Bank ac­count data could help lenders avoid IRS tax tran­script de­lays

Pay­check in­for­ma­tion gleaned from bank ac­counts is emerg­ing as an al­ter­na­tive to ver­i­fy­ing a mort­gage ap­pli­cant’s in­come and em­ploy­ment with a 4506-T tax tran­script re­quest to the IRS.

National Mortgage News - - Contents - By Bon­nie Sin­nock

The jury’s still out on whether bank ac­count data is a vi­able al­ter­na­tive to the te­dious process of con­tact­ing em­ploy­ers to ver­ify a mort­gage ap­pli­cant’s job sta­tus. But there’s al­ready hope that the same data could re­place the even more net­tle­some task of In­ter­nal Rev­enue Ser­vice in­come ver­i­fi­ca­tions.

While Fan­nie Mae is cur­rently test­ing new ways to use check­ing ac­count and di­rect de­posit data to ver­ify a bor­rower’s em­ploy­ment and in­come, it doesn’t ap­pear that large mort­gage in­vestors are quite ready to use the data as an al­ter­na­tive to IRS tax tran­scripts. But that hasn’t stopped third-party data providers from get­ting excited about the prospects.

“This is an al­ter­na­tive that can be used where bor­row­ers will fit into the ap­pro­pri­ate cri­te­ria based on their net in­come and their cash-flow streams,” said Brent Chan­dler, founder and CEO of For­mFree Hold­ings, which works with En­vest­net-Yodlee to pro­vide au­to­mated ver­i­fi­ca­tion of a bor­rower’s in­come and as­sets us­ing data from banks and other sources.

The ba­sic idea is to ver­ify ap­pli­cants’ em­ployer and salary in­for­ma­tion by iden­ti­fy­ing the source and fre­quency of di­rect de­posits and other pay­roll ac­tiv­ity in their check­ing ac­counts.

“We’re start­ing with W-2 em­ploy­ees like we did with data val­i­da­tion for Day 1 Cer­tainty, be­cause that is the bulk of the bor­rower base,” said An­drew Bon Salle, ex­ec­u­tive vice pres­i­dent of Fan­nie Mae’s sin­gle-fam­ily busi­ness. But “that could change over time” de­pend­ing on the needs of fu­ture bor­row­ers, he added.

Fan­nie Mae’s Day 1 Cer­tainty pro­gram of­fers lenders upfront rep­re­sen­ta­tion and war­ranty waivers on a num­ber of loan file data points if they use au­to­mated ver­i­fi­ca­tions pro­vided by ap­proved third­party data ag­gre­ga­tors. The ini­tia­tive is de­signed to save lenders time dur­ing the orig­i­na­tion process and make un­der­writ­ing de­ci­sions more ac­cu­rate.

The new method of us­ing bank ac­count data in­stead of tax tran­scripts may prove par­tic­u­larly useful if non-salaried em­ployee in­come, which re­lies more heav­ily on tax tran­script ver­i­fi­ca­tion, be­comes more preva­lent among mort­gage bor­row­ers.

The mort­gage in­dus­try has long be­moaned in­ef­fi­cien­cies and de­lays in the In­come Ver­i­fi­ca­tion Ex­press Sys­tem, the IRS ser­vice that pro­cesses 4506-T re­quests and pro­vides lenders with bor­rower tax tran­scripts. The ser­vice is no­to­ri­ous for slow­downs and out­ages dur­ing tax sea­son and is of­ten sus­pended dur­ing fed­eral govern­ment shut­downs, like the one in late 2013 that lasted over two weeks and led to in­dus­try­wide de­lays in loan clos­ings.

More re­cently, the in­dus­try was caught off guard after the IRS made se­cu­rity up­dates to IVES late last year that im­me­di­ately led to crip­pling de­lays.

In the im­me­di­ate wake of the mort­gage cri­sis, lenders would sub­mit a 4506-T to the IRS “on ev­ery loan or sub­stan­tially ev­ery loan that they un­der­wrote, even ones that didn’t close,” which added to mount­ing ex­penses and re­duced mar­gins in the in­dus­try, said Nick Volpe, chief strat­egy of­fi­cer at ACES Risk Man­age­ment Corp.

