An examiner told us that he thinks we should have a debt to income ratio form in all of our loan files. Our practice is to utilize the form on R/E loans only. Is there a regulation that requires that we use the form for all loans?

It's not a regulation, but with one, you can see that someone actually calculated and looked at it. It also will indicate any ratios that may be an exception to any underwriting requirements of the bank.

I think the regulator just wants evidence that a loan officer considered the ratio in the decision.

It's also good for the bank to know as well

Not a regulatory requirement that I know of but it does fit under safe lending practices.

Certainly it should be calculated if you consider D/I ratios and deny loan requests because it is high. A template helps standardize it so everyone is on the same sheet of music for ant fixed amounts you may add to or deduct from the two sides of the equation.

One of the hallmarks of predatory lending is a pattern of lending without regard to ability to repay. This can help alleviate any concerns of this. In addition, there could be fair lending problems that arise from not having a consistent application of debt to income calculations. I think it definitely falls into the classification of "best practice".

The design for loan documentation of the one date and two ratios our operation, the ratio and per cent were added to the lending officer's approval section of the consumer application. This way an addition of another page was not needed. The date we document is the last credit report. The second ratio is LTV, the loan value of the collateral to the loan amount requested, third is DR, monthly payment debt to the monthly income.
The policy for underwriting is to perform the analysis for all consumer, RE, and commercial. This was an issue when self fair lending examinations were in the infancy. I use the documentation of all three when testing for fair lending compliance, especially in consumer real estate applications.
Documentation of these ratios are proof the lending officers are following the bank's lending policies. The lending management feels the payment deliquency rate is decreased due to the use of the ratios in consumer lending.
But of course this is theory and not one that may tested.

Although not a specific regulatory requirement in the sense that there is a clear paragraph somewhere in the U.S. Code of Federal Regulations to which we can point, there are several general regulatory "principles" that are leading to this. Predatory lending concerns, augmented by fair lending concerns, are the leading issue. The agencies' issuance on sub-prime lending comes close to requiring lenders to prove that they have responsibly underwritten the loan.

There are also rising ideas under BSA. You need to document loan purpose, but now also may need to prove that you identified the customer and evaluated the loan purpose sufficiently to be sure that the borrower and the use of funds are legal. The ratios could become a part of this.

Anon,

We recently had a Fed examiner do a "complimentary" fair lending review. He also warned us that if we deny based on excessive debt to income, etc., we better show how we determined that. All of our loan officers now use a D/I worksheet for all their loans (except commercial/business). It does make it easier on me as well when I review the Adverse Actions. It gives me a feel for what the loan officers are doing from branch to branch or from office to office. It's amazing to see how one officer's 45% D/I ratio is acceptable when his counterpart across town thinks 39% is too high!

A comon misreading of a Debt to Income Ratio is 45% for one borrower may not mean the same as 45% for another.

A Person making $200,000 a year and 45% DR still has a net income of $110,000, a person with a $50,000 income only has $27,500.

The percentage alone can be misleading.

Ahhh, if only life were that easy to have only one determining factor.

MarkB

Don, I have heard the term "disposable income" used to describe the concept you describe.

Don, I agree with that comment and have argued it before. But at one time I was told by an OCC examiner that if you use D to I in your loan decisions and that if X D to I was unacceptable, that D to I had to be applied consistently to all applicants. Something about allowing a higher D to I for incomes >= X is a form of disparate treatment against lower income persons.

Great point Don, it is extremely important to consider what I call "residual income" (what is left over). I do loan review in addtion to compliance at my bank and it is very frustrating to review files that lack this calculation. It is particulary frustrating when you're reviewing a weak loan and the ratio you calculate is higher than the lender's calcuation, yet you have no way of determining why the calculations differ. Our safety and soundness examiners have expressed an interest in seeing more documentation of the underwriting process. The good thing is that it is very easy to calculate debt to income ratios, and it is very easy to create a spreadsheet for this calculation. I created one and sent it to the lending staff a few years ago, yet very few people actually used it.

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Our safety and soundness examiners have expressed an interest in seeing more documentation of the underwriting process.

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Without going into detail, our S&S examiners requires that all loans have a debt service calculation in the file.

Since they are now required, several lenders have had their eyes opened as to why this person is not necessairly a good credit risk even though he has banked with us for X number of years, and may not have bad credit.

And one of my gripes regarding D/I ratios and the other valid factors mentioned above, is when the loan officers do approve something that doesn't fit within the Banks' guidelines, they don't explain it. A D/I ratio is just one small, iddy biddy indicator. As the commenters have said, other factors should be considered.

