Standards Tighten on Loan Applications

[Jan 29, 2009.]

 

Mortgage loan defaults are at a record high.  As banks examine the causes of the defaults, fraud is again and again identified as a root cause.  In order to eliminate fraud, standards have become tighter on loan approvals. Income documentation and value assessments are at the forefront of the changes being made. 

What is an IRS Form 4506?

In order to verify the income stated on the borrower's application for a loan, the loan officer will collect documentation such as W-2s, pay stubs, and IRS 1040 tax returns.  In the past, that was where the verification process of the supplied paperwork stopped.  These days, with mortgage defaults being at record highs, the lender is going straight to the IRS to double check that the W-2s and tax returns are not fabricated. 

By signing the IRS Form 4506 at your loan application meeting or at the loan document signing, you are authorizing the bank access to your actual filed tax returns from IRS databases.  Any borrower who has given the bank fraudulent information about their income will be found out through this method. This will hopefully prevent foreclosures in the record numbers that we have recently seen.

Lenders cannot choose the appraiser

Another cause of loan defaults has been identified as inflated appraisals.  In the past, the lender was able to select an independent appraiser or even use an in-house appraiser to report an inflated value.  If the particular loan application needed a high value, the lender could choose an appraiser who would report the needed value by making adjustments and using specific comps.

New standards will take effect May 1, 2009 to ensure that appraisal reports are objective and that values are not being inflated.  Once enacted, lenders will order an appraisal from a central pooling agency that will randomly assign the appraisal to a license and qualified appraiser in the area of the property.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.