A Loan Application With Debts the Customer Wants Left Out
Priya Raman applies for a $28,000 unsecured home-improvement loan over 60 months. Her salary is $72,000 a year, or $6,000 gross per month. On the application she lists rent of $1,650, a car loan payment of $465, and minimum credit card payments of $120. The quoted monthly payment for the new loan is $560. Her credit report also shows a $19,000 auto loan at $540 per month, which she says her ex-husband pays under an informal arrangement, and an $8,000 personal loan at $260 per month that she did not list. Priya asks you to submit the application “as is” because her divorce decree will prove her ex is responsible, and she needs an answer by Friday. Bank policy requires total monthly debt obligations, including the proposed payment and housing, to be at or below 45% of gross monthly income; exceptions require documented compensating factors and underwriter approval.
1. Calculate Priya's debt-to-income ratio using all obligations and state whether the application meets policy.
Read the worked answer
Use gross monthly income of $6,000 and include housing, all installment debts, minimum revolving payments, and the proposed payment:
- Rent $1,650
- Car loan $465
- Credit cards $120
- Other auto loan $540
- Personal loan $260
- Proposed payment $560 Total = $3,595. DTI = 3,595 ÷ 6,000 = 59.9%.
Even using only the debts Priya disclosed, total = 1,650 + 465 + 120 + 560 = $2,795, or 46.6%, which still exceeds the 45% policy limit. The application therefore fails policy on either version. Omitting known debts would understate the ratio and produce an inaccurate application.
2. Priya asks you to leave off the auto and personal loans until she brings the divorce decree. How should you handle the application and her request?
Read the worked answer
Do not submit an application you know is incomplete. Tell Priya that the bank must include all debts shown on the credit report and disclosed in the application; unexplained omissions can be treated as misrepresentation. Record her explanation about the auto loan and any documents she provides-such as a divorce decree, payment history, or a payoff letter-so the underwriter can evaluate whether the obligation should be excluded under policy. Do not promise approval or tell her the decree guarantees exclusion. If she refuses to allow accurate reporting, decline to submit the application and escalate. Offer to proceed with a complete file and let underwriting decide.
3. The loan is denied. What communication and documentation are required, and what alternatives can you mention?
Read the worked answer
If the loan is denied, issue a timely adverse-action notice stating the specific principal reasons-for example, “debt-to-income ratio exceeds policy maximum” and, if applicable, credit history. Do not use prohibited or vague reasons. Include required credit-score disclosures if a score was used, and explain how to request a copy of the report or reconsideration. Document the decision, the reasons, and the customer communication. You may mention legitimate alternatives: a smaller loan, a secured product, adding a qualified co-borrower, or paying down debt and reapplying. Present them as options to discuss with lending, not as a promise of approval.