IRS Makes it Harder to BS Mortgage Applications

Starting today, it’s going to get much riskier to lie about your income when you apply for a Florida mortgage.

That’s because the IRS is overhauling a key income verification tool used by lenders — making it faster and easier to pull confidential tax information of potential borrowers electronically.

This could be a huge development in spotting fraud upfront, according to Mike Summers, V.P. of Veri-tax.com, a California firm that services more than 3,000 large and small mortgage lenders nationwide. When it comes to home loan applications, fraud is a multibillion-dollar problem annually.

Falsified income tax filings are an important contributing factor, and some popular Florida mortgage products themselves open the door to bogus claims about income.

In recent years, many mortgage providers have offered would-be buyers “stated income” and other limited documentation mortgages (even, to some degree, no doc loans) 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 Florida mortgage broker that, yes indeed, they earn enough to qualify for the loan. The transaction then proceeds to closing. Often times, lenders will ask the borrower to fill out what is known as an IRS Form 4506-T along with the required mortgage documents.

• That form authorizes the lender or the investor providing the money for the Florida 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 only be used 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 — making 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 Florida mortgages.

But now, with the IRS promising to provide electronic transcript tax data within 1-2 business days in an electronic format, more lenders are likely to run income checks before closing — even on loans to applicants who aren’t 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, said Summers. “We are really excited” at the prospect of lenders making more extensive use of IRS double-checks before closing.

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 the cost of mortgage applications will jump by $9 per.

How will this affect the way lenders do business? While now mortgage 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 have the ability to handle large volumes of requests per month, but at a higher cost.

What does the IRS’ move to electronic tax verifications mean for Florida mortgage applicants? For one thing, you will likely 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 more likely will be spotted before closing, and could be subject to prosecution.

Wider uses of 4506-Ts could also increase the potential for abuse of the system. 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 Florida mortgage loans — to access the data of up to four years of filings long after the 60-day limit prescribed by the IRS.

At its worst, improperly executed Form 4506-Ts give unknown individuals the potential to obtain your most confidential income and tax information, then sell or distribute it. With income checks likely to be faster and more frequent in the new electronic format, it will be more important than ever for Florida home mortgage applicants to follow the IRS’ instructions on Form 4506 to a “T.”

That means never signing a form without dating it and specifying the tax years you’re allowing to be checked. Even if the loan officer insists 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.