Bankers say a new procedure to prevent fraud has slowed loan applications - and they blame the IRS.

In October, the U.S. Small Business Administration reached an agreement with the Internal Revenue Service requiring lenders to obtain applicants' permission before the agency will obtain a borrower's original tax record for comparison with those submitted with loan applications.

The new procedure was prompted by a rash of fabricated income tax returns from borrowers seeking federally backed loans in the wake of the devastating Southern California earthquake early this year.

But bankers say the IRS has dramatically slowed loan approval by taking up to a month to check against possible application fraud. An IRS spokesman could not be reached for comment.

In a Nov. 14 letter to SBA administrator Phillip Lader, the American Bankers Association urged the agency to withdraw the policy. ABA lobbyist Edward Yingling said the new procedures "have caused serious delay in the application process," and that the SBA should address specific problems rather than applying the procedure across the board.

John Cox, the SBA's associate administrator for financial assistance, said the agency is studying the procedure to determine how big the problem may be. He said the agency will decide next spring whether to make the procedure permanent, drop it completely, or modify it.

For instance, it might not require every application to comply with the new rule. Mr. Cox said the agency might instead take a sample by geography or by industry to spot check for fraudulent applications.

Mr. Yingling also pointed out that bankers were concerned that the SBA implemented the new policy without public comment.

"A policy change of this magnitude should have been issued for public comment in order to encourage a dialogue on this significant change prior to its implementation," he wrote.

The SBA was not required to take comment. Mr. Cox said the change was procedural and not a shift in policy, and did not require publication in the Federal Register.

"I don't think we made any technical error in implementation of this procedure," he said.

While the IRS has said it expects a 10-day turnaround on the return verifications, some bankers say the process is taking much longer.

Ken Gibbons, president of Union Bank in Morrisville, Vt., said he submitted four verification requests on low-documentation loans during November.

So far, he has received only one verification from the IRS office in Andover, Mass. - on Nov. 28 for a request submitted on Nov. 4. Another request, submitted on Nov. 8, is still pending.

"The low-doc program talks about character and credit score," Mr. Gibbons said. "Now the first thing you say to the person is we don't believe these tax returns."

Likewise, Calvin Garlic, guaranteed government lending coordinator for the First National Bank of Maryland, said that while the local IRS office has not gone beyond the two-week target yet, he fears die verification requirement will cause problems down the road.

Specifically, he said problems will likely result when customers who have borrowed with SBA-backing return for more credit.

"Now we are saying we have to get something from you that we never required before, and you have to wait for the IRS to provide real tax returns before you get your money," he said.

Despite the concerns, banks in California have had to verify tax returns for about a year. Some bankers there have claimed that the IRS provided verification within 24 hours of a request.

While bankers fret over the potential problems with borrowers as a result of the requirement, Mr. Cox said he has yet to receive a complaint from a loan applicant.

The SBA has asked those bankers having trouble to contact them so the problems can be fixed. That way, Mr. Cox said, the SBA can contact the IRS so that everyone gets a clear understanding of what is expected.

"We correct problems by taking individual cases and running them down," he said.

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