By Chris Gonzalez
On June 1, 2019, the Taxpayer First Act was passed into law to help improve and modernize the IRS.
Among other provisions, the new law impacts the ability of lenders and third parties to receive official tax information.
For financial institutions that sell loans on the secondary market or have external parties review underwriting in which tax returns and/or tax transcripts are obtained from the IRS, the act requires borrowers to consent to the sharing of their tax information effective December 28, 2019.
Section 2202 of the act states: “Persons designated by the taxpayer under this subsection to receive return information shall not use the information for any purpose other than the express purpose for which consent was granted and shall not disclose return information to any other person without the express permission of, or request by, the taxpayer.”
Prior to the change, only Form 4506-T was needed to disclose tax return information to third parties.
Now a separate disclosure consent must be executed by the borrower, and the responsibility falls on the lender to comply with these new requirements. The new disclosure consent requirements were enacted to protect taxpayers’ confidential information from being wrongfully disclosed.
Secondary market investors have referred financial institutions to the Mortgage Industry Standards Maintenance Organization (MISMO®) for model language for the consent.
In summary, if financial institutions obtain and use tax return and/or tax transcript information to underwrite a loan, they must obtain express consent from the borrower to share that information with third parties (e.g., FNMA, FHLMC, FHLB, external auditors).
Since any loan selected for post-closing quality control review requires evaluation of the tax transcript, not having consent from the borrower would prohibit the investor or any third-party auditor from reviewing the tax returns and/or tax transcripts during post-closing quality control.
As a result, the file would not comply with post-closing quality control requirements. For this reason, we strongly encourage you to implement procedures to have a signed borrower consent form in all loan files.