OK "Mr. or Ms. Self Employed"...so you want a loan, eh?

I admit, this is more of a "rant" than it is an avenue towards offering a constructive solution to today's lending environment.  We all know the days of "stated income" or "no doc" loans are over, (or at least for now...the jury is still out!).  There was a reason those types of loans were created in the first place, and they DID have a place in our ever complicated financial world of credit qualifying, FICO scoring, and judgment rendering of who is and who isn't worthy of obtaining home financing.  Unfortunately, like many opportunities, there are a few "bad apples" (to keep it simple) that will abuse the offer and ultimately ruin it for those who actually play by the rules.  Of course, that's already been proven. 

That being said, where or when will the lenders find the happy medium and begin to service those of us who don't exactly "fit" into the standard qualifying model?  After reading Stewart Penn's Blog post yesterday: "Jumping through hoops...", there was an insightful comment make by fellow 'Rainer', Eric Kodner, who said: "I've always found it humorous that lenders worry so about the individual who is self-employed (or multiply-employed, with multiple income streams) and yet they have so much confidence in the ability to pay of an individual who has one job which he or she holds at the whim of a single employer.  People today who are wage-earners are trembling in their boots.  They are one pink slip away from disaster.  And yet the lending industry, in its infinite stupidity, regards them as golden."

It got me thinking...Are there any statistics out there showing the percentage of mortgage defaults for self-employed borrowers vs. salaried wage earners?  I imagine the banks have already studied this, but I can't find anything on the Internet showing hard data or "favor" on one side or the other. And what happened to the old days of building a "relationship" with the bank??  I guess we already know the answer to that question, and have so for some time: it doesn't matter any more.  It's too bad, if you ask me.  What happened to the "human factors" in making a decision on who was a good risk and who wasn't?

  • Timely payment history? (i.e., never missed a payment in 12 years of self-employment...good times and bad)
  • Good credit history (OK, FICO scores prevail here)
  • Healthy cash reserves and tangible assets (savings accounts, SEP IRAs, etc.)
  • Substantially low LTV (my favorite...)

I DID find this from Sal Trump - (EzineArticles.com) that said...

"The self employed face a logistical obstacle when applying for a mortgage. They deduct business expenses on their tax returns in order to have a low net income, which saves them money at tax time, but their mortgage lender uses that net income figure to determine their annual income. The bookkeeping discrepancy can make the self employed borrower appear to have a low income and high expenses, even if the situation is just the opposite.  The best candidates for a self employed mortgage have great credit, little consumer debt, two or three years of audited financial records, and cash to use for a down payment. There are, however, many cases in which all of these stars do not align. Self employed borrowers are considered high risk by lenders because their income can vary widely from month to month, and because income can't be accurately estimated into the future."...

Sounds like a sequel in the works for Kurt Vonnegut Jr's 'Catch-22'!


  David Ames 

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  (415) 271-2071

Comment balloon 44 commentsDavid Ames • September 23 2010 05:42PM


I would love to see those statistics, too!  As a self-employed person, I find myself more likely to pay my bills because my life kind of depends on it.  I find that we are more able to come up with additional monies than the person who gets the same $x/hr for 40 hrs/wk.  We are willing to work 80 hours a week, but so few traditionally employed people are willing to get even a part-time second job to pay the bills.  What happened to the days where people worked 2-3 jobs to make ends meet if they needed to?  *end of my rant*  :)

Posted by Shelley Rowton, ABR, RSPS - (512) 507-5779 MoveToRealty of Austin (Move To Realty) over 7 years ago

Rant away...I'm with you Shelley.  When my buddy Stewart (a realtor here on AR) was asked by his mortgage broker why his 2008 income took a dive, (and wanted a formal explanation), I almost spit out my coffee laughing!  It's stuff like that that makes me shake my head.  (He qualified, that wasn't an issue).  Has this mortgage broker been living in a cave?  ;-)

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

It really is ridiculous.  If the LTV is there that is what counts.  As you say, with today's layoff figures who's to say that the buyer will not be next, and they have little or no chance of getting back into the workforce.  Whereas Mr. Self-Employed has already proved their solvency over several years.  Go figure.  And yes, I loved that comment by the bank to Stewart.

