Q: Are we required to gross up non-taxable income. For example, a person on social security who only gets $12,000 a year, would we need to gross this income up by 1.20% to ensure fair lending?
A: While it is not required that an institution gross up non-taxable income, Fannie, Freddie and FHA all allow a gross up factor of 25% on this type of income. (Or alternatively you may use the current federal and State income tax withholding tables.) The decision to use this factor is discretionary. However, it is important that if you decide to gross up income, in order to avoid any appearance of a fair lending violation, ALL similar types of non-taxable income should be grossed up and in a similar manner.
This Q&A was obtained from FDIC’s website, in a document entitled “November 16, 2010 FDIC Teleconference on Fair Lending Issues,” which may be found here: