HMDA Income for Cosigners (Video)
In this Compliance Clip (video), Adam explains how to report income under the Home Mortgage Disclosure Act in relationship to cosigners. The question we have this:
Question: A loan has one borrower and a co-signer. Do I report the income of just the borrower, or do I report the income of the co-signer since we wouldn’t do the loan with just the borrower?
The answer to this come from 1003.4(a)(10) of Regulation C. In this video, Adam breaks down the different HMDA requirements for reporting income as it relates to co-signers and breaks down a few key phrases as well as the applicable commentary to Regulation C.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to discuss HMDA income for co-signers. The question we have here is: A loan has one borrower and one co-signer. Do I report the income of just the borrower or do I report the income of the co-signer since we would not do the loan with just the borrower?
The answer, of course, is going to come from Regulation C, and it's in part 1003.4(a)(10). In fact, it's 4(a)(10) part 3, and the answer is it does depend. So let's take a look at this here at 1003.4(a)(10)(iii) of Regulation C that says, “Except for covered loans or applications for which the credit decision did not consider or would not have considered income, the gross annual income relied on in making the credit decision, or if a credit decision was not made, the gross annual income relied on in processing the application.” So there's a lot to this, but there's a key phrase in there that we need to take a look at. And of course, that key phrase is relied on. So it's the gross annual income that you relied on in making your credit decision.
Now, the commentary expands on this for us. This is the actual rule out of Regulation C. The commentary expands on this to give us a little bit more guidance, a little bit more clarification. Let's take a look at the commentary. Comment 1 specifically says, “When a financial institution evaluates income as part of a credit decision, it reports the gross annual income relied on in making the credit decision…” So what that tells us is if we use the income of just a co-signer, we report that income. If we use the income of just the borrower, we report that income. If we use the income of both the borrower and the co-signer combined, then we report that income. And in my opinion, what you need to have documented is somewhere in your credit analysis, the loan underwriting worksheet, whatever you have in your institution, what number did you use to calculate your debt-to-income ratio. That income is what you probably want to tie back to for HMDA. So you're going to tie back to something in the credit file that you relied on. Usually, that is the income that was used to calculate the debt-to-income ratio. So it depends on what you use. Again, if it's just a borrower, go with that. If it's both the borrower and the co-signer, you go with that. So it's going to vary on a case by case basis, but you should definitely be able to trace that back to your loan file in the credit underwriting worksheet.
Now, there is something else I wanted to point out here because the commentary goes on and actually explains quite a few things that gives a few different situations on what relied on means. But when we're talking about co-signers, sometimes people wonder if that also applies to guarantors. Co-signers and guarantors are different. So a co-signer is somebody who's actually signing the note. They're legally obligated directly where a guarantor is only secondarily liable. So a guarantor and a co-signer are in fact different where a co-signer is signing the note and the guarantor is not. They're signing something like a guarantee. So let's take a look at this.
The commentary talks about this. It says, “If an institution relies on the income of a co-signer to evaluate credit worthiness, the institution includes the co-signer's income to the extent it's relied upon.” So that's exactly what we talked about. Now, the commentary here goes on and talks about guarantors. It says, “An institution, however, does not include the income of a guarantor who is only secondarily liable.” What this tells us is we're only worried about the income that is primarily liable for anyone who has signed the promissory note.
Hope that makes sense. That's all I have for you today in this Compliance Clip.