Posted by Jane Peters, Connecting you to the L.A. real estate market (Home Jane Realty) over 7 years ago

Jane, when I read Stewart's post, I could practically hear by blood boiling.  It's like a day doesn't go by that I don't hear some new idiotic condition or request from a lender during escrow (from beginning to end...and unfortunately, it's the last minute conditions that really get me steamed).

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

Hello all ... it's me ...

I've calmed down now that my loan is on track ... but I still can't believe that question posed to me.

Posted by Palm Springs Realtor Stewart Penn, Bennion Deville Homes - Broker Associate (Bennion Deville Homes) over 7 years ago

Neither can we, Stewart.  Good grief Charlie Brown!

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

David, I could rant about this quite a lot myself, maybe eventually I will write a blog or two...

Anyway, my husband and me are both self employed, getting mortgage with 60% down was a NIGHTMARE. We didn't know till about 2 days before closing if we are closing or not. Not to mention moving or not. (yet we had sublet the apartment, rented a truck etc - hoping for the best)

Posted by Anna Tolstoy (Coldwell Banker Residential Brokerage) over 7 years ago

What a great post David!  I have several "retired" clients in this position...with years of exceptional credit history!  One A buyer cannot obtain an insitutional loan because they have 4 current loans on real estate with excellent ltv  on each property, even in a depressed real estate market!  Go figure!  Anyone ready for bringing out the "wrap-around" loans again?

Posted by Carla Reeves over 7 years ago

I know of one agent who wanted to get a mortgage. She had been declined by several lenders because she was an independent contractor. She took a part-time job paying $14.00 per hour and POOF she was viable - even for 100% financing! Since she was successful, she did have more than 20% to put down, but the fact was, the lenders thought her part-time job at $14.00 per hour was better than her umteen years as a professional - and successful - agent. I thought that was AMAZING and at that time commented, "it wasn't the independent contractors or small businesses who got us into this situation."

Posted by Sandra Bild ("Bild" a Better Business / Social Media Manager) over 7 years ago

David, I can't understand why we are considered high risk if we have funds set aside in savings, etc., as you stated.  We ARE worthy and it stinks!   Many self employed people have far more asssets that the MANY of the home buyers that are one paycheck away from financial disaster.   As long as their numbers make sense up front, they are good to go.  They loose their jobs, they are in major trouble.  I'm with you!  *sigh*

Posted by Elizabeth Cooper-Golden, Huntsville AL MLS (Huntsville Alabama Real Estate, (@ Homes Realty Group)) over 7 years ago

The one program that I thought was great for Self Employed and fair for lender and borrower alike were the Bank Statement programs.  These programs took all the deposits into a business or personal bank account over a period of typically 12 or 24 months and averaged them out to deduce a monthly income.  This calculation smoothed out the highs and lows of SE income and provided the lender with a suitable income track record.   Unfortunately, the mighty lender implode broom of the 2007 collapse swept away these programs along with the much riskier and much more abused NINA/Stated/No Doc/No Pulse/No Nothin' mortgages. 

At some point there will be more SE options.  They will be more conservative than a few years ago and will make sense for all parties.  That day is coming.  It has to.  There is a huge amount of pent up demand for SE lending and a nice profit for the lenders that can sensibly fill this niche..  Coming up with credit lines and secondary securitization is the hard part.  Anybody got 50MM laying around?   

Posted by Keith Landis, Pennsylvania - "Your Pennsylvania Mortgage Source" (Keystone Home Finance - NMLS#834342 - Conventional - FHA - VA -USDA - Jumbo Programs - Direct Phone 412-726-1654) over 7 years ago

There are more and more private money loans out there at good rates for self-employed. It is hard to believe that do not recast tax returns for self-employed to qualify them like everyone else. It seems once we took the self-employed out of the lending equation, the economy got worse and worse. It seems silly to penalize the people who build our economy - whatever. It will all work out.

