooo......

If the applicant passes with current DTI but fails with the new payment, disclose "income insufficient for the amount of credit requested."

If the applicant fails with current DTI, disclose "excessive current obligations in relation to income." And even though that automatically means that the applicant will also fail DTI with new loan payment, do not disclose that reason.

Is that what I am understanding from this discussion?

And thanks, David.....informative post!.....though I think it would be a very rare occurrence to ever have four reasons.
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#2076198 - 04/28/16 06:04 PM Re: DTI - Reason for Denial swiggles
raitchjay Offline
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OK
Personally, i don't think there's a "right" or "wrong" answer here (on the issue of disclosing 1 or 2 reasons that is). They fail both tests, so you can say disclose both reasons. Or you can, as David is saying, say that by failing one test, they automatically fail the other, so you only disclose the one. With common sense, you could defend either approach IMHO.
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#2076238 - 04/28/16 08:07 PM Re: DTI - Reason for Denial swiggles
Dan Persfull Offline
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This is from 2005 but it is still useful:

https://www.bankersonline.com/sites/default/files/tools/adversereasonschart.pdf

I side with only using the one reason.

Are you denying the applicant because their current DTI is excessive or because the DTI will be excessive with the added credit? I would assume if you are denying because the additional credit will cause the DTI to be excessive then the current DTI would be in line without the additional credit.
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#2076240 - 04/28/16 08:09 PM Re: DTI - Reason for Denial swiggles
swiggles Offline
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The problem I am having here is lenders not being consistent. I am trying to educate them about which reason to use for which DTI calculation and whether or not to use both reasons if both apply. Whichever way we choose, everyone needs to be on board and do it the same.
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#2076253 - 04/28/16 08:34 PM Re: DTI - Reason for Denial swiggles
David Dickinson Offline
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Quote:
I think it would be a very rare occurrence to ever have four reasons.

I agree. In some of those rare occasions, however, I've had some examiners try to cite banks for disclosing 5 reasons. Any combination of 5 of the following is possible:
length of employment,
length of residence,
value of collateral
income insufficient,
unable to verify income,
unable to verify credit,
unable to verify employment, and
delinquent past credit obligations.
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#2076267 - 04/28/16 09:08 PM Re: DTI - Reason for Denial swiggles
swiggles Offline
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swiggles
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Quote:
Are you denying the applicant because their current DTI is excessive or because the DTI will be excessive with the added credit? I would assume if you are denying because the additional credit will cause the DTI to be excessive then the current DTI would be in line without the additional credit.


...not sure I understand your question.
Some we deny for current DTI (meaning DTI with payment would also be too high)
Some we deny because though current DTI is OK, the added payment makes the resulting calculation too high.
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#2076275 - 04/28/16 09:30 PM Re: DTI - Reason for Denial swiggles
Rocky P Online
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The only way that both might be applicable -

"There are two DTI reasons for denial in our software:

Excessive current obligations in relation to income (if current DTI is too high)
Income insufficient for amount of credit requested (if DTI after adding new payment is too high)"

. . . might be if the housing payment might be decreasing (empty nesters, etc.), but still be too high for the bank's underwriting guidelines. The back end would be dropping, and so would the front, but still over the bank's limit.
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#2076280 - 04/28/16 10:15 PM Re: DTI - Reason for Denial swiggles
swiggles Offline
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Thanks to everyone!!!!
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#2076359 - 04/29/16 03:35 PM Re: DTI - Reason for Denial swiggles
Dan Persfull Offline
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not sure I understand your question.
Some we deny for current DTI (meaning DTI with payment would also be too high)
Some we deny because though current DTI is OK, the added payment makes the resulting calculation too high.


My point is you are either denying because the current DTI is too high OR the new credit will cause the DTI to be too high.

If your DTI policy is 45% and the applicant's current DTI is 60% you are going to deny the credit based on that DTI. Excessive obligations in relation to income.

If their current DTI is 40% but the new credit's payment will cause the DTI to increase to 45% you will deny based on that. Income insufficient for amount of credit requested.

In my opinion the adverse reason would be either one or the other but not both.
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#2076414 - 04/29/16 04:58 PM Re: DTI - Reason for Denial swiggles
JWills, CRCM Offline
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The Mitten State
That is what we were told, the reason had to be one or the other. It has taken some training to get all lenders onboard with the reasons.
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#2076564 - 05/02/16 02:17 PM Re: DTI - Reason for Denial swiggles
swiggles Offline
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Thank you!
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#2200365 - 12/11/18 07:23 PM Re: DTI - Reason for Denial swiggles
WABComply Offline
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I know this is an old post but I feel like I am going crazy. I have been out of underwriting awhile now. Currently doing some HMDA data integrity reviews and totally confused myself.

I always remember underwriting front end and back end ratios. If the front end failed I would deny the loan as "Insufficient Income for the amount of credit requested." If the obligations added now created a denial, I would deny the loan as "excessive obligations in relation to income".

If am reading this correctly, it seems I have it totally backwards. That I have to calculate the additional obligations separately before applying the front end calculations and if that exceeds the total DTI then I would select excessive obligations. It just doesn't make sense to me. Can someone please explain it. Thanks in advance.

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#2200366 - 12/11/18 07:34 PM Re: DTI - Reason for Denial swiggles
burke116 Offline
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RVA
I always just think of it in terms of their loan amount request. So if their DTI is fine now, but adding on the new debt creates a problem, it's "insufficient income for the amount of credit requested." Meaning, possibly requesting a lower loan amount could work.

Otherwise, if they're already over no matter what, they have excessive obligations in relation to income (regardless of amount of credit requested).

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#2200371 - 12/11/18 08:01 PM Re: DTI - Reason for Denial burke116
WABComply Offline
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I can see that. Thanks

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#2200379 - 12/11/18 08:44 PM Re: DTI - Reason for Denial swiggles
Adam Witmer Offline
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Great explanation, Burke116. That is how I view it as well. That said, Regulation B doesn't define these reasons, so the meanings could vary from one institution to another.

(Note: While the reasons of excessive obligations and insufficient income originate from the AA Notice model form found in Appendix B, the reasons are not defined anywhere in the rule.)
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#2202940 - 01/14/19 09:12 PM Re: DTI - Reason for Denial swiggles
ckme Offline
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If a charged off loan/credit card is on the credit bureau, how do you use it in the adverse action - delinquency or collection account?

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#2203690 - 01/23/19 05:05 PM Re: DTI - Reason for Denial ckme
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We check the "Other" box & type in Charged Off Account(s).

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#2203734 - 01/23/19 07:19 PM Re: DTI - Reason for Denial swiggles
Oursisnottoreasonwhy Offline
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Delinquent past or present credit obligations with others

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#2203817 - 01/24/19 02:26 PM Re: DTI - Reason for Denial swiggles
Dan Persfull Offline
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Delinquent past or present credit obligations with others

This.
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