DTI Ratios: Net vs Gross

A columnist recently proposed re-evaluating DTI ratios based on 'Gross'
Could such a change improve lending and reduce 'disparate impact?'

The recent Qualified Mortgage and Qualifying Residential Mortgage rules proposal by the Consumer Finance Protection Bureau (CFPB) are hoping to insure that borrowers obtain loans that they have the ability to repay.

As an incentive to lenders, loans made within the guidelines will be immune from litigation.

Before the rules are finalized and enacted into law–on the January 10, 2014 anniversary of their proposal–there will be great debate upon their impact on lenders, vendors, and service providers in the mortgage industry, and consumers.

One of the guidelines that is already being discussed is the maximum Debt-to-Income ratio that would be allowed within the "safe harbor" that provides complying lenders with immunity from prosecution. The numbers now reflect fairly traditional ratios of 28% front end and 43% back end of gross income.

But is gross the best figure to use?

In his two-part blog recently posted on National Mortgage News, Garth Graham, a partner with STRATMOR Group and a former senior vice president of CitiMortgage, writes, "There are a lot of variables that reduce the gross to the net, but what is certain is that the gross number means little to a consumer trying to pay their bills each month. In fact, it’s pretty close to imaginary to them."

The response has been fascinating. One comment suggests that how we parse DTI will have an impact on meeting Equal Credit Opportunity Act (ECOA) requirements that mitigate “disparate impact” and help provide equal financial opportunities for all individuals.

What do you think? NCS is currently designing new products to improve the process of Cash Flow Analysis and completion of MGIC forms, SAM and AGI requirements.

Have a look at Graham's blog – linked below – and give us your input on this page, or in an email.

Part 1 – "Nothing but Net a Better Focus Than Gross" (January 16)
Part 2 – "Gross Is for Kids, Not Ability to Repay" (January 23)