Ask the QC-XpertsQC-MACIRS Form 4506, CHARM booklet, early payment defaulted loans
As standard practice, our company has our borrowers sign the IRS
Form 4506. My underwriting department is now telling me that we
should have our borrowers sign a new 4506T form. When I look at the
two forms, they look the same to me and I really don't understand
what the big deal is with my underwriting department. Can you
explain the difference between the two?
Cheryl T., Lenexa, Kan.
Dear Cheryl T.:
The IRS did create another 4506 form, which they call the "4506T."
The form title is "Request for Transcript of Tax Return" versus the
title on the 4506, which is "Request for Copy of Tax Return." For
several years now, the mortgage industry has been using the 4506
forms to retrieve copies of borrowers tax returns, W-2s, 1099s or
tax return transcripts. There has always been a fee associated with
the execution of the 4506. As of Jan. 1, 2004, the IRS charges $39.
The new form 4506T, which became effective Jan. 1, 2004, is to be
used to request tax transcripts. There is no charge associated with
the execution of the 4506T form and the tax transcripts are
generally acceptable for quality control purposes. In this time of
watching the bottom line and cutting costs, you would serve your
company well to replace the 4506 with the 4506T form as requested
by your underwriting department.
Like everyone else, our company has started originating many more
adjustable-rate mortgages (ARM). We recently started receiving
letters from one of our investors asking for proof that we gave the
borrower the CHARM booklet. I thought this booklet was required on
purchase transactions only. Isn't this correct?
Cindy S., Oldsmar, Fla.
Dear Cindy S.:
We are sorry, but you are misinformed on this. The CHARM booklet is
required to be given to the borrower any time an application is
taken. It doesn't matter if the application is for a purchase or
refinance, if it is for an ARM loanor an ARM product is discussed
and/or a non-refundable fee is collected from the borroweryou are
required to deliver the CHARM booklet.
The Truth in Lending Act's Regulation Z, Section 226.19 (b)
states, "If the annual percentage rate may increase after
consummation in a transaction secured by the consumer's principal
dwelling with a term greater than one year, the following
disclosures must be provided at the time an application form is
provided, or before the consumer pays a non-refundable fee,
whichever is earlier." The regulