The California Mortgage Bankers Association is working with the Internal Revenue Service to reduce the time it takes to verify the incomes of self-employed borrowers.
When these people apply for loans, they must fill out a form authorizing the lender to get information about them from the IRS. The lender then mails the form to the IRS, which in turn mails back a transcript of the applicant's tax return. This process can take from three to 10 weeks, said David Molumby, who sits on the California association's quality assurance committee.
"It doesn't work at all for the lender to have that kind of delay," said Mr. Molumby, who is also vice president for quality control at Headlands Mortgage, Larkspur, Calif.
Under the new system, the borrower would write his or her signature on an electronic pad, which the lender would then zap across the phone lines via modem to the agency. Within 24 hours, the IRS would then transmit the tax information to the lender, encrypted to ensure confidentiality. The IRS did not return American Banker's phone call seeking comment by press time.
Snail mail is not the only option for lenders seeking tax return information. Companies such as Verify LLC, Tustin, Calif., and National Credit Reporting Systems, Egg Harbor City, N.J., can get them a faster verification from the IRS-for a fee.
Though the IRS probably would charge a fee for its computerized service, Mr. Molumby expects it will be "significantly cheaper" than what the private firms now charge.
Mr. Molumby, who has been working on the project since 1996, is optimistic that the service will be unveiled early next year. "It's in the short term," he said. "I don't think we're talking about another year going by."
The new system "would be practical in a large amount of cases, but not all cases," said Robert Knuth, president of National Credit Reporting Systems, known as NCS. Some brokers and correspondents may not be willing or able to invest in the hardware, but their wholesalers may insist on some kind of verification, he said.
The self-employed have alternatives to submitting their tax returns. Some lenders offer "stated-income loans" for which the borrower need not provide income verification, as well as "no ratio" loans for which the borrower does not even have to state his or her income. Lenders usually charge higher interest rates for these products.
The IRS' project will help spot attempts at mortgage fraud in its early stages, said Arthur Prieston, a Los Angeles lawyer who specializes in fraud cases. Often people tell lenders they have higher incomes than they tell the IRS, for obvious reasons. Computerizing the process will let lenders spot these discrepancies before they fund the loans, Mr. Prieston said.