If I have a 42% D/I ratio to a female individual and that loan was denied, but I see a 42% D/I ratio to an individual male that was approved -- whether it be residual income, disposable income or some other reason for approving the loan -- place a memo in the file and tell me why.

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place a memo in the file and tell me why.

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When you discover the secret to get lenders (especially commerical lenders) to do that, be sure you bottle it, you'll become a overnight cazillianaire (sp)

It is a tough Fair lending issue. I hold that in some instances common sense will still get a pass.

I have had loans with high debt ratio's where long standing customers had medium 6 figure balances and no blue sky net worths in excess of several million dollars, and an examiner didn't like a 45% DR. Because other customers with much lower incomes and the same DR were declined.

Fair Lending is not an exact science. We do this type of analysis for a lot for banks all over the country, and there is no way you can pull up a specific number and say if you don't hit it you are providing disparate treatment.

There are literally hundreds of mitigating factors. Unfortunately, in the press of completing exams,regulators do not have the time to look at all the variables.

Thats where bank officers have to step in and provide the justification which examiners really want you to do.

Its not disparate if you make a good case, and you have to be prepared to do so. Most examiners can be reasoned with if your case is sound.

Thats also why self assessment is so important, as it waves any flags far enough in advance so a compliance officer can provide the common sense reasoning.

The biggest discriminator and provider of disparate treatment of all is the Credit Score, and that's another thread

Very good commentary. Could you bottle and sell your rationale to the examiners? You'll join Mark in becoming a cazillionaire overnight.

I agree with your rationale 100%. It never mad since to me that an examniner could "imply" disparate treatement because you gave this person a loan with a 50% DtoI but they still have $5k monthly disposalable income. Where the same ratio to the this person may only leave them $300. As you said somewhere along the line common sense has to prevail.

As for documantation, I'm of the old opinion "If you didn't document it, you didn't do it."

Absolutely true, Regulators don't really care for the rug dance an office makes in front of them while trying to remember why they did something a year ago. Document Document

Documentation is key to any self assessment a compliance officer does.

I believe its part of the chief credit officers responsibility to have loan review people really look hard at whats going on. They need to ask the questions regulators will.

Can you bottle it. I wish I could , but you can "SUPERVISE" it. Set the standard which should be the average performance expected, and expect everyone to at least be average. Good leadership and management will get most to the acceptable average level, and inspire many to excel far beyond that.

Compliance has to be part of performance reviews. Commercial Loan Officers who ignore compliance issues are below average in performance and should be counseled as such.

You won't be popular, and officers that can't abide will soon leave. This then opens the door to create the culture necessary that will ease some of the burdens placed on compliance officers

I can hear the word Blasphemy being used now, but think about it. Is it good to have Loan Office"A" as a friend who costs the bank a $5,000,000 dollar fine for desperate treatment, or get them on board.

Senior management that ignores this should accept any regulatory consequence's that come their way. AND all the new regulations that will be imposed to create more participation.

One interview with a unreasonable examiner doing a fair lending review is usually enough to sell a loan officer on documenting their actions, but I wouldn't wish that experience on even the most uncooperative lender!

I have a question about debt to income ratios:

Is there a set formula to them? I was declined for an auto loan because my d/i ratio was too high, but one bank said it was 54% and another said it was 64.3% ???

Michelle, the only formula for D to I ratio I know of is dividing your monthly outgo by your monthly income. How the two came up with different figures could depend on several factors. One may have picked up a payment the other didn't or they calculate your credit card payments based on a certain percentage and they differ between the two lenders. It's also possible one used gross and the other used net.

Get a copy of your credit report and see if you can come up with the same ratios. If not ask them how they calculated the ratios (or you could just call them and ask them to explain how they arrived at the ratios).

No Michelle there really isn't. DTI is computed using a variety of factors, and lender by lender or bank to bank it can be computed differently. Some leave everything in when doing the computation. The more conservative lender might remove a few pieces of income that are non-recurring, or perhaps significantly higher one year to the next. Another might average these figures. With a typical lender you might have some in put to this process, but with a vehicle lender, frankly you don't really have much to go on. They're shipping off your application to a big warehouse who uses their formula to determine the figure in about 45 seconds. Any additional time spent cuts into costs.

If you do have anything extraordinary debt wise or income wise (you lost a bonus, took on a daughters debt to avoid default, etc.) you might consider talking to a bank verses the dealers.

Actually one figure was from a bank and one from a credit union. The credit union gave me their "formula" and I got 115% DTI (my math is right, but my figure isn't, so there's a step they left out)

The type of debt can affect the ratio...maybe that's where you're off? Sometimes you average the total debt with a certain percent repayment figure, sometimes you use minimum payments...sometimes you add in a payment on paid off cards if credit is available (very conservative). Do they spell that out?