The Internal Revenue Service (IRS) has recently implemented significant changes to the process of ordering tax transcripts and records, encouraging lenders to move from a manual ordering process to submissions that are Optical Character Recognition (OCR) compliant. As part of this modernization, the IRS has also introduced clean form requirements for the IRS Form 4506-C.

While this transition is expected to enhance efficiency, it’s essential for lenders to adapt their internal procedures for accurately collecting information on this form to prevent a) avoidable errors, b) subsequent rejection of transcript orders, and c) duplicate orders. Lenders must adapt their approach so that they remain in compliance as they submit IRS transcript requests and work alongside borrowers to ensure accurate tax return transcript information.

Top 4 Mistakes On IRS Transcript Request Forms

To ensure a smooth process and avoid rejection using the changed 4506-C, lenders must avoid the following prevalent errors when submitting this important request for an IRS transcript.

Below are some of the most common mistakes that cause form rejection.

1. Not using the updated form

The IRS updated their previous transcript form, the 4506-T, to the 4506-C at the end of 2022. Lenders are now required to use this new form, so ensure all agents have access to the October 2022 version of the form and use it exclusively for requests.

Vendors like DocMagic take care of this issue for you. We ensure you receive the right version of the necessary form based on updates from the IRS, making sure to follow updates as they occur and react accordingly.

2. Making simple errors

Unfortunately, small mistakes in filling out the form itself can result in rejection of your IRS transcript request. Among others, we’ve seen sections 5a and 5d missed or filled out incorrectly; various checkboxes left unchecked; and strikethroughs, circles and arrows used when they’re not allowed anywhere on the form (even if the borrower initials them to approve their use).

3. Using the incorrect address

It’s vital to double-check the borrower’s current address(es)—or, more accurately, their addresses listed in the loan file—in order to avoid rejection of your 4506-C. Check your records to ensure the addresses listed in the loan match this form perfectly.

4. Missing signatory checks or filling them out incorrectly

Last, always make sure the attestation box is checked when filling out this form. In addition, you must check the box that says “Signatory confirms document was electronically signed” if the form was electronically signed at any point.

Why The IRS Transcript Form 4506-C Is Important

It’s usually mandatory for lenders to have each borrower complete and sign a separate IRS Form 4506-C at or before closing, assuming their income is used to qualify for the loan (regardless of the income source). The only exception is when the borrower’s income has been validated by the Automated Underwriting System (AUS).

Both Fannie Mae and Freddie Mac require lenders to submit the IRS Form 4506-C for all loans reviewed under their post-closing quality control plan, except when transcripts are obtained during underwriting or when the borrower's income is validated by the AUS. Lenders should also be aware of the need for reverification of the borrower’s income and employment information.

Lenders should review and update their processes to incorporate thorough checks for errors on the IRS transcript Form 4506-C as part of their approval process. Staying vigilant and adhering to the revised requirements will help prevent transcript order rejections and ensure a compliant lending process.

To get more updates, contact us about our advanced compliance newsletter—the Compliance Edge.

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The U.S. Treasury and the Federal Housing Finance Agency (“FHFA”) recently announced the suspension of certain provisions of the Preferred Stock Purchase Agreements (“PSPAs”) which govern the conservatorship of Fannie Mae and Freddie Mac (the “GSEs”). The provisions, which went into effect on Jan. 14, 2021 under the outgoing former FHFA Acting Director, Mark Calabria, placed several restrictions on the GSEs’ activities.

One of the suspended restrictions is a 7% volume cap on the total acquisition of single-family mortgages secured by second homes or investment properties that includes a 52-week look-back period. In response to the suspension, Freddie Mac retired sections 4201.15 and 4501.16 of the Freddie Mac Single-Family Seller/Servicer Guide that limited its acquisition of single-family mortgages with these property types. 

Multifamily lending volume caps were also removed along with restrictions on the use of cash windows by lenders (loans acquired for cash consideration) and loans with multiple risk factors.  

