Starting Oct. 2, 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 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 per year problem, according to the FBI, and falsified income tax filings are an important contributing factor.
Some popular mortgage products themselves 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 andécorporate 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 what is known as 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 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 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, said Summers. “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 more likely will 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 its 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.
Ken Harney is a real estate columnist with the Washington Post.