AVOIDING GOVERNMENT-INSURED LOANS TO BORROWERS WITH DELINQUENT FEDERAL TAXES!
56,000 FHA insured mortgage originations to borrowers with delinquent federal tax debt. From HUD’s MRB webpage, “The Mortgagee Review Board (Board) is authorized to take administrative action against HUD/FHA approved lenders that are not in compliance with FHA approval and lending requirements. The cases before the Board involve lenders who inadvertently or knowingly and materially violate HUD/FHA program statutes, regulations and handbook requirements. These lenders are subject to administrative sanctions by the Board. For serious violations, the Board can withdraw a lender’s FHA approval to participate in FHA programs.
How does HUD require lenders to determine if an applicant has a federal debt? The 4000.1 addresses the issue of delinquent federal taxes, albeit in a relatively skimpy fashion under the heading “Delinquent Federal Tax Debt. 4000.1, pg.140 (11/18/20) II (A)(1)(12)(b) Mortgagees must check public records and credit information to verify that the Borrower is not presently delinquent on any Federal Debt and does not have a tax lien placed against their property for a debt owed to the federal government.”
There are inadequacies with the 4000.1 guidance on the tax debt. If a notice of federal tax lien is supposed to put the delinquent taxpayer in the limelight, that’s a hit or miss proposition. For starters, the CRA’s no longer report tax liens. And besides, the IRS no longer issues a Notice of Federal tax liens if the balance is under $10,000. The IRS reports that about 41% of delinquent taxpayers owe under $10,000. In those cases where the tax debt is more than $10,000, there is no guarantee that the IRS will effect a notice that is readily detectable by lenders or other stakeholders. Second, the absence of a federal tax lien may leave lenders improperly assuming the applicant has no federal tax debt or that an adequate determination of the applicant’s tax status has occurred. That is a faulty assumption.
56,000 FHA loans to applicants with delinquent federal taxes (the Journal was unable to discover the number of USDA and VA loans originated with borrowers delinquent with federal tax payments at application) is a problem. Not enough lenders have the procedural standards or specified solutions for determining if the applicant has a federal tax debt. FHA talks with the Department of the Treasury and IRS to engineer solutions to this problem have yet to produce an announced solution. Might the FHA integrate the CAIVRS with the US Treasury databases to provide lenders with real-time delinquent tax status? Presently unknown if and how this plays out.
A tightening of federal debt and mortgage origination laws would make promulgation and enforcement much simpler. Short of rule changes, and in light of the damning Inspector General’s assessment, HUD is likely to do something to mitigate the number of guaranteed mortgages to delinquent taxpayers.
Unfortunately for third-party originators, if and when the enhanced quality control goes live, the lender will likely gather the delinquent tax data during the underwriting or audit process. That is a nightmare scenario. As a result, an otherwise healthy loan application could face very late and unforeseen adverse actions or challenging underwriting conditions. How could originators avoid this situation?
The IRS 4506 form, in its various iterations, is well known to MLO’s. Currently, lenders may use the IRS 4506-C (formerly 4506-T) to obtain transcripts of tax returns or transcripts of the IRS taxpayer’s account through the IRS Income Verification Express Service (IVES). Currently, and primarily, lenders use Return Transcripts for quality control related to income data and income verification. The Account Transcript may identify delinquent taxes for the last three years.
At no cost to the filer, the IRS provides extensive information regarding tax filings (Return Transcripts) and outstanding tax obligations (Account Transcripts). Delinquent taxes and payment records should show up and allow for the account holder to download a transcript. At the least, lenders should audit the last three years’ account transcripts. Lenders must pay for transcripts.
Nothing is foolproof, but mitigating the threat risk could start with the Account Transcript. Taxpayers can set up a free online account with the IRS in minutes.
IRS Account Transcripts are not a panacea for mitigating loans to borrower’s delinquent on federal tax payments. Depending on the transcript and tax liability, the transcript may not reveal if the taxpayer is delinquent in the most recent tax year or is delinquent with regular tax payments such as quarterly estimates. The transcript won’t show delinquent taxes until the individual makes their filing or the IRS files a return on their behalf. But must it be all or nothing? No. Why not tackle the low-hanging fruit by getting Account Transcripts today? Try it for yourself. Go to the following IRS website, set up your account, and get your free Account Transcript. https://www.irs.gov/payments/view-your-tax-account
Mortgage Brokers and HMDA
Who will be the next compliance piñata?
The Regulation C reporting transaction threshold includes preapprovals not accepted or denied, applications withdrawn, applications closed for incompleteness, applications resulting in a counteroffer. If the lender reports – you don’t. If there is no lender for these originations, they are yours to report if you meet the loan volume threshold test (100 closed-end mortgage loans in each of the two preceding calendar years).
