[Vicki Kramer]

When a customer provides his personal tax return and his corporation’s tax return for us to verify and document Ability to Repay, should we require additional documentation to verify that he does receive income from the corporation and exactly how much? I’ve reviewed the corporate tax return but don’t see a line item for salary, etc. Also, should we use the net income in the DTI calculation?Thanks in advance for your help!

[rcooper]

Under the Ability to Repay rules you have the general rule and the QM rules. The QM rules provide you as the creditor more protections when you comply with the more stringent QM provisions.

The general ATR rules require you to verify income using reliable third party documentation. The tax returns may provide sufficient evidence for you, but you may also request additional documentation. The key is you to “verify” income. See 1026.43(c)(4) which states you can use:
(i) Copies of tax returns the consumer filed with the IRS or a State taxing authority;

(ii) IRS Form W-2s or similar IRS forms used for reporting wages or tax withholding;

(iii) Payroll statements, including military Leave and Earnings Statements;

(iv) Financial institution records;

(v) Records from the consumer’s employer or a third party that obtained information from the employer;

(vi) Records from a Federal, State, or local government agency stating the consumer’s income from benefits or entitlements;

(vii) Receipts from the consumer’s use of check cashing services; and

(viii) Receipts from the consumer’s use of a funds transfer service.

Or, although it isn’t required under the general ATR, look to appendix Q for additional information on sources of evidence for verifying compensation/income from a corporation owned by the consumer/borrower (e.g. information from accountant showing ownership percentage along with evidence that the borrower is entitled to compensation, etc.).

For Qualified Mortgage transactions you’ll need to look to Appendix Q for the rules on calculating the DTI. Specifically look at section I-A- I-E for information on the individual income and I-F – I-G for corporate returns, as well as any additional documentation you may need. Appendix Q is available here.

One thing noted in Appendix Q, section I-F, is how to determine compensation from a consumer owned corporation if the information isn’t shown on the tax return. Appendix Q is a good place to start whether you are required to comply with it (QM) or not (general ATR). And you will begin with the gross income when calculating the DTI.

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