Posted by Lori Bowers, The Lori Bowers Group over 7 years ago

I would like to see these stats too!  

Posted by Catherine Ulrey, Equestrian and Acreage Property Specialist (Keller Williams Capital City) over 7 years ago

If you pay taxes you can get a loan - if you don't you won't.  Do you want to avoid paying income taxes and not report all your income or do you want to qualify for a loan? That's the way the Feds look at it today. 

Posted by DMC over 7 years ago

It's funny that with our current housing crisis nobody is coming out and mentioning the huge influence self employeed borrowers have on the housing industry.  I was a motrgage broker in Hawaii for 9 years, on the Big Island where NOBODY has a w-2 income that would qualify to purchase a home.  Almost every purchase I did was a self employeed borrower with great credit, good reserves and horrible looking tax returns.  No big deal, they still got a great rate due to their large down payment, good credit and reserves (stated income).  Someone needs to explain to the powers that be, that these are the people most likely to step up and take a risk by getting back into this housing market.  If you let them.

Posted by Rich Bosselmann-RS, Your Kona real estate connection. (Koa Realty Inc.) over 7 years ago

There was a study done of what type of borrowers default by category but I can't remember where it was posted. It was around the time when all the changes came out & they were already 'preplanning' borrowers defaults.  There has to be some actuary that has figured it out for these guys.

They are going to run out of 'perfect people' to loan too very soon I'm afraid.

Posted by Lyn Sims, Schaumburg IL Area Real Estate (RE/MAX Suburban) over 7 years ago

If anyone does dig up stats on defaults by self-employed vs employed by others, that would sure be interesting to see!  When we last refi'd (to an LTV of about 50%) I had to write a statement of what I believed I would make this year in real estate!  LOL  I kind of just wanted to put down LOTS - but wasn't at all sure the underwriter had a sense of humor...

Posted by Nancy Conner, Olympia/Thurston County WA (Managing Broker - City Realty Inc) over 7 years ago

...you said it all... ...lenders are still "stupid" and that is why we are still in this situation... ...and be assured we will be in this for decades to come... ...because their learning curve is extremely slow and shallow...

Posted by Phyllis Lerner call 914.438.7556, William Raveis Legends Realty Group (William Raveis Legends Realty Group LLC) over 7 years ago

I'm feeling the passionate feedback.  Here goes...

Anna, good grief (again)...and with 60% down! (head shaking).  Good luck, and I look forward to your upcoming blog post regarding it.  Let's hope it all works out in your favor. I'm sure it will be a story we can all relate to (either personally or through recent client transactions).

Thanks, Carla.  Funny you mention the ole' "wrap around" as i know it's being considered more and more these days.  I remember having a retired gentlemen come by one of my open houses a few months back who complained in the same manner.  Just listening to his story confirmed how many people in our communities are really affected by this.

That IS amazing, Sandra! (and borderline laughable if it were actually a laughing matter).  I suppose the positive spin here is: Good for her for finding a "loophole" into the system.  Then again, shame on the "current" system for dismissing her years of proven stability and wherewithal to maintain a successful livelihood.

"sigh" indeed, Elizabeth.  We're on the same boat. Yes, we ARE worthy (dagnabit!)  ;-)

i couldn't agree more, Keith.  (and LOL on the "no pulse" comment).  I think it HAS TO as well,  and I'm more encouraged hearing it from someone in the industry such as yourself.  I understand the credit lines and secondary securitization hurdle.  Perhaps the pent up demand and profit for the lenders will be the catalyst for future modifications.  All it takes is one brave company to offer a product that SE (and retired) consumers can feasibly qualify for.  Once that ball starts rolling, others will follow if they have any desire to capture that segment of the market.




Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

David, When I started in real estate my first listing was an adorable coop apartment in a Chelsea Brownstone. It received multiple offers. The two best offers were pretty much the same. One was from a PR person at a musuem the other was from a psychiatrist with his own practice.

