Small Creditor ATR – Grossing up Income

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    Mary Frances

    We are a small creditor and do not have to follow Appendix Q. We have some borrowers that receive Nontaxable income like social security income or housing allowance(minister). Currently we do not gross up the non-taxable income on bank level loans for ATR. If we start grossing up the income we know that we have to be consistent with all consumer loans (real estate loans and non-real estate loans).
    Our question is what is the best way to do this? What percent should we use to gross up – 15%, 25% or do we need to go by the borrower’s tax rate? We know we would need to document the file per ATR for real estate secured loans but what if we have a consumer auto loan for $10,000 and the borrower’s income is social security? We typically do not request tax returns for an auto loan as long as we have the SS Rewards letter but in order document the file for grossing up the income would we need to have the tax return or would the SS reward letter work?


    This was an area for discussion at our FDIC compliance exam last year. We were grossing up all non-taxable income at 25%, but we did not have a list of the types of income that we would gross up. We changed procedures to include a specific list.

    We gross up for any loan made to a consumer. Last year, the examiners did not have an issue with a flat rate for all borrowers. We are a small creditor as well. Even though we are not required to follow Appendix Q, it is going to be interesting to see whether examiners change their expectations and ask that we use the actual tax rate of the borrower.

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