Expected to last for at least one year, the suspension will provide “FHFA time to review the extent to which these requirements are redundant or inconsistent with existing FHFA standards, policies and directives that mandate sustainable lender standards,” said FHFA Acting Director Sandra L. Thompson. FHFA plans to consult with the U.S. Treasury regarding the review of the PSPA requirements and on any recommended revisions.

The suspension of the provisions does not affect the GSEs’ ability to retain all their earnings under the FHFA’s Enterprise Regulator Capital Framework Rule finalized in November 2020. However, the FHFA’s recent announcement states that it will be reviewing the GSE’s Regulatory Capital Framework and “expects to announce further action in the near future.”

Related Content:

• CFPB publishes analysis of consumer complaints (10/13/2021)
• FHFA to eliminate the adverse market refinance fee (8/4/2021)
• FHFA director replaced following Supreme Court decision (7/6/2021)

On July 7, 2021, Fannie Mae and Freddie Mac (the GSEs) announced changes to all uniform instruments, except those being retired — including notes, riders, security instruments, addenda and special-purpose documents.

Fannie Mae's and Freddie Mac's websites will continue to provide both the current versions of the uniform instruments and the updated versions, which have a July 2021 footer date. The announcements provide that the updated uniform instruments may be used now but will only be mandatory for loans with a note date on or after the effective date of Jan. 1, 2023. An 18-month transition period was provided to allow the industry time to prepare for the transition.

The updated uniform instruments cannot be used in any combination with earlier versions. For instance, if a July 2021 security instrument is used, the applicable July 2021 note must also be used.

Fannie Mae’s Selling Guide Update (SEL-2021-06) states that the changes to the uniform instruments were made to “enhance clarity and usability.” Fannie Mae has posted the updated versions of the documents and a Uniform Instrument Update Fact Sheet to their web page. The fact sheet states that the updates are the result of a comprehensive review in collaboration with Freddie Mac.  

Freddie Mac has a new 2021 Uniform Instruments web page which provides a list of affected documents and authorized changes. The Single-Family Seller/Servicer Guide also includes the updates in Exhibit 4A and 5A. The prior Exhibits 4 and 5 will be retired after the new effective date.

DocMagic is currently reviewing changes to the new uniform instruments and will provide additional information regarding a timeline for implementation in a future update.

Related Content:

• FHFA to eliminate the adverse market refinance fee (8/4/2021)
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• FHFA director replaced following Supreme Court decision (7/6/2021)

The Federal Housing Finance Agency (FHFA) announced that the Adverse Market Refinance Fee of 50 basis points (0.500%) will be eliminated for loans delivered to Fannie Mae and Freddie Mac (the GSEs), effective Aug. 1, 2021.

As previously reported by DocMagic, the Adverse Market Refinance Fee was announced in August 2020 and implemented by the GSEs for most refinance mortgages above $125,000 in December 2020. The GSEs advised at the time that the new fee was necessary to manage risks and forecasted losses that would result from the COVID-19 pandemic.  

However, the pandemic did not bring about the losses that were expected as the GSEs have continued to post gains throughout the pandemic. Also, in April 2021, the GSEs reported that the COVID-19 forbearance rate was down to 2%, from a high of approximately 5% in mid-2020. The FHFA announcement states that the “COVID-19 policies reduced the impact of the pandemic and were effective enough to warrant an early conclusion of the Adverse Market Refinance Fee.”

FHFA’s recently appointed Acting Director, Sandra L. Thompson, stated that “the COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money.”

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• CFPB report finds several mortgage-related violations in 2020 (7/20/2021)
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On June 23, 2021, the U.S. Supreme Court issued a 7-2 decision in Collins v. Yellen, which held that the structure of the Federal Housing Finance Agency (FHFA) was unconstitutional in that Congress overstepped its authority by placing a single director in charge of the agency that could only be removed for cause. 

