WASHINGTON — It seems like just another boring piece of the paper blitz that arrives when you apply for a home loan, but given IRS Form 4506-T's new prominence in the mortgage market, it's worth a second look.
The form authorizes a loan officer or mortgage investor to get electronic transcripts from the Internal Revenue Service covering multiple years of your federal income tax filings. Though the IRS has supplied private tax return information to lenders for years, the data typically were requested only at settlement, and mainly for self-employed applicants or those with unusual income patterns.
Fannie Mae recently directed lenders to obtain two sets of electronic transcripts for all borrowers, regardless of income sources — a 4506-T upfront at application and another at closing. Fannie told lenders the move was part of its efforts to spot fraudulent income claims and limit loan losses.
During the height of the housing boom, many lenders went soft on borrowers, allowing millions of them to "state" their incomes rather than supply copies of actual tax returns filed with the IRS. These so-called no-documentation loans often later turned out to be "liar loans," with puffed-up incomes enabling borrowers to obtain larger amounts of mortgage money than they could justify — or afford — based on their actual incomes.
When lenders didn't verify stated income claims, liar loans frequently turned into foreclosure bombs. Their remains are visible in neighborhoods across the country, where foreclosures have soared to record levels.
Now, not only Fannie Mae but most major lenders are tightening standards and double checking everything. When it comes to what you say is your annual income, they want to verify it twice — even if you submitted stacks of IRS returns.
The IRS is helping out as well by lowering the cost of those multiple verifications. As a result of higher-than-expected revenues generated by skyrocketing demands for 4506-T's, the IRS — which is not permitted to make a profit on services such as income verification checks — has cut the price of transcripts from $4.50 to $2.25, according to industry sources.
Curtis Knuth, vice president of New Jersey-based NCS Inc., one of the largest vendors of Form 4506-T's to the mortgage industry, says "the timing of the cost reduction couldn't be better for lenders looking to return to more prudent underwriting." Most lenders, he said, do not charge loan applicants separately for income verifications but roll the costs into their origination or processing fees.
The much-more intensive use of Form 4506-T is also focusing new light on what consumers should — and shouldn't — do when confronted with a lender's or settlement agent's request that they fill one out.
Here's a quick overview:
• Take Form 4506-T seriously. It's a powerful tool, and potentially exposes otherwise confidential personal financial information to unknown and uncontrollable numbers of people.
• Pay careful attention to the IRS's instructions on the form, particularly as related to the tax return transcript years being requested, and to the dating of the form next to your signature. The date you write in is important because the IRS won't provide transcripts unless it receives the request within 60 days of the signing date by the taxpayers making the loan application. Make sure you date the form when you sign it.
Filling in the tax return years is crucial as well because it allows you to limit what the lender, settlement official or secondary market purchaser of the mortgage can obtain. The form includes boxes allowing up to four years of tax data to be accessed, but loan applicants can specify that fewer years be available.
Earlier in this decade, controversy erupted in the mortgage industry because some large secondary market loan investors and banks were requiring brokers or closing agents to instruct applicants to sign a Form 4506-T but not date it or fill in the transcript years being requested. Some lenders even distributed their own printed instructions along with the Form 4506-T, requiring the homebuyer's or refinancer's signature, but no dates. This not only countermanded the IRS's instructions but gave investors the ability to check incomes whenever they chose — long after the closing.
The bottom line: Be aware of the new importance of Form 4506-T, and get used to seeing it twice during the mortgage cycle. Make sure you know how it's supposed to be used — and how it can be abused. Check it out in advance by going to the forms area at the IRS's Web site (irs.gov) and downloading a copy.
Ken Harney can be reached at firstname.lastname@example.org.