AGI vs Gross income

We are officially HMDA in Janurary. We are practicing now (all except GMI). A serious question has come up.

We are making a loan to a individual rental tycoon. My loan officer is furious, he relies on AGI and i am telling him "no..it is the gross income that must be recorded on the LAR."
His reponse is "you mean i have to add back all the expenses to get gross, when it is AGI that I rely on?"
I am telling him "yes" unless someone disagrees.

You should report whatever income the lender relied on to make his decision. I guess in this case, it would be AGI.

203.4

(10) The ethnicity, race, and sex of the applicant or borrower, and the gross annual income relied on in processing the application.

The regulation does not say anything about the AGI income relied on. It requires you to report the gross income relied on.

Whether the loan officer realizes it or not they are using gross income for their decision. The AGI has to be derived from the gross less deductions/expenses. So how can the LO justify they are not using gross income to arrive at the AGI?

I guess I'm not doing very well in my answers lately, huh?

Actually, #12 I don't think you're wrong in reality. While Dan is correct - that is what the regulation says - I see lenders who use Net income all the time and I'm unaware of any regulatory scrutiny. The real issue is "what did the LO use?" That's all that really matters. Examiners will compare the LAR to the D/I ratio (or other income figure) used by the LO.

The "Gross income" only becomes a factor when net income is 0 or less than 0. The LAR software will not allow 0 or a negative number. This is when everyone starts to wonder about what the regulation really says (see Dan's post).

Not really. You do have to rely on the income used, but the Reg does require gross income to be used.

I agree with Dan. We have the same problem on the CRA side. The loan officer says "well I relied on net income for my credit decision". Fine, now report the revenues that made up the net income. For HMDA, you report the gross income that made up the AGI.

I don't disagree with you two from a regulation stand point. I'm saying, I don't believe I've ever seen a bank cited for not reporting gross. Maybe you have.

I sure wouldn't take any chances with my examiners. They didn't even like it when our CRA amounts were off, even when they were in the same revenue category.

David, I have not seen any one written up and in day to day operations I would agree with you, but again the reg does state gross income used.

I would also question if this LO relies on AGI for all their borrowers or just this one "real estate tycoon" because he doesn't want to take the time to go through all the numbers to arrive at the gross. That's where I see the biggest potential for reporting problems, using gross income for this borrower because you needed it to qualify the loan, but using AGI for this "tycoon" because the numbers are too difficult to crunch. You are not being consistent in calculating your income. Not only a potential HMDA problem but also a potential fair lending problem.

I don't disagree. Just trying to tell you what I see (or rather, don't see) in many banks. I always teach "Gross", but often see net or AGI and see no criticism from regulators.

I don't disagree either David...I think we're really saying the same thing...in real life this works...but the Reg. requires this....

Unless I'm reading HMDA wrong, the reg doesn't tell you what income figure to use, but it definitely tells you to report the income figure that you used.

We have a compliance auditing firm check our HMDA data twice a year, and on the income issue they just want to see that the income we used is what we are reporting in our HMDA data. Only once that I can recall did they question the derivation of income on a file, and that was because we reported zero income (which, as I explained to them, was the primary reason for the denial of the loan!).

203.4

(10) The ethnicity, race, and sex of the applicant or borrower, and the gross annual income relied on in processing the application.

If the applicant has a gross income of $60,000 and you netted out taxes, other expenses to arrive at a disposable income of $40,000 to use as the basis to calculate the debt to income ratio to make the credit decision, the gross annual income relied on for the decision was $60,000 not $40,000. $40,000 was the net, not the gross.

How the examiners, in real life, may look at this will vary. All I am doing is telling you what the Regulation requires. And I also refer you to my tag line.

Is it possible the emphasis should be on 'relied on in making the credit decision' instead of 'gross annual'? I'm sure we aren't the only institution that grosses up non-taxable income. In these instances, we report the grossed up amount. How is that any different than adjusting rental income down? Assuming you treat all landlords the same, of course.

Anything is possible...



If one wants to report on AGI then that is a risk they have to decide to take. In most cases it will be a minimal risk. All I am doing is telling you what the Regulation requires. And I also refer you to my tag line.