DEC 13, 2013

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Compliance Matters

Shutdown Underscores False Confidence in Mortgage Recovery


Even after resolution of the government shutdown, the aftereffects on the industry will surely be felt for some time, particularly regarding lending. With a key role in driving electronic signature and record adoption and as a liaison between government, lenders and consumers, we have a unique point of view into the process and how the ongoing volatility in Washington impacts all sectors of lending, and what we are seeing is very concerning.

Before this most recent shutdown even began, lenders and consumers were already being impacted by the earlier 2013 federal budget sequester, which triggered hiring freezes and other cost-cutting measures at many agencies including the IRS (many employees were involuntarily furloughed over the summer for days at staggered intervals equating to an average of 40-48 hours of no pay). In and of itself, the budget sequester already challenged the agency’s existing process efficiencies, but the shutdown, along with its subsequent backlog of document requests for mortgage and other loan applications that must be processed through the IRS system, exacerbates the problem. Now that the government has reopened, getting back up and running is a daunting process for the industry.

Perhaps most alarming in all of this has been the underlying false sense of confidence in the housing recovery that the shutdown highlighted. This is evident in the decision by major financial institutions to go against their original positions and relax their policies relative to tax transcripts and wage statements (via IRS 4506-T taxpayer consent forms) when verifying sources of borrower income or securitizing pools of loans for the secondary market. In doing so, these lenders have opened themselves up to significant levels of buyback risk due to negligence and fraud, creating an ideal setting for problems that could linger for some time, potentially derailing what positive momentum the housing industry had gained over the past year and returning to “old” habits that originally contributed to initial mortgage crisis.

With no end in sight to the adversarial climate in our nation’s capital and the budget debate essentially kicked down the road to January, process improvements must be identified to help alleviate future problems tied to disruptions in the government.

One achievable solution ripe for consideration would be to modernize the 4506-T order transmission and tax transcript delivery capabilities at the IRS by replicating secure data exchange procedures and proven system-to-system connection models. Trusted IRS program participants would be allowed to securely interface with the IRS to obtain authorized documents, experience dramatically improved turnaround times, and bypass the bottlenecks often experienced today due to the labor intensive, manual processing required at IRS service centers. Lenders and consumers would experience dramatic turnaround time improvements and no longer be impacted regardless if governmental employees are allowed to report to work due to budget sequestering or other political gridlock. The government would also benefit with substantial cost savings even as the volume of tax transcript requests continue to increase year-over-year.

However, this solution has yet to be implemented and approved by government officials, so no one is able to realize its positive effects yet. Now that the government has recently come back online, the IRS is doing its best to execute a strategy to work through the tremendous 4506-T backlog that was accumulated during the shutdown period and that is compounded daily as a result of each new order submitted every day. To avoid overwhelming the diligent IRS agents or its technology systems, it is anticipated that it will take several weeks to work through the mounting requests before the IRS is able to return to its normal 48 hour turnaround service levels sometime in early November. 

How the IRS chooses to manage the issues of regulating staff levels and preventing its technology platforms from being overwhelmed will ultimately be dependent on how it is funded and what guidelines must now be incorporated as a result of Congress temporarily shutting down this “non-essential” government function that has such a direct impact on the overall health of our nation’s economy. 

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