How to Verify Cash Value and Income of Stocks

The stock market has been incredibly volatile this past year. As a result, some of your residents may have experienced significant reductions in the value of their stock portfolio and may be asking for interim recertifications. Others may have had the benefit of a positive swing in their portfolio's value or are enjoying more household income from dividends that cash-rich companies have increased as they've become more confident in the economy.

Especially in times of economic volatility, it's important to understand how to value your residents' stocks and assess the income derived from them. That's because you're required to determine the cash value of household assets and the income they produce every time you certify or recertify a household. And some of your residents' assets may include shares of stocks, and they may get income from those stocks in the form of dividends.

To comply with HUD's requirements on verifying assets, you must verify each stock's cash value and the amount of dividend income it will generate during the next 12 months. But getting the right information for your calculations can be a challenge if you don't know what the rules require when verifying stock asset value and income.

According to the income certification rules in HUD Handbook 4350.3, you should verify this information directly with the stockbroker who handles the household member's stock account [Handbook 4350.3, par. 5-13 (B)(1)]. This way you avoid having to make sense or rely on the authenticity of account documents that household members give you. But you need to make sure that the verification form you send asks for the right information to properly determine the stock's cash value and income.

To help you get the right information, we'll give you a Model Form_Stock Asset and Income Verification, that you can use to get account information from stockbrokers. We'll also give you an overview on the rules for calculating stock value and income.

Information You Need

HUD rules require you to determine the following information about household members' stocks when certifying household income:

• The cash value of each stock; and

• The anticipated income from each stock for the next 12 months.

How to Determine Cash Value of Stocks

To determine cash value, you first need to know the market value of each stock, which is determined by multiplying the number of shares owned by the household member by the current price per share. For example, John Doe has 300 shares of stock in XYZ company. Each share has a market value of $11.54 per share. The market value of the stock is $3,462 (300 shares x $11.54 per share).

You can then determine the stock's cash value by deducting the costs that the household member would incur—in this case the broker's fee or commission—in selling or converting it to cash. For example, if John Doe sold his stock, his broker would charge his account a fee of $50. The cash value of the stock is $3,462 minus $50, or $3,412 [Handbook 4350.3, par. 5-7(C)(1)(a)].

You don't have to worry about capital gains on the sale of the stock. These are taken into account when counting other assets, such as bank accounts. Capital gains are considered lump-sum receipts, and you count any amount deposited into bank accounts as an asset. But in some cases, the capital gains may be so large that, when deposited into a bank account, they generate large increases in interest income. The increase may be large enough to require households to report them so that you can process an interim recertification [Handbook 4350.3, par. 5-7(G)(3)].

How to Determine Income

The annual income from a stock is the amount that the stock is expected to earn in dividends in the coming year, explains management consultant Dorli Bokel. For example, if a resident owns 100 shares of ABC Corporation and the company recently paid a quarterly dividend of $1.50 per share, his income from the stock for the quarter would be $150 (100 shares x $1.50 per share). If the stock pays regular dividends, you can use past dividends to estimate projected income from the stock for the coming year. In this case, multiply the quarterly dividend ($150) by four to arrive at an annual income of $600.

But if dividends vary considerably in frequency or amount, you shouldn't estimate an income figure. Rather, count no income for the stock until it earns a dividend, says Bokel. Then remind the household member that the lease requires him to notify you whenever his income "cumulatively increases by $200 or more per month" [HUD Handbook 4350.3, par. 7-10 (A)(4)]. This means that if the household member later receives a dividend of $200 or more, he must notify you immediately so that you can process an interim income recertification.

If a household has more than $5,000 in assets, special rules apply to the amount of income from assets you should include on the certification form. You must "impute" income from those assets and use the imputed amount if it's greater than the actual income from those assets. Assuming that the total value of a resident's household assets—including stocks—exceeds $5,000, you would have to calculate the resident's income from those assets as the greater of the actual income (in the form of dividends paid) or the "imputed" income (which is the asset value multiplied by 2 percent) [Handbook 4350.3, par. 5-7 (F)].

HUD Prefers Third-Party Verification

Under HUD rules, written third-party verification is the preferred method of verifying income [Handbook 4350.3, par 5-13(B)(1)]. In most cases, you should at least attempt to verify stock value directly with a broker in writing and not rely solely on documentation from the household member. But if the broker doesn't return the form and doesn't respond to your phone calls, HUD rules permit you to use documents submitted by the household member, such as a monthly or quarterly statement and the household member's 1099DIV form from the IRS [Handbook 4350.3, app. 3]. Check if your local HUD office will let you rely on household documentation without seeking third-party verification when verifying stock value and dividends.

Use Form to Get Information

You can use our verification form to get the information you need. Or if you use documentation from the household member to verify, you can refer to the form to be sure that any documentation that the household member provides contains the same type of information that our form asks for, so that you can calculate asset value and income accurately.

The form asks for the quarterly dividend, which is the actual income that the stock earns each quarter. If the broker gives you the dividend amount per share, multiply this amount by the number of shares that the household member owns. To estimate the coming year's income for a stock, multiply the quarterly dividend by four, advises Bokel.

To use our form to get account information from the broker, take the following steps:

• Ask each household member who owns shares of stock for the name, address, and telephone number of the broker who manages the account. If the member trades on an account through an online brokerage, ask for the address where the member sends checks to open or fund the online account.

• Where indicated, fill in the names and addresses of the broker, site manager, and household member. Also, include the household member's portfolio or account number and Social Security number to help the broker correctly identify the person.

• Ask the household member to sign the release statement on the form. The release statement shows the broker that the household member has okayed the release of confidential information to you.

• Send the form to the broker. It's best to address the form to the person who manages the account or to another appropriate contact person. To get this person's name, call the brokerage house branch, explain that you'll be sending a form to get account information, and ask who on the staff should get it. Depending on the brokerage house, this person may have a title like "account manager" or "portfolio manager."

Insider Source

Dorli Bokel: President, Quadel Consulting Corp., 1200 G St. NW, Ste. 700, Washington, DC 20005; www.quadel.com.