Validate This? (IRS Form 4506 that is)

For the past year or so, it has become nearly automatic for lenders to verify that the tax returns submitted to them by brokers matched the tax returns filed with the IRS.  Tax returns are required on a file when a borrower is either self-employed or has substantial commission income (e.g. for a salesperson) or bonus income (for a professional/manager or, usually a Wall Street banker/trader). This was done by submitting a signed  IRS Form 4506  to the IRS and waiting a few days for them to provide a verification of the filed returns.   This verification was then compared to the tax returns in the lender’s file to confirm that they were the same.  

A few months ago, lenders starting submitting these 4506 forms to the IRS on ALL files whether or not tax returns were provided to them.  For a salaried borrower, all that is required for income verification are 2 paystubs and 2 years of W2 statements, not full tax returns.   As a result, now borrowers are being analyzed on documentation that is not needed or required.   This is causing needless delays and aggravations.   Recently, on a coop purchase for a perfect file being made to a federal government employee (who ironically works for the Treasury Dept.), a condition was added to the Commitment Letter based upon the 4506 verification.  This condition required an explanation for Schedule C income (not expenses I note) that were being show on the borrower’s federal tax return.  Now note, this return was neither required for the loan or submitted!   It turns out that this income belonged to the borrower’s husband (since it was a joint tax return) who was not a borrower on this loan or part of the transaction!

So, the moral here is to make sure that a borrower, even a salaried one, does not have anything on their tax returns that could cause an issue with a loan.  The lenders are checking this even when not required (since Fannie Mae/Freddie Mac are not requiring it)!  The waste and needless delays continue and expand!


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