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Thursday, October 29, 2015

Requiring a Borrower’s Alternate Income Sources

QUESTION
We went through a state banking audit and were cited for requiring applicants to provide their income certain sources other than employment income. How are we supposed to underwrite loans if we don’t get that kind of information?

ANSWER
You do not specify the other sources of income in your question. However, a creditor may not inquire whether income stated in an application is derived from alimony, child support, or separate maintenance payments unless the creditor discloses to the applicant that such income need not be revealed if the applicant does not want the creditor to consider it in determining the applicant’s creditworthiness. [12 CFR § 202.5(d)(2)]

Regulation B, the implementing regulation of ECOA, provides a model application form to illustrate how income information may be requested consistent with this restriction. [12 CFR Part 202, Application B; 12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.5(d)(2)-1)] Note that one of the model forms is a version of the URLA application from January 2004, which is not the current conversion of the form specified by Fannie and Freddie.

A general inquiry about the source of income may lead an applicant to disclose alimony, child support, or separate maintenance income. So, a creditor that makes a general inquiry about the source of income should preface the request with the required disclosure about income from alimony, child support, or separate maintenance. [12 CFR Supplement I to Part 202 – Office Staff Interpretations § 202.5(d)(2)-2]

However, must the foregoing disclosure regarding income from alimony, child support, or separate maintenance be made for all requests of income? Actually, No. If an inquiry about income is specific and worded in a way that is unlikely to lead the applicant to disclose the fact that income is derived from alimony, child support, or separate maintenance payments, the disclosure regarding income from alimony, child support, or separate maintenance is not required. For instance, a creditor in an application form could ask about specific types of income such as salary, wage or investment income without providing the disclosure. [12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.6(b)(8)-1]

Jonathan Foxx
President & Managing Director 
Lenders Compliance Group