Date: Monday, October 23, 2006 @ 01:38 PM EDT
Topic: Credit and Finance
Starting Monday, it's going to get much riskier to fib about your
income when you apply for a home mortgage. That's because the Internal
Revenue Service is overhauling a key income verification tool used by
lenders -- making it faster and easier to pull up electronically the
confidential income tax information of borrowers.
"It could be huge" in spotting fraud upfront, before it's too late, said Mike Summers, vice president of www.Veri-tax.com,
a Tustin, Calif.-based firm that services 3,000-plus large and small
mortgage lenders nationwide. Fraud in mortgage applications is now a
multibillion-dollar-a-year problem, according to the FBI, and falsified
income tax filings are an important contributing factor.
Some popular mortgage products open the door to bogus claims about
income. Many lenders in recent years have offered "stated income" and
other limited-documentation mortgages aimed especially at self-employed
applicants. Dubbed "liar loans" by industry critics, stated-income
mortgage programs allow applicants to bypass standard underwriting
requirements for W-2s or copies of personal and corporate income tax
records.
Instead, applicants simply assure the loan officer or broker that, yes
indeed, we earn enough to qualify for the mortgage, and the transaction
proceeds to closing. Often lenders will ask borrowers to fill out an
IRS Form 4506-T along with their other mortgage documents.
That form authorizes the lender or the investor providing the money for
the mortgage to obtain transcripts from the IRS summarizing income and
tax data for as many as four years. The form must be signed by the
borrower and can be used only during the 60-day period following the
date of signing.
Until now, the process of faxing in 4506-T requests to the IRS and
obtaining transcripts has been paper-driven and non-electronic. That
has made income verifications slow and difficult to fit into lenders'
highly automated loan-underwriting systems. Most lenders have used
4506-T forms as a way to perform quality-control checks on pools of
closed mortgages.
But now, with the IRS promising to provide electronic transcript tax
data within one to two business days in an electronic format, more
lenders are likely to run income checks before closing -- even on loans
to applicants who are not self-employed or using stated-income programs.
"This is going to be light years ahead of where the IRS was before,"
when the income-verification process was in the horse-and-buggy era,
Summers said. "We are really excited" at the prospect of lenders making
more extensive use of IRS double-checks before closings.
The only downside from a lending industry perspective: Rather than
providing transcripts at no cost as in the past, the IRS now plans to
charge a flat $4.50 for each tax year covered in a 4506-T request.
Typically lenders want to see two years of returns, so the IRS policy
change means costs will jump by $9 per loan application. Though lenders
will be able to deal directly online with the IRS, most are expected to
continue working through third-party vendors such as Veri-tax, who can
handle large volumes of requests per month, but at a higher cost.
What does the IRS move to electronic tax verifications mean for
mortgage applicants? For one thing, they will probably be asked to fill
out Form 4506-Ts earlier and more frequently. Borrowers who are playing
games with stated incomes or falsified 1040 tax returns are more likely
to be spotted before closing and could be subject to prosecution.
Wider uses of 4506-Ts could also increase the potential for lender or
broker abuse of the system. For example, some large wholesale lenders
have required borrowers to sign the forms, but not date them or
indicate the tax years to be checked. That allows secondary market
investors -- the firms that ultimately own and fund the mortgage -- to
access the data on up to four years of filings long after the 60-day
limit prescribed by the IRS.
At worst, improperly executed Form 4506-Ts give unknown and unseen
individuals the potential to obtain your most confidential income and
tax information, then sell it, distribute it or post it on the
Internet. With income checks likely to be faster and more frequent in
the new electronic format, it will be more important than ever for home
mortgage applicants to follow the IRS instructions on Form 4506 to a
"T."
That means never signing the form without dating it and specifying the
tax years you're authorizing to be checked. Even if the loan officer
insists that it's the mortgage company's standard procedure -- or
worse, a precondition for obtaining the loan itself -- never sign an
incomplete 4506-T.
In the right hands, federal income verifications are a great way to
fight fraud. In the wrong hands, it's an open invitation to identity
theft, or worse.
By Kenneth R. Harney
Saturday, September 30, 2006
The Washington Post Company
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/29/AR2006092900542_pf.html