But the IVES de­lays and added ex­pense of re­quest­ing the tax tran­scripts have got­ten so bad, many in­vestors “made changes in the last year or so that no longer re­quired the lenders to get them, gen­er­ally speak­ing, in the man­u­fac­tur­ing process,” he said.

In­stead, lenders have bor­row­ers sign a 4506-T to au­tho­rize a tax tran­script re­quest, but only sub­mit it to the IRS if the bor­rower has non­tra­di­tional in­come sources or other riskier char­ac­ter­is­tics, or if the loan is se­lected for a qual­ity con­trol re­view.

“It’s changed to be­come more of a back­end func­tion,” for the most main­stream loans,” Volpe said.

How­ever, that’s prompted con­cerns about un­der­writ­ing stan­dards be­com­ing too lax — some­thing that bank data ver­i­fi­ca­tions could ad­dress. An­other

ben­e­fit of the bank data pro­posal is that the in­for­ma­tion is time­lier than what’s avail­able in an­nual tax re­turns.

Still, bank data is un­likely to ever com­pletely re­place IVES be­cause the tran­scripts of­fer a more de­tailed and broader view of bor­row­ers’ fi­nances.

“I don’t think to­day that you’ll elim­i­nate the use of the 4506-T where the 4506-T is needed,” said Steve Smith, CEO of Finic­ity, a fi­nan­cial data ag­gre­ga­tor.

Tests have al­ready shown us­ing bank data for as­set ver­i­fi­ca­tion isn’t a per­fect re­place­ment for em­ployer ver­i­fi­ca­tion, let alone tax tran­scripts. Data sub­mis­sions can vary by bank and lenders can run into is­sues when mort­gage ap­pli­cants don’t de­posit pay­checks at a bank. Other is­sues can arise when a pay­roll ser­vices out­sourcer or pro­fes­sional em­ployer or­ga­ni­za­tion is­sues pay­checks in their own name, rather than the ap­pli­cant’s ac­tual em­ployer.

What’s more, some lenders may be hes­i­tant about us­ing the data, even if it’s ap­proved by in­vestors.

“We are not par­tic­i­pat­ing in that right now,” said Magesh Sarma, chief strat­egy of­fi­cer for Amer­iSave Mort­gage Corp., cit­ing a pref­er­ence for get­ting in­for­ma­tion di­rectly from em­ploy­ers as op­posed to “try­ing to sur­mise” what in­come a bor­rower has made based on a bank state­ment.

Still, there are lenders will­ing to give sin­gle-source in­come val­i­da­tions a shot. Bor­row­ers have been “ab­so­lutely blown away by how sim­ple it is,” Bill Ban­field, ex­ec­u­tive vice pres­i­dent of cap­i­tal mar­kets for Quicken Loans said in an in­ter­view last year about its in­come ver­i­fi­ca­tion pilot with Fan­nie Mae.

While bank data may not work in ev­ery sit­u­a­tion, it could re­duce the in­dus­try’s reliance on tax tran­scripts and in turn, strain on the IRS and IVES. Mean­while, ef­forts are also un­der­way to help the IRS im­prove its out­dated tech­nol­ogy, but that re­quires fund­ing either from Congress or the mort­gage in­dus­try it­self.

A pro­posal to re­place tax ver­i­fi­ca­tions with se­cure ac­cess to data from an­other govern­ment source of in­come val­i­da­tion has been thor­oughly re­searched, but re­quires leg­is­la­tion that hasn’t got­ten nec­es­sary ap­provals, said Anne Can­field, ex­ec­u­tive direc­tor of the Con­sumer Mort­gage Coali­tion.

Us­ing bank in­for­ma­tion also has some down­sides, but it is at­trac­tive in that it doesn’t re­quire con­gres­sional ap­proval, Can­field said.

“Would it re­place the 4506-T? I don’t know about that. I think ul­ti­mately we’d just have to see. We’d want to make sure that it’s ac­cu­rate. That’s the bot­tom line,” she said.

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