I remember my broker at the time saying: "It's a no brainer!" and I said "The Doctor, right"? and she said NO! the paycheck. I didn't get it then and I still don't. Lenders and coop boards don't like self-employed or business owners. The doctor ended up getting the apartment because he wrote a fabulous letter to my seller (he used psychology lol) and steady paycheck ended up dropping out.

BTW: My best friend that I've known my whole life (we grew up next door) is an agent at Zephyr in SF, Gary Small.

Posted by Mitchell J Hall, Lic Associate RE Broker - Manhattan & Brooklyn (The Corcoran Group) over 7 years ago

That's an excellent point you bring up, Lori. Your last line: "It seems silly to penalize the people who build our economy" pretty much says it all!  After all, isn't small business and aren't entrepreneurial individuals the backbone of our society...at least that's what "they" keep telling us.

If you find any Catherine, please share!  ;-)

DMC: It does translate that way in some respects.

I love your last line, Richard: "Someone needs to explain to the powers that be, that these are the people most likely to step up and take a risk by getting back into this housing market" ...so true.  And like your Big Island scenario and the large cash down...I'm willing to bet these buyers a still enjoying their homes and doing just fine.

"perfect people"...love it, Lyn!  If you ever find that info, you know where to share it!!

You should have, Nancy...that would've been a hoot (but obviously not wise, darn it).    I hate it when my little horns sprout on top of my head and I can't be devilish with them.

God I hope not, Phyllis.  ;-)  But, I agree, this is going to take some time.  I'm just hoping the curve works in a more exponential manner (and in the proper direction).


Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

Hey Mitchell...wow, small world (no pun intended).  Gary is one of my favorite colleagues here at Zephyr!! (He still carries a slight east coast accent...we love it).  Interesting story regarding the COOP.  My guess would've been the doctor, too (perhaps for the medical prestige factor...depending on the board).  LOL on the "psychology"...I wonder if he'd get it today (or better, if he'd even bother trying!).

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

Thanks so much for the post today.  Wow....unemployed, i guess it is a form of unemployment isn't it.!!

Posted by Patricia Aulson, Realtor - Portsmouth NH Homes-Hampton NH Homes (BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate ) over 7 years ago

There does need to be a solution for self employeed buyers. I really think there should be a program created.

Posted by Chuck Carstensen, Minnesota Real Estate Expert (RE/MAX Results) over 7 years ago

Patricia, I'm guessing you meant 'self-employed', but funny nonetheless.  Quirky times!

I agree Chuck...we had one or two, now they're gone.

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

I was a homeowner until two years ago and my divorce took care of that.  Now, I'm rebuilding my portfolio and am worried that being in this business will make it nearly impossible to buy again.  I've got friends in the mortgage business so I'm covered there but there's only so much they can do.  What I'm worried about is having someone tell me I can't buy in the price range I know I can afford.  Oh well...

Posted by Bryan Robertson, Broker, Author, Speaker (Intero Real Estate) over 7 years ago

I have been told that lenders need the last two years tax returns, but you are correct about the fact that a self employed person will show high expenses on their returns not giving a true picture of their financial health.  For instance, I am able to wrtie off my health insurance premiums while someone who is employed but with no benefits would not.

Posted by Maureen Megowan, Palos Verdes Real Estate Blog (Remax Estate Properties - ) over 7 years ago

As you point out David ... there are no more "relationships" with banks.  Example:  My wife and I both started out working at a small Savings and Loan in the mid-1970's.  It was sold to a slightly larger savings bank.  It then was sold again ... to a larger bank, still fairly local to the Chicagoland area.  Then again, sold.  I've lost track, but it's been sold .. I think ... two more times and is now a Chase. 

Now, this is a smaller town.  We have remained a customer that entire time, even though my wife and I both work elsewhere.  Could we be called by name after all that time when we walk in?  No.  Have to produce a license each and every time, even after almost 35 years of conducting business there, and having a mortgage as well.  Some relationship ... some customer service,huh?


