IRS scrambles to clear ‘clogged drain’ slowing mortgage applications

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WASHINGTON — Top officials at the Internal Revenue Service met with mortgage industry groups this week to discuss possible fixes to the agency’s verification system, which lenders rely on to process mortgage loans.

During a conference call late Monday, IRS officials told anxious industry group executives that they were working to address the problem, which many fear will significantly delay mortgage closings.

“We are hearing that time frames have increased by two to four days longer than the time frames prior” to a recent change to the system by IRS, said Ron Haynie, senior vice president for mortgage finance policy at the Independent Community Bankers of America. The “IRS seemed very open to addressing the issues quickly.”

At issue is the Income Verification Express System, an IRS service that mortgage lenders and other financial institutions use to request copies of tax returns to verify loan applicants' income and assets. The IRS made an update to the system on Dec. 8 and “processing delays began almost immediately,” according to the Mortgage Bankers Association, which detailed the issue in an alert to members.

“One of the largest vendors reports that they may have to revert to manual downloads, which means production levels dropping from tens of thousands of transcripts per day to perhaps hundreds," the alert said.

It’s a “slow clogged drain” currently, said one industry source, and it's unclear how quickly the issue can be resolved.

During the conference call with mortgage groups, IRS officials said they are in the process of finding a fix.

"Acting IRS Commissioner David Kautter and his team seem completely committed to finding a short-term and long-term solution," said Anne Canfield, executive director of the Consumer Mortgage Coalition. "Hopefully, this short-term crisis will be averted. Industry and IRS tech experts are working now to identify and put in place solutions.”

In a statement, the IRS said it made changes to IVES in order to make it more secure.

"The IRS took this step as part of a wider effort to protect sensitive taxpayer data in light of continuing cybersecurity threats," the agency said. "We are aware of concerns from industry members, and we are continuing to work with them."

For their part, some vendors are arguing the concerns about delays are overblown. Leonard Ryan, president and founder of vendor QuestSoft, which participates in the IVES system, said that the new process has added hours to the turnaround time.

But the change did not impact the “mission critical part,” which is getting the request to the IRS.

"It is the part they are returning it back to us that has gotten more sticky," Ryan said.

"After some moderate hiccups on Monday after their announcement, we have operated with only minor delays mainly because of their requirement to have approvals to access now based on individuals."

To verify that a person making a request for a transcript is authorized, the new system requires the IRS to send a security code to a personally attached device. That added a manual component to the request process.

"For people who have automated systems, there's a little wrench thrown in the process," Ryan said.

In the past, the IRS has had delays in processing 4506-T forms through IVES. In March 2015, there was a two-week outage due to a software glitch. Since the outage occurred during tax season, where the IRS moves employees into slots to process tax returns, the glitch slowed down the request process.

Canfield said the IRS is also open to making longer-term changes.

"The acting commissioner and his team were also very interested is working on a regular, organized basis with the industry working group,” she said. “Moreover, we offered to work to get them the additional resources they need to completely upgrade their systems, which is desperately needed.”

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