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Think Twice Before You OK Tax Disclosures


WASHINGTON — Home loan borrowers across the country should be on the lookout for misuse of a key federal income tax form that many lenders are now routinely asking mortgage applicants to sign before settlement.

The document--known as IRS Form 4506--empowers its holder to obtain transcripts of four or more years of your federal income tax filings directly from the IRS.

Once Form 4506 has been signed by a mortgage applicant, according to the IRS, there are no controls over who sees your tax returns, what is done with them or how long they can be retained or redistributed.

The problem with Form 4506, according to settlement attorneys and mortgage brokers, is that lenders increasingly are requiring borrowers to fill out the document as a condition of obtaining a home mortgage.

Some applicants never see the form until they're at settlement, when they're told they must sign still another piece of paper on the dotted line.

Consider the case of two Maryland homeowners who recently applied for a refinancing from a Baltimore financial institution.

As part of the application process, the homeowners were asked to submit copies of their federal tax returns for 1995 and 1996. At settlement, however, they were presented with a copy of Form 4506, authorizing release of transcripts of not only their 1995 and 1996 returns, but also of 1994 and 1997, the latter of which they hadn't even filed yet.

The fine print on the document indicated that "based upon the form, the IRS will release the tax information requested to any party shown on line 5." Yet line 5 was left blank--a practice settlement attorneys and lenders confirm is commonplace. They say this helps facilitate the sale of new loans into the "secondary" mortgage investment market.

The fine print also indicated that, no matter who was listed on line 5, the form would be valid only for 60 calendar days after the date next to the applicants' signatures.

Yet the settlement agent said it was not necessary to fill in the date, and that some lenders specifically request that the date be left blank.

In effect, the borrowers were asked to sign away the rights to four years of their most private financial information to unknown parties--the blanks on line 5--for an indefinite period of time.

Even the IRS was unhappy to hear how its document is apparently being used.

"I would have walked out of the settlement," said IRS spokesman Don Roberts. "I wouldn't sign if line 5 [on the form] is blank, and I wouldn't sign if it's not dated."

Roberts added that Form 4506 is intended to be a "service" to creditors who want to independently confirm loan applicants' income data.

Paul Skeen, a loan officer with Community Mortgage, an Annandale, Va.-based brokerage firm, said lenders and secondary market investors frequently ask that Form 4506 be left undated.

Yet by signing without a date and with line 5 blank, unsuspecting applicants have no idea when their tax returns might be accessed in the future or by whom.

"I've been counseling my clients to only sign [the form] if they've dated it," Skeen said.

Settlement attorney Randall Rothstein of Bethesda, Md., says he sometimes has seen Form 4506 come from the lender with a "sticky label that says 'leave blank,' " over the date or on line 5.

Rothstein confirmed that "more than at any time in the past," a signed 4506 has become a condition of obtaining the loan, particularly for self-employed borrowers.

A lender whose national company uses Form 4506, Steve Abrew, executive vice president of Headlands Mortgage Corp. of Larkspur, Calif., said the form "has a legitimate purpose"--the prevention of fraud by applicants.

But, Abrew said, Form 4506 should be part of the upfront application process only, never sprung on paper-dazed borrowers at settlement when they'll sign almost anything.

And, he added, when you request two years of tax returns to underwrite a loan, "you should never ask for four years" of returns via 4506.

"I would definitely say no if I were [a borrower] in that position," he said.

The upshot here: IRS' Don Roberts warns mortgage borrowers confronted with Form 4506 to "read it carefully." If line 5 is blank, be aware of the potential Pandora's box that opens. The same goes for the date line left blank.

If you don't want your tax returns to be floating around, simply refuse to go along with 11th-hour demands that you sign a 4506 covering years unrelated to your loan application.

Don't be afraid to walk out. There are plenty of other loans, and lots of other lenders.

Distributed by the Washington Post Writers Group.

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