Even if you have not experienced this for yourself, nearly everyone has heard horror stories from a blind date. They have become a cultural archetype in every way. You go in expecting young, athletic, charming and too often, find yourself grappling with the liberal application of those words. Growing up in the mortgage industry over the last 20 years, I can attest that a few parallels exist here. What you thought was a great deal for the bank, that solid customer with the high FICO score, great employment, and low debt ratios turns out to be a house of cards built on shifting sands, and the "perfect match" ends in default and risk. We are left asking how this got sideways so quickly.
What we all want is that firsthand knowledge of our suitor that can guarantee a happy union. Does that exist? In some ways, it always has. The ability to verify who we were dealing with has not typically been the problem; more likely, it has been a lack of desire to exercise that ability. Well those days are long past, friends. In today's market, we have no choice but to use our tools wherever we can, and a silver bullet has been in our arsenal the whole time: IRS Form 4506-T. While using automated underwriting systems and credit models will enhance the speed to market, they are only as good as the information plugged in at origination. Exercising the request for tax transcripts and diligent review of the information provided will make that borrower's ability and willingness to repay the lender a much more secure proposition.
While the borrower is required to sign the 4506-T, in the not too distant past, very few lenders actually followed through on this protection. Today we are seeing 4506-T requests grow exponentially, and not just on the originations side. The servicing side of the business has been using this tool quite often now as well. In order to mitigate the risk posed in the loan modification process, lenders are choosing to go back to this trusted tool. And for good reason, the Treasury Department estimates that over 50% of loan modifications end up back in foreclosure in those cases where income is not verified.
Of course the obligation to analyze the documentation that is returned is just as important as ordering it in the first place. If we look no further than the AGI, we could be missing the big picture. Some other things to look for would be undisclosed self employment, losses that are written off, alimony (it is deductible and likely claimed to lower tax liability), mortgage interest, tax liability from previous years, undisclosed liabilities on Schedule E, interest or dividend income where assets in the file might suggest they exist, and lastly we get good borrower profile intelligence. This can all be compared to the other data we have accumulated to develop a clearer picture of the borrower.
Is it foolproof? No, because a savvy fraudster might choose to file a bogus return that is later amended after acquiring the mortgage lending that fuels the scam. A tax transcript might give you only that snapshot in time, but if we are careful to order all the years available to us, we will see the inconsistencies and can condition for additional documentation as appropriate. If we use this document in concert with diligent underwriting, comprehensive credit analysis, and a robust 4506-T enabled fraud detection software product, we can turn away the frogs until that prince comes along. Oh, and live happily ever after!
Matt Merlone is director of investigations at Interthinx.