The answer to the reporting question depends on the policies and procedures the MLO’s follow. The short answer is, avoid overlapping and ambiguous preapproval and prequalification processes. For example, if your preapproval letters look like loan commitments, you get closer to the loan volume reporting threshold by listing granular loan conditions such as those enumerated in Regulation C (see LOSJ V1 I3). Once the creditor is involved in the credit decision, generally, the origination is theirs to report.
(To be a preapproval program as defined in § 1003.2(b)(2), the written commitment issued under the program must result from a comprehensive review of the creditworthiness of the applicant, including such verification of income, resources, and other matters as is typically done by the institution as part of its normal credit evaluation program.)
No credit decision by a lender, your probability of meeting the reporting threshold just went up. Suppose the applicant withdraws their loan application/preapproval before you transmit the loan to a lender? That moves you towards the reporting threshold. Preapprovals considered withdrawn due to incompleteness, closer to the threshold. Now, don’t panic; you must have at least 100 closed-end originations in each of the preceding two calendar years to trigger the reporting requirement. This loan volume threshold means you could have plenty of lead time to comply. Furthermore, the two consecutive years of 100 reportable originations are more than what many brokers will accumulate.
Regardless of its name, a program that satisfies the definition of a preapproval program in § 1003.2(b)(2) is a preapproval program for purposes of Regulation C. Conversely, a program that a financial institution describes as a “preapproval program” that does not satisfy the requirements of § 1003.2(b)(2) is not a preapproval program for purposes of Regulation C.
Should mortgage brokers be concerned about the HMDA reporting thresholds? For some brokers, reaching 100 reportable originations is a high probability. Keep in mind. It’s not what you think is correct, but what you’re doing or not doing might appear to an examiner and fit within the examiner’s rubric for compliance. Think in terms of unassailable records and consistent processes. That’s a good start.
Tip of the Week
Interviewing the Applicant
When dealing with borrowers and prospective borrowers, mortgage loan officers must sometimes ask some pretty challenging questions. For MLOs, hard conversations and sensitive topics are par for the course. But for most applicants, being poked and prodded for sensitive information is not par for their course – even when they expect it.
The prospect interview is an excellent forum to build rapport by demonstrating respect for the prospective applicant/applicant. Without question, the manner the MLO communicates with stakeholders might convey respect or disrespect. Whether your message of respect is received at the subliminal or cognitive level, the message that conveys respect is a powerful trust builder. Many everyday MLO tasks afford the opportunity to convey respect. Being an excellent listener is one of those tasks. In a perfect world where the applicant could trust that the MLO had their best interest at heart and the MLO was competent for the tasks at hand, trust is a lesser issue. If the MLO does their job, the applicants should not have to figure out what they need to know when getting a mortgage loan either. Leadership is also central in building rapport.
Keep in mind how the prospect comes to trust you. Some trust-building instances happen at the cognitive level, but a lot is happening at the subliminal level. For example, just because the prospect doesn’t say they are concerned about data security doesn’t mean it’s unimportant to them. However, the prospect may be uncomfortable broaching the concern. The MLO fails to address the matter, and the prospect goes with Rocket Mortgage. Why? Because “Rocket is a big company and my tax returns and bank statements are probably safer there.” Or just as likely, the applicant couldn’t say why they went to Rocket. When that happens, it could be a lack of trust at a subliminal level. Something the prospect can’t quite put their finger on. By the way, use the Reg P and ESIGN disclosures to discuss e-commerce data security more skillfully.
Some people have a lovely way of communicating, of asking questions. Of showing how much they care. Some, not so much. The good news, if you in the latter category, interpersonal, leadership, and communication skills are just as learnable as riding a bike. Here is an easy interviewing tip that is simple to implement. Try it on your next call. Pepper your conversation with common courtesies. “May I ask you some questions about your finances?” “Thank you for that information, Mr. Borrower,” “Can I ask you a question about the $15,000 deposit to your money market account on July 8th? “Would you please provide the documents listed on the document list by 1:00 PM this Thursday?
Why courtesy? Courtesy equals respect in the minds of most folks. Your stakeholders will interpret your courtesy as a sign of respect and your respect as a sign of your care for them. Try the permission courtesy. The permission courtesy demonstrates respect and at the same time empowers the prospect. Always look for new ways to improve your game. Building respect is essential in establishing rapport. Couple that with your enthusiasm, and they can’t help but like you. Good rapport, coupled with your understanding of the buying decision and topped with enthusiasm, is a potent force for winning business. What if you don’t understand the buying process? Uh-oh. No worries, stay tuned as the Tip of the Week unpacks the buying process in next week’s newsletter.
As Og Mandino said, “if I must be a slave to habits, let them be good habits.” Make the excellent habit of courtesy yours today.
2021 CE – Sneak Preview
Are you violating the SAFE Act, Regulation Z, and Title X (UDAAP 12 U.S.C. § 5536(a)(1)(A)) by the way you are leveraging unlicensed assistants? What if more than one licensed originator is involved in the loan manufacture, which NMLS ID goes on the required documents? Take a gander at our 2021 CE and learn all about it!