Beware lender who requires lengthy access to tax returns

Nation's Housing

March 14, 2004|By KENNETH HARNEY

SHOULD YOU have to sign away your legal rights to refinance your mortgage or buy a new home?

Of course not. But that is precisely what some mortgage lenders are requiring, though their customers might not have the slightest idea what's going on.

Lenders are forcing borrowers to waive their privacy rights and grant them what amounts to a fishing license to gain access to their federal income tax records. Worse, lenders are free to pass along the tax-return fishing licenses to other companies when they sell the loan.

Kathie Street, a mortgage broker in Bellingham, Wash., recently was ordered by a national lender to instruct her loan customers to sign - but not date - an IRS Form 4506 as a condition of financing their loan. If the clients refused, the loan would be canceled.

Form 4506 grants lenders access to multiple years of private tax returns for up to 60 days after the borrowers sign and date the form. Widely used in the mortgage industry to combat fraud, the form directs the IRS to provide full returns or transcripts showing key details of the taxpayers' filings.

The form carries explicit instructions that taxpayers must date and sign it. "Do not sign this form unless all applicable parts have been completed," it reads at the top of page one.

The second page says the form "must be signed and dated by the taxpayer" granting permission to the lender to request income tax return information from the IRS.

The instructions also explain the significance of the dating of the form: "The IRS must receive [it] within 60 days of the date signed by the taxpayer" or it will be rejected.

Open-ended access

By signing, but not dating, Form 4506, mortgage applicants essentially allow people not known to them - months or years down the road - to date the form and receive up to four years' worth of IRS tax filings, no questions asked. There are no controls over their subsequent use of the income and tax information.

Street says she has no objection to 4506 forms when they are used properly. But when the lender involved with the recent refinancing asked Street's clients to sign a waiver allowing the lender - and not the loan applicants - to date the form later, Street hit the roof and refused.

Then things got rough. Although the loan company, Connecticut-based Mortgage Lenders Network USA Inc., had made a commitment to finance the loan, it warned Street that her clients' refinancing would be terminated unless they left the Form 4506 undated. Street says her clients ultimately gave in and signed a new, undated 4506 "because they really wanted this loan."

They also signed a Form 4506 Disclosure Statement, prepared by the lender, that read: "I/we have signed the IRS Form 4506 without dates and I/we give Mortgage Lenders Network USA Inc., its successors and assigns, permission to date and use it for auditing purposes."

When I asked Mortgage Lenders Network for an explanation, general counsel Steve Olearcek said the waiver form is required for all borrowers but was not designed by MLN. Instead, he said, it is a fill-in-the-blanks form that is circulating within the industry.

The purpose, Olearcek said, is to comply with the requirements of secondary market investors who purchase loans from companies such as his. He said giant investor Freddie Mac insists on a 90-day period to audit loans that it acquires by pulling tax information on borrowers using Form 4506.


Freddie Mac spokesman Douglas Robinson said that's baloney.

"We want the 4506 dated and signed" according to IRS instructions, he said, and waiving consumer privacy rights via Form 4506 "is not our policy and has never been our policy."

The use of waiver forms circumvents Internal Revenue Service instructions, but here is the kicker: The IRS says that it can't do anything about the practice, no matter how widespread it might be.

"The IRS certainly encourages everyone to use the form as the instructions [indicate]," said spokeswoman Michelle Lamishaw. "However, if people choose to enter into a different kind of relationship with their banks, that is their choice."

What? When a lender holds a gun to an applicant's head and says, 'Sign away your privacy rights or you don't get a mortgage," what kind of "banking relationship" is that?

If a lender requires you to waive your tax privacy rights, the smart response by an informed consumer on Form 4506 is to tell the lender to take its mortgage and shove it.

You're bound to find another who'll let you fill out the form according to the IRS' instructions and give you a good mortgage, too.

Ken Harney's e-mail address is

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