If we are underwriting a loan for renewal, and assuming that we are performing an ability-to-repay analysis, we collect the past two years’ tax returns. However, two of our borrowers have different income in 2016 than they did in past years’ one borrower is no longer employed and will be relying on social security income, and another borrower has a new job with higher income. In both cases, should we consider the current year’s income as part of the ability-to-repay and underwriting analysis? If so, in the future, do we have to consider the current year’s income for every ability-to-repay analysis?

Yes, in both cases you should consider the current year’s income as part of the ability-to-repay and underwriting analysis. Creditors generally are required to make reasonable and good faith determinations of consumers' ability to repay a loan based on eight factors, including current income and employment status. So long as a creditor considers those factors, the creditor has latitude to develop its own technical underwriting criteria.

In this case, you know that your customers’ income and employment status have recently changed, and that their current income and employment status cannot be determined using tax returns from previous years. Consequently, in both cases, you should review the current year’s income for each customer in order to assess their ability to repay.

However, you do not need to develop a rigid policy to consider the current year’s income in every repayment ability analysis. Regulation Z’s official interpretations acknowledge that every credit transaction is different. In cases where a consumer’s current income is the same as in previous years, it may be possible to assess current income (and ability to repay) using tax returns from previous years. The rule gives creditors the flexibility to make such determinations on a case-by-case basis, provided that the underwriting criteria in each particular extension of credit results in a reasonable, good faith determination of a consumer's ability to repay.

We also note that as you conduct ability-to-repay analyses, you must be sensitive to the proscriptions of the Equal Credit Opportunity Act, which prohibits discrimination based on race, color, religion, national origin, sex, marital status, or age. In other words, although you are not required to establish rigid, one-size-fits-all ability-to-repay policies, you must take care not to let the flexibility afforded by Regulation Z create discrimination pitfalls. To that end, make certain that all information considered during an ability-to-repay analysis — along with the reasons that the information was considered — are clearly documented.

For resources related to our guidance, please see:

Regulation Z, Ability-to-Repay Rules, 12 CFR 1026.43(c)(2) (Requirement to determine a borrower’s ability-to-repay based on eight specified factors including current income and employment status.)

Official Interpretations, 12 CFR 1026 Paragraph 43(c)(1), Comment 1, (“So long as creditors consider the factors set forth in § 1026.43(c)(2) according to the requirements of § 1026.43(c), creditors are permitted to develop their own underwriting standards and make changes to those standards over time in response to empirical information and changing economic and other conditions.”)

Official Interpretations, 12 CFR 1026 Paragraph 43(c)(2)(i), Comment 1, (“A creditor may base its determination of repayment ability on current or reasonably expected income from employment or other sources, assets other than the dwelling that secures the covered transaction, or both. The creditor may consider any type of current or reasonably expected income, including, for example, the following: salary; wages; self-employment income; military or reserve duty income; bonus pay; tips; commissions; interest payments; dividends; retirement benefits or entitlements; rental income; royalty payments; trust income; public assistance payments; and alimony, child support, and separate maintenance payments.”)

Official Interpretations, 12 CFR 1026 Paragraph 43(c)(2), Comment 1, (“…a creditor must ensure that its underwriting criteria, as applied to the facts and circumstances of a particular extension of credit, result in a reasonable, good faith determination of a consumer's ability to repay.”)

Official Interpretations, 12 CFR 1026 Paragraph 43(c)(1), Comment 1(i), (“Whether a particular ability-to-repay determination is reasonable and in good faith will depend not only on the underwriting standards adopted by the creditor, but on the facts and circumstances of an individual extension of credit and how a creditor's underwriting standards were applied to those facts and circumstances.”)

Equal Credit Opportunity Act, 15 USC 1691 (“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, or age . . . .”)