Special to American Banker
Which is more important: convenience or confidentiality?
That is a question that consumers will need to ask themselves in coming months as the mortgage industry considers involving the Internal Revenue Service in efforts to speed up the approval and closing of loans.
The IRS now plays no direct role in mortgage loans. Lenders require only a copy of a W2 form and a bank statement showing the applicant's current assets.
But there is increasing interest in getting the IRS directly involved as lenders work to automate the loan approval process.
"We're trying to get automated access to the IRS to verify tax returns," said one origination software vendor, who asked not to be identified. "The agency has already said that it is amenable to this."
The IRS declined to comment for this article.
One reason the industry is interested in such access is to fight fraud. Mortgage bankers and brokers have been accused of falsifying W2s and other key documents, sometimes without a customer's knowledge, so a deal could go through and the requisite fees be collected.
For example, said Ron Sadaka, vice president and general manager of the Wall Street Mortgage Group, a mortgage brokerage in Florida, said that this year a woman in that state who thought her loan had closed learned only as she was moving that her mortgage broker had given false documents to a bank.
The bank called the lender to check her tax returns before signing off on the closing, Mr. Sadaka said. "The bank discovered that the mortgage broker had falsified pay stubs and her W2s, printing them out on his computer. The bottom line is that the woman didn't qualify for the loan."
That broker is under investigation by state authorities, said Mr. Sadaka, whose company is based in Boca Raton.
Richard Beidl, a senior analyst at Tower Group in Newton, Mass., says the IRS is "a handy certified, 100% documented income [information] source."
But getting the IRS involved poses disturbing questions. Industry sources say that while the agency is willing to share information with lenders, it wants the lenders to return the favor - and thus help in catch people who cheat on their taxes.
The IRS "wants the loan file to be shared with them, so that they can see if someone is cheating on his or her taxes," said the origination software vendor.
Lenders fear that the agency's demands for information reciprocity would worry consumers. "Most people remain distrustful of the IRS," said one banker. "They're willing to tell their lender a lot more than they are the IRS. After all, all the lender can do is turn you down. The IRS, on the other hand, can say, '10 to 30 [years in prison].' "
Most everyone agrees that the inability to tie directly into the IRS slows down mortgage approval, particularly for applicants who are self-employed or who have complex income situations.
"The process is somewhat cumbersome today, as the consumer must sign an authorization form to get this information, which is then sent to the IRS," says Dusty Lashbrook, executive vice president and chief operating officer of Mortgage.com in Atlanta. "The typical turnaround time is two to three weeks, but it can be as much as two to three times longer than that," particularly around tax time.
So how can the process be speeded up? One solution is to have firms that do electronic filings on behalf of taxpayers, such as Intuit's TurboTax service, make their information available to lenders.
"If a lender can tap into Intuit and its TurboTax software or any other electronic tax filing system, then they can retrieve the necessary information with the customer's permission without having to provide reciprocity of information to the IRS," Mr. Beidl noted. "From a consumer's perspective this is helpful because the IRS isn't getting access to personal information that shouldn't necessarily be available to them."
But companies such as Intuit worry about customer confidentiality. To deal with that concern, Mr. Beidl suggested, a lender could provide an ID number to a consumer, who could then go to the Intuit site or other site, type in the number, and make the information available to that particular lender.
"It's the same thing that you have today with SAT scores, where the consumer can designate which colleges are able to access that information," Mr. Beidl said.
Some consultants said honest taxpayers would not worry about the IRS having access to their loan files. "There are a lot of people who file taxes [for whom] it's very clean and simple," said one consultant. "You have your standard deductions, you have a couple of kids, no problem, you write that off."
"It's just a matter of time before lenders have access to this information electronically, either through third-party tax filers or through the IRS directly," said Ed Jones, president of Arc Systems.Com in Austin, Tex.
Mr. Quinn is a freelance writer in Arlington, Va.