Under the Housing and Economic Recovery Act of 2008, Congress placed Fannie Mae and Freddie Mac into conservatorship overseen by a new federal agency, the FHFA. The agency was created with a single director, who is appointed by the president and confirmed by the Senate to serve a five-year term. Once appointed, the head of the agency could only be removed by a president for cause, which the decision states is not the same as “at will.” The Supreme Court ruled that the restriction on the president’s ability to remove the agency director violates the Constitution’s basic principle of separation of powers. 

Writing for the majority, Justice Samuel Alito states that the agency’s leadership structure “clashes with constitutional structure” by “concentrating power in a unilateral actor insulated from Presidential control.” Justice Alito also referred to the Supreme Court decision in the last term which struck down similar restrictions on the president’s ability to remove the head of the Consumer Financial Protection Bureau (CFPB), stating that “the Constitution prohibits even ‘modest restrictions’ on the President’s power to remove the head of an agency with a single top officer.”

The Supreme Court decision also ruled against a group of shareholders on a statutory claim that the FHFA exceeded its authority by agreeing to a new variable dividend formula referred to as the “net worth sweep.” The court is allowing the shareholders to go back to the lower courts to agree whether the unconstitutional restriction on removal of the director led to compensable harm.

Following the decision, the White House released a statement advising that the Biden administration would replace FHFA Director Mark Calabria, a Trump appointee, with a director “who reflects the Administration’s values.” Calabria announced his resignation, and within hours, Sandra L. Thompson was appointed as Acting Director, effective immediately. Thompson has been at the FHFA since 2013, serving as the Deputy Director of the Division of Housing Mission Goals, and overseeing housing and regulatory policy, capital policy, financial analysis, and fair lending activities. Prior to the FHFA, Thompson worked for the Federal Deposit Insurance Corporation for 23 years in various leadership roles. In a statement released by the FHFA, Thompson said, “There is a widespread lack of affordable housing and access to credit, especially in communities of color. It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing.”

DocMagic will continue to monitor agency announcements for any further developments.

Related Content:

• GSE guidance for revised General QM definition (6/7/2021)
• GSEs announce plans to limit purchases to loans meeting revised General QM rule (5/11/2021)
• CFPB rescinds 7 pandemic-related policy statements (4/7/2021)

By a large margin, PROGRESS in Lending magazine’s 90,000+ readers say that eClosing technology is in high demand. 

The magazine ran a reader survey asking whether, in their experience, demand for eClosing technology was poor, average, or huge. The response: 75% said demand was huge, 25% said it was average, and 0% said poor.

“Whereas in previous years eClosings were a ‘nice to have,’ the events of 2020 made them a ‘need to have,’” Michael Chaney, DocMagic’s National Sales Director, told PROGRESS in Lending. 

“Although most lenders were aware of the benefits that borrowers could gain from automating and removing paper from the closing process, it simply wasn’t enough of a driver to create widespread adoption. However, the need for social distancing, stay-at-home requirements, and safety as a result of the pandemic ended up catapulting eClosing technology to the top of lenders’ must-have technologies pretty much overnight.”

There is increasing evidence of the industry’s growing embrace of eClosings. In January, Ginnie Mae — which announced last year that it would start accepting eNotes as digital collateral — issued its first mortgage-backed security (MBS) backed by digital pools consisting entirely of eNotes, with a total value of approximately $24 million. Ginnie Mae says it expects to see even more growth in the volume of eNotes securitized under its MBS Program in 2021.

“The issuance of securities backed by digital pools validates the viability of the securitization model outlined in our Digital Collateral Program and sets the foundation for broader and more rapid adoption of digital mortgages,” said Angel Hernandez, Ginnie Mae’s Director of Policy and Program Development, in a statement. “This event is the culmination of efforts by numerous internal and external stakeholders in our digital initiatives, including issuers, document custodians, warehouse lenders, technology providers, and other industry partners.”

