I work with a really conservative Rural Development Loan Officer and as a result am really cautious about what I submit. But, with the addition of “significant delinquencies” in the regs, it looks like this one’s potentially a good package, but one that I wouldn’t normally submit. I was wondering, do you agree?

Mid-score of 662, is valid and reliable. No payment shock. Good stable and dependable income. One federal student loan totaling $3,000 (total balance, not delinquency) in repayment but is also in collections but no judgement. No other collections. Are they eligible?

Sincerely, Significantly Cautious

Dear Significantly Cautious,

This is a huge change to the handbook and how Rural Development processes and reviews credit in 502 applications. It takes individual interpretation out of reviewing credit when the score is more than 640 and reliable. For your file, assuming there are no significant delinquencies per the handbook language, and there isn’t another applicant with a lower score—it sounds like the applicant has acceptable credit and no further analysis is needed.

Let’s walk through how I got there using the handbook (in black) and my commentary (in green).

For applicants with no outstanding judgments obtained by the United States in a Federal court, with no significant delinquency,

The term significant delinquency should only be defined by the Handbook list that you provided below. Additional “definitions” of significant should not be applied.

and who have more than one credit score listed on their TMCR that result in a reliable credit score of 640 or higher on their TMCR, Exhibit 4-4 need not be used to identify indicators of unacceptable credit handling. In addition, a verification of rent and Form RD 1944-61, Credit History Worksheet, need not be completed. These applicants are automatically classified as having acceptable credit histories regardless of what is listed on the TMCR.

Regardless of what is listed doesn’t mean that the TMCR wouldn’t be reviewed—because it needs to be looked at to ensure it is reliable. But once that decision has been made, if the score is 640 or above and there are no significant delinquencies [as defined by the Handbook], there is no further work to be done. It is acceptable credit.

To avoid potential disparate treatment, additional credit analysis is not appropriate. Credit scores are used to reduce the time necessary to conduct a credit analyses, but under no circumstance can they be used to make adverse decisions.

Only the following four items should be considered as a significant delinquency.

An applicant with significant delinquency on the credit report, even with a reliable credit score of 640 or higher, will be subject to further credit analysis and Form RD 1944-61 must be completed. Significant delinquency includes the following:

• A foreclosure, deed-in-lieu of foreclosure, short sale, or mortgage charge-off that has been completed within the last 36 months.
• A Chapter 7 bankruptcy discharged less than 36 months prior to the application date.
• A Chapter 13 bankruptcy where the applicant has not successfully completed the debt restructuring plan or has not demonstrated a willingness to meet obligations when considering the last 12-month payments made under the restructuring plan.
• Agency debts that were debt settled within the past 36 months, or are being considered for debt settlement.

If any of these four items are on the credit report, then the Credit History Worksheet needs to be completed. Field staff, packagers, and/or intermediaries should not be adding items to this list, even though they may feel that the delinquency is significant for the specific applicant. As stated in the handbook, this needs to be consistently applied so that there is no disparate treatment among applicants.

For applicants with no outstanding judgments obtained by the United States in a Federal court, with no significant delinquency, and who have more than one credit score listed on their TMCR that result in a reliable credit score of 640 or higher on their TMCR, Exhibit 4-4 need not be used to identify indicators of unacceptable credit handling. In addition, a verification of rent and Form RD 1944-61, Credit History Worksheet, need not be completed. These applicants are automatically classified as having acceptable credit histories regardless of what is listed on the TMCR. To avoid potential disparate treatment, additional credit analysis is not appropriate. Credit scores are used to reduce the time necessary to conduct a credit analyses, but under no circumstance can they be used to make adverse decisions.

If however, the credit score isn’t reliable, is below 640, or there is significant delinquency—then Exhibit 4-4 and the Credit History worksheet are completed. And that’s when you would look at something like a bill in collection and ask the questions: Why did it happen? What have you done to resolve it? But if the applicant meets the initial credit criteria for a reliable score of 640 or above with no significant delinquencies/Federal Judgment, then the 4-4 and Credit History Worksheet never comes into play.

So turn in the application, it looks good!

Sincerely, Sher

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Dear Sher,

I’m a 502 Loan Packager and since the recent changes to the handbook I’m not quite sure I fully understand grossing up. Can you tell me when I should gross up and when I don’t. 

Sincerely, Grossed up and confused

Dear Grossed up and confused,

So, for grossing up, with the exception of SNAP benefits, all stable and dependable nontaxable income will be grossed up to 120 percent for Repayment Income only. The only exception is if the income isn’t stable and dependable, for example if child support payments are not made as agreed and/or will end in the next two years they should not be grossed up. Here’s the regulation and how to apply it.

The standard PITI and TD ratio limitations are based on the assumption that the income is taxable. If the income is not subject to Federal taxes, the amount of continuing tax savings attributable to the nontaxable income may be added to the applicant’s repayment income. Nontaxable income will be multiplied by 120 percent to gross up such income. Examples include: Social Security, Child Support, Section 8, etc.

For example, an applicant’s repayment income of $25,000 includes $4,000 of nontaxable income:

Here’s the language from the handbook on grossing up:

Paragraph 4.4 Calculating Annual and Adjusted Income

1. Calculating Repayment Income

Repayment income is the amount of the household’s income that is available to repay the Agency’s debt. To compute repayment income, the Loan Originator should count only the income of persons who will be parties to the note.

The Standard PITI and TD ratio limitations are based on an assumption that applicant income is taxable. If a particular source of income is not subject to Federal taxes, for example, certain types of disability payments or military allowances, the amount of continuing tax savings attributable to the nontaxable income source may be added to the applicant’s repayment income.

Nontaxable income will be multiplied by 120 percent to “gross up” such income.

Example – “Grossing Up” Nontaxable Income

The applicant’s repayment income of $22,000 includes $5,000 of nontaxable income.

The revised repayment income for the applicant would be calculated as follows:

$17,000 Taxable income

+ 6,000 “Grossed-Up” Nontaxable Income ($5,000 x 1.2)

$23,000 Revised Repayment

Sincerely, Sher

Dear Sher is a regular Self-Help Builder News feature. If you have a question you would like answered or researched by Sher, please send it to asisco@rcac.org and your question may be featured in a future publication.