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Gross Income for Loan Applicants

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We qualify loan applicants based on gross income. Our credit officer says that tax free income from SSI or VA Disability is the gross income and shouldn't be grossed up. I say the income is net and should be. Who's right? If we don't gross tax SSI up, are we discriminating?

From the FDIC SCANS Bulletin put out by the Chicago Regional Office:

Division of Supervision and Consumer Protection, 300 South Riverside Plaza, Suite 1700. Chicago, IL 60606312-382-7500

Bulletin Number: CHIRO-03-2010

Potential Substantive Fair Lending Violations Resulting from Inconsistent Treatment of Non-taxable Income
Recent compliance examinations have identified situations where financial institutions have not consistently applied underwriting standards with respect to non-taxable sources of income. Many financial institutions have adopted underwriting policies relating to the treatment of nontaxable income as recommended in guidelines established by secondary market purchasers whereby non-taxable income is given greater weight than taxable income ("grossing-up"). Financial institutions have been found to gross-up some non-taxable income, such as social security payment while failing to gross-up other non-taxable, such as child support or public assistance income. Although a financial institution is not required to adopt a policy to treat nontaxable income differently from taxable income, if it chooses to adopt such a grossing-up policy, it must apply this policy to all non-taxable income of applicants, not only social security income, which is the most common non-taxable income. Failure to gross-up certain types of non-taxable income, such as child support, when a financial institution has adopted a policy to weigh nontaxable income more favorably, may subject your financial institution to significant fair lending violations.

The Equal Credit Opportunity Act prohibits creditors from discriminating on the basis of sex and marital status. 15 U.S.C. Section 1691(a). The failure to gross-up child support income while including other forms of non-taxable income pursuant to such grossing-up underwriting standards may result in a finding that such policy or practice disparately affects women and/or unmarried women. According to U.S. Census data, women are 88 percent more likely to receive child support payments than men. Additionally, the Fair Housing Act states that it is unlawful for "any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction because of . . . sex, (and) familial status. . . ." 42 U.S.C. Section 3605(a). A financial institution's failure to gross-up income derived from non-taxable child support payments when it is grossing-up other sources of non-taxable income in a real estate related transaction intrinsically treats families with children less favorably. As stated above, such policy may also result in a disparate impact on women.

Financial institutions are encouraged to review underwriting standards to ensure the consistent treatment of all non-taxable income sources when evaluating credit applications. If you have any questions concerning this information, please contact us bye-mail at scans( or call us at the Chicago Regional Office Banker Hotline, (312) 382-6926.

First published on 10/18/10

First published on 10/18/2010

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