Posted by Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi, 708.921.6331 - 40+ yrs experience (NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656) over 7 years ago

Bryan...Very frustrating, indeed.  That's a tough spot to be in.  Although last year (and so far this year, thank goodness) my income is proving "worthy", it's my 2008 returns (not a good year) that are killing it for me in order to do a simple refi (and we're talking about a 50% LTV here!).  Although I don't HAVE to refinance, it would be nice to take advantage of a lower fixed rate.  Where's the logic? So much for making my payments on time for the past 12 years!  Grrrrr.

They do, Maureen, and let's face it...the last 2 or 3 years haven't been all that great.  The deductions are still worth it.

Gene...now there's a familiar story.  I used to work for Wells Fargo (back in the mid to late 80's), and I remember when loan officers sat at desks in the lobby.  The branch manager and the "loan team" would meet once a week to review all applications and actually make the decisions regarding approval.  Then again, the bank opened at 10:00 am and closed at 3:00 pm (so there was enough time to process deposits, etc).  God I feel old.

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

I think the stats are done and self employed is riskier- you've got more than doctors and lawyers, you've also got high risk stuff like restaurateurs, retailers, Freelance (death), consultants (double death), franchisers, and small time trade people like contractors whose work is tethered to seasonality or the health of the economy. 

It is insane, though, that a continuously self employed person with an ample (20% or more) downpayment can't get a decent mortgage. 

Posted by J. Philip Faranda, Broker-Owner (J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY) over 7 years ago

I saw an email broadcast today  distributed among company agents inquiring if anyone still had this type of loan.

Posted by Cheryl Ritchie, Southern Maryland 301-980-7566 (RE/MAX Leading Edge www.GoldenResults.com) over 7 years ago

I have a good story.  My husband and his brothers wanted to refinance their mother's house and the three boys would split the payments three ways.  They wanted less than 50,000.  All three brothers have multiple CDs (enough to pay cash for several houses) at the credit union invested at a high rate and no one wants to cash theirs plus all of us have government retirement incomes except one and we have all been members since the credit union started.  We still had to provide document after document until they wanted our IRS tax return copies and we finally stopped the whole process.  Needless to say, as these CDs expire, we will be moving our money to somewhere we can get some type of customer service.  I didn't agree with the no docs but this is extreme in the opposite direction.

Posted by Linda Hinson (S & L Properties) over 7 years ago

No doubt, Philip...and I get where the risk models come in.  It's when (like you said) you have a size-able down payment and the assets to back up your worth, but's it's not enough.  It's going to be a while before lenders are comfortable with more "flexible" qualifying models.

I haven't found any out there, Cheryl.

Sounds like a good plan, Linda.  If an equal amount of cash isn't enough to back up the loan, what is?  I don't blame you for stopping the madness process.

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

I'm not getting it David, if a SE individual deducts business expenses on his schedule C that means those monies were used to operate his business and not available to him for housing, food, clothing, entertainment or any other personal expense.  If he does have those funds available for living expenses then he lied to the government that they were used for business expenses.

Loans for SE folks are available and I have originated many in the past couple of years.  They just have to tell the same story to the government that they tell to the bank.

Posted by Steve McCoole (Mortgage Alliance Group - San Diego, CA - NMLS#305667) over 7 years ago

David, I hope you don't mind but I wanted to respond to Steve. One of my sons started a business in Raleigh and he wanted a business loan for a modest amount of money (around 100,000).  He had saved that much of his own money to put into the business.  He supplied all sorts of documents that the lender required week after week.  He is employed full time and so is his wife.  They own many assets.  At 32, his credit score is close to perfect. The breaking point was that the lender wanted him to encumber ALL his assets to secure the loan...not just his personal residence or his rental which both are almost paid for so it's easy to see that yes, the lenders will loan but at what costs.  We loaned him the money and he has already paid it back.  I think the lenders are probably going to lose alot of money over the next few years because private individuals are going to do more financing themselves.

I see that Steve is in California so they may have state laws that are different but in NC it is bordering on ridiculous.

Posted by Linda Hinson (S & L Properties) over 7 years ago

Not at all, Linda...You make a good point.  This is a touchy subject right now, and all sides of the fence are welcome.