Vendors have responded to growing demand by enhancing their offerings.

“Whether a lender takes a phased approach to implementing eClosing technologies with various hybrid models or they elect to establish a 100% paperless eClosing workflow complete with RON technology, eNotes, and eVaults, it is nonetheless refreshing to see the industry as a whole working to create a better mortgage experience for borrowers,” Chaney said.

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(2/27/21 update: The new URLA: The No. 1 thing to do ASAP to ensure you're ready)

Starting March 1, 2021, all lenders who intend to sell closed residential mortgage loans to Fannie Mae or Freddie Mac will be required to use the new Uniform Residential Loan Application (URLA), the standard form that borrowers use to apply for a mortgage loan.

It’s a significant change for the mortgage industry; in fact, when the GSEs first announced the news in August 2016, it was the first substantial change to the form in 20 years.

How a new lender found success amid the pandemic: Download the MortgageCountry case study

The goal is to have a more consumer-friendly loan application experience while also moving the lending industry closer to digitizing the loan origination process.

Here are some of the key things you should know:

Biggest changes on the form

The redesigned URLA will replace Freddie Mac Form 65 and Fannie Mae Form 1003 and will require lenders to request more borrower information than ever before. It will have 94 new data points for a total of 236 data fields—making it 129% bigger than the previous form.

At the same time, the updated form is removing obsolete fields, such as requiring applicants to list their car’s make and model.

The redesigned URLA will also use clearer language and have a new layout that makes the information easier for technology to ingest, supporting the move toward digitization.

Shifting timelines

The date by which all lenders would be required to use the redesigned URLA has been repeatedly postponed. When the GSEs first announced the change in 2016, the new URLA was slated to be available in January 2018, with no mandated use-by date announced.

The GSEs later announced the mandatory implementation date would be Feb. 1, 2020. Late last year, however, at the direction of the Federal Housing Finance Agency, the required implementation date got pushed back to Nov. 1, 2020.

But that plan also got upended, this time by the pandemic. In April, the GSEs pushed back the mandated implementation date to March 1, 2021.

In the meantime, limited production began on Aug. 1 and open production will begin Jan. 1, 2021. The current URLA will be retired on March 1, 2022.

For more details on the current implementation timeline, check out this update from our Compliance Edge newsletter.

What else lenders need to consider

With so many new data requirements, lenders should get ready now for the new URLA to avoid any disruption to their business. For a time, lenders may need to be prepared to support both the old and new URLA forms concurrently.

Lenders should start by ensuring their LOS will offer end-to-end support for the redesigned form. Other technological updates will also be necessary; for example, those using static web contact forms will likely need to update their technology stack. 

Lenders need to communicate with their investors about where they are in the transition process. If the investors don’t also standardize on the new MISMO format, it may be more difficult and expensive for lenders to sell loans.

Related Content:

• FHFA, other agencies announce extension of COVID-related policies (9/16/2020)
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• 5 key questions about ID validation during RON (8/12/2020)

On Aug. 26, the Federal Housing Finance Agency (FHFA) announced an extension of its policies providing for Fannie Mae and Freddie Mac (the GSEs) to continue to purchase loans that entered a COVID-related forbearance prior to purchase. The GSEs’ policies were set to expire Aug. 31, but the announcement extends the policies to Sept. 30.

The policy extensions also include processing flexibilities allowed as a result of the pandemic, such as alternative methods for documenting income and verifying employment. You can view the FHFA announcement at their website.

RON: The last mile in the eClosing marathon

Additionally, on Aug. 27, HUD and the GSEs announced an extension of their moratoriums on foreclosures until Dec. 31. These were previously set to also expire on Aug. 31. The extension of the GSE moratorium will “protect more than 28 million homeowners with an Enterprise-backed mortgage,” said FHFA Director Mark Calabria. The Department of Veterans Affairs announced a similar extension on Aug. 24.

