The Most Objectionable Of Documents

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By Benny L. Kass
Saturday, February 21, 2009

Q: Last week, I went to settlement on my first house. The settlement clerk at the title company had me sign a number of papers, most of which I did not understand. One was an Internal Revenue Service form that appeared to give carte blanche to the holder to access my income tax returns. When I questioned why I had to sign this form, I was told "the lender wants it." I was also told not to fill in the date after my signature.

Is it customary in real estate closings to require such a form? If so, why does the lender want it?

A: When I began practicing law, home buyers had to sign only three legal documents when they went to settlement: a promissory note, the deed of trust (the mortgage) and a settlement statement (now called a HUD-1).

Nowadays, every time there is a lawsuit involving mortgage lending or whenever a regulator issues a new rule, lenders add new forms. When buyers go to closing today, in addition to the note and deed of trust, here are just some of the other documents they have to sign: loan application, authorization to obtain a credit report, driver's license information, certificate that they will personally reside in the house, power of attorney to lender to correct typographical mistakes, proof that they are U.S. citizens, an affidavit that there are no liens or lawsuits pending against them, and an IRS form stating that they do not owe any back taxes and are not subject to withholding requirements.

In addition, lenders insist that borrowers sign IRS Form 4506, "Request for Copy of Tax Return." In my opinion, this is the most objectionable of the documents. You are giving a blank check to the holder of the document to have complete access to your federal income tax returns. It is an invitation to pry into what you thought were your private tax returns.

Lenders claim they need this form in case they discover irregularities, fraud or misrepresentations on the part of their borrowers. If shortly after settlement the borrower stops making the mortgage payments, the lender wants the right to investigate whether the borrower was telling the truth when he or she applied for the loan. Lenders say reviewing income tax returns will help.

As we all know, mortgage lenders rarely keep the loans they make in their own portfolio. They sell the loans in the secondary mortgage market so that they will have more money to make more loans. This means that any subsequent lender who holds your mortgage document wants the right to ask the IRS for copies of your tax returns. This also means that your Social Security number, which must be listed on Form 4506, can be found in a file drawer somewhere.

Why did your lender ask you not to date the form? According to the instructions that accompany Form 4506, the IRS advises that it will reject the request unless it is received within 60 days of the date the taxpayer signs it. Because the lender does not know when it might ask the IRS for a copy of your tax return, it wants you to leave the form undated. Presumably, the lender will fill in the date later.

But this is contrary to the clear instructions provided by the IRS on the top of the form:

"Do not sign this form unless all applicable lines have been completed. . . . Request may be rejected if the form is incomplete, illegible or any required line was blank at the time of signature."

A careful reading of the form, available on the Web at http://www.irs.gov, indicates that the holder can request returns from more than one tax year. Item seven provides room to list eight years and says "if you are requesting more than eight years or periods, you must attach another Form 4506."

In answer to your question: Yes, it is customary in the industry to require this form. And it is common to require it be left undated, no matter how open-ended that seems.

The bottom line is that if you want that mortgage loan, you have to comply with all the lender's requirements -- reasonable or not.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, www.kmklawyers.com.


© 2009 The Washington Post Company

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