Steve: Technically (on paper) you're right. But I think you get the gist of where I'm coming from, or at least I hope you do.  Based on your feedback, it would appear that the Federal government believes that salaried wage earners don't have any other expenses than what is claimed on their tax returns via a standard or itemized deduction.  Granted, on the mortgage side, DTI's are calculated to assume a certain percentage of "expenditures" allowable in order to qualify and create a "safe" zone, but where is the reality there?  How do you know those folks aren't spending their money on fancy dinners 5 nights a week...gambling at the Indian casinos...buying expensive toys for themselves or their friends...taking exotic trips, etc.  While SE's may be able to legally deduct some of those things, the wage earner may not and are therefore not penalized accordingly (yet they may be spending the same money regardless).  Are they a lesser risk?  There's definitely a double standard. My main point is that there was a good purpose for those stated income loans (or 'bank statement programs' that Keith mentioned above).  There is a HUGE segment of the population that CAN afford to purchase, that DO have the reserves, and who CAN comfortabley make their way in the world, yet they don't "fit" into the current lending model for decent, respectable loans.  Imagine the impact on rebuilding this economy if these folks were allowed to enter the game a little bit and reduce some of the foreclosure inventory, etc. I'm just sayin...

I really appreciate your input.  It made me think about it a little deeper and it encourged me to express my thought a little further.

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

David, Very interesting post and comments here. Here's one more...

M. and I have been self employed all of our adult lives. We have a retail biz now in year 24 of it's existance. It seems like we've been in every type of biz but food service.

The key to all this for us has been making sure we have a dedicated stream of revenue to cover basic stuff before we ask for money to 'play with'. No offense but any loan to self employed folks including new business money is viewed as high risk by lenders. While you're asking for a loan on a new biz or what ever, they're leaned back in their chairs wondering why you don't just get a job! It is risky and they know it, often better than the person asking for the loan.

We created over a number of years,  income enough to cover our mortgage, utilities, insurances and so on coming from outside the primary biz. Yup. We did it with real estate.

Posted by Charles Edwards Bentonville, AR REALTOR, Bentonville Real Estate Agent and Broker (Coldwell Banker Harris McHaney & Faucette 479-253-3796 ) over 7 years ago

Sounds like you've got your end covered nicely and well managed, Stewart.  How great to have two income streams. :-)

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

David -- this is such a frustrating subject for self employed business owners!  I wonder if things will ever improve so that once again we can borrow what we're able to repay. So many SE folks have perfect credit, no debt, and just can't get a break from lenders. 

Posted by Maureen Bray Portland OR Home Stager ~ Room Solutions Staging, "Staging that Sells Portland Homes" (Room Solutions Staging, Portland OR) over 7 years ago

I'm hopefull Maureen, (although I'm not holding my breath for anything soon).  In fact, I have quite a few clients in limbo right now because of this situation.  People in "limbo" don't move an economy in the direction it needs to go.

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

I agree, most every self employed person I have ever met is a fighter, they will do anything to stay afloat and pay their bills, they don't give up! I will bet you are right on the self employed stats vs that of those who are laid off is about the same if not even less homes being foreclosed on by those who are self employed. I would love to see a study done on those who are self employed

Posted by Respect Realty LLC, Brokers - Oregon / SW Washington Real Estate (Respect Realty LLC) over 7 years ago

I'd put money on it as well, Todd.

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 7 years ago

The qualifying "model" should be adjusted and the relationship with your bank is a thing of the past. Its a sad commentary on a situation created by the banks.. 

Posted by Jeff Fisher, RE/MAX Fine Properties (RE/MAX Fine Properties) over 4 years ago

Jeff...I inadvertently resurected this old post by mistake, but I appreciate the comment.  It was a sad commentary given the state of things in 2010.  Although things have lightened up a bit since then, it's still a struggle for many and progress is slow.

Posted by David Ames, San Francisco (Zephyr Real Estate, San Francisco) over 4 years ago

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