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Fannie Implements Regulation Change

As a means to help prevent mortgage fraud, Fannie Mae has tightened its compliance rules regarding the use of IRS Forms 4506, 4506-T and 8821 to validate borrower income documentation. Lenders who fail to comply with the new policies run a high risk of failing to meet all of Fannie's updated underwriting guidelines and will be unable to sell their loans to Fannie.

As of Sept. 1, Fannie now requires all lenders to obtain completed and signed Form 4506-T from borrowers at both loan application and closing, add the execution of Form 4506-T with the IRS to the lender's written quality control plan and ensure that all loans selected for quality control review include the reconciliation of the tax transcript information with the income documents in the loan file.

Will Dillard, director of operations at SettlementOne Credit Corp., said that Fannie's 4506-T policy change "has been the subject of much debate since the June 2009 announcement." He added that, although some in the industry have interpreted the announcement to mean that Fannie only "highly recommends" that transcripts are obtained from the IRS, the requirement for lenders to add the execution of the Form 4506-T with the IRS to their written quality control plan is mandatory.

"Fannie Mae then goes on to further require that the reconciliation of the transcript information with the income documents in the loan file must be completed for all loans selected for the lender's quality control reviews."

Mr. Dillard added that SettlementOne offers an automated tax verification service to address the new Fannie Mae requirements. Its tax verification product offers users updated status reports and a direct communication portal to its staff.