In addition to the FHFA extension of processing flexibilities related to COVID, the USDA also recently announced an extension of “Temporary Exceptions in relation to COVID-19 pandemic” that include exceptions for appraisal and inspection requirements and verifications. The USDA also announced an extension of its moratorium on foreclosures similar to that of HUD and the GSEs. You can find coronavirus-related information on the USDA's website.

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eNotes are having a moment. Last month, Ginnie Mae formally kicked off its Digital Collateral Program to begin the process of accepting electronic promissory notes—or eNotes—and other digital loan documents as collateral.

A few weeks before that, on July 1, the Federal Home Loan Bank of Des Moines became the first of the 11-member FHLB system to announce it would accept residential mortgage eNotes as collateral. By mid-July, FHLB Dallas followed suit, while FHLB Chicago just announced two days ago that it was also on board.

On top of that, MERSCORP registered an all-time monthly high of 40,170 eNotes in July, while the number of eNotes registered in the first half of 2020 alone (just under 150,000) already outpaces the total registered in all of last year (127,358). It's clear that eNotes are the wave of the mortgage industry's future.

Compliance Alert: What lenders should know about Ginnie Mae's new program

With this move Ginnie Mae, a federal agency that guarantees bonds issued against pools of FHA and VA mortgages, follows in the footsteps of GSEs Fannie Mae and Freddie Mac, which have been accepting eNotes for a few years now and are to date the largest buyers of eNotes.

eNotes have been on an upward trajectory since early 2018, but this year the pandemic—due to social distancing mandates and a growing preference for closing loans remotely—has accelerated its adoption. Since July, eNote registrations have set a new monthly record in 10 of the last 12 months, MERSCORP has seen a 1,300% increase in companies starting the process to integrate their operations to eNotes, and 18 warehouse lenders are currently funding eNotes—up from one in 2015.

"It’s fair to say that 2020 has been the year of the eNote," said Chris Lewis, DocMagic's Director of Enterprise Solutions. "In my opinion, by the end of the year, any investor that doesn’t accept eNotes will be in the minority and will lose business opportunities as a result."

Related Content:

• Compliance Alert: GNMA Announces Launch of Digital Collateral Program
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• Improving the Loan Process With eNotes

Testing Information

The first big change with these forms is in the Uniform Loan Application Dataset, or ULAD, for short. This dataset is used to submit your application data to Fannie Mae and Freddie Mac. The GSEs mapped ULAD to MISMO version 3.4.  They used 3.4 because the GSEs would have to engage in extensive use of extensions to have used a lower version of MISMO. They also state that you must use ULAD to submit your data to Desktop Underwriter and your Loan Product Advisor if you're using the new, redesigned URLA. The two things need to go together. If you are interested in the data transmission of your application data to the GSE's automated underwriting systems, they did provide ULAD testing cases on their website, which you can find at fanniemae.com or freddiemac.com.

Changes to accommodate the new form will be enabled prior to the industry use date of July 1, 2019. If your account has access to DocMagic's staging environment, these changes are available for your review at this time. The application will be available during the update. You can activate the update by closing DocMagic Online and relaunching.

What do I need to do?

In order to generate the new forms, you must select "Use 2020 URLA" from the Tools > Options menu within DocMagic Online. If you do not select "Use 2020 URLA", DocMagic will continue to provide you with the existing URLA/Form 1003 until the mandatory date of February 1, 2020, at which time the new URLA form will be applied automatically.

How do I learn more?

The new URLA form introduces many changes in the way borrower information is captured and displayed, including bolstering certain areas of the application such as income verification, military service, assets and liabilities, homeowner counseling, and more in depth property information. For a complete overview of the new functionality we have prepared the following resource page and strongly encourage our DocMagic customers to become familiar with the new content and system changes. DocMagic URLA Resource Page