Taxpayer First Act: Are You Compliant?

By: Greggory B. Oberg, Esq.

Last week lenders woke up to a new year, and a new IRS requirement. The Taxpayer First Act, which was passed into law in July and took effect on December 28, 2019, adds to the already lengthy and complex web of requirements to originate loans for secondary markets.

If you haven't heard of this law before, read on and get tips for discussing compliance with your team.

Why is this Happening?

Styled as a consumer protective statute, the Act tightens control over 4506-T tax transcripts issued by IRS to third parties; documents essential to the mortgage transaction but favored by ID thieves and fraudsters in recent years.

What the Act Requires

Briefly, the Act will require additional, explicit consent by the taxpayer (borrower) in a mortgage transaction before tax information can be shared with third parties.

Such third parties would include GSE and other private investors once the loan is sold. Where a consent is not received, the re-disclosure (or sharing via loan file) of tax information would be in violation of the law.

What are the Consequences?

Good question, but they're not good. At the very least, it would seem loans without documented consent will be ineligible for delivery to Fannie/Freddie. Both have commented on the issue, but not explicitly changed the respective Selling Guides as of this publication.

How to Comply

IRS and the GSEs gave us little help on the topic, but fortunately MISMO stepped in and developed some model language that can be used.

I understand, acknowledge, and agree that the Lender and Other Loan Participants can obtain, use and share tax return information for purposes of (i) providing an offer; (ii) originating, maintaining, managing, monitoring, servicing, selling, insuring, and securitizing a loan; (iii) marketing; or (iv) as otherwise permitted by applicable laws, including state and federal privacy and data security laws. The Lender includes the Lender’s affiliates, agents, service providers and any of aforementioned parties’ successors and assigns. The Other Loan Participants includes any actual or potential owners of a loan resulting from your loan application, or acquirers of any beneficial or other interest in the loan, any mortgage insurer, guarantor, any servicers or service providers for these parties and any of aforementioned parties’ successors and assigns.

(©2019 The Mortgage Industry Standards Maintenance Organization. All rights reserved)

Additional Concerns

Use of the MISMO language is probably a best practice, unless you have counsel internally that is comfortable drafting a specific statement. The MISMO language is representative of a concerted effort by industry to meet the requirements of the Act, but will not be perfect in every instance.

It also fails to include some of the technical aspects, like a signature line, headings for borrower/transaction identification and license disclosure, and other items that may or may not be required. In absence of any clear IRS or other federal guidance, we're left with a "best guess."

From there, systems integration/LOS needs should be evaluated. I know a guy (hey Lance, hope you're enjoying the blog this AM).

If you're NOT prepared to comply with the Act already, you are not alone. We've spoken to a handful of clients in the last week who are at various stages of implementation. Would love to hear from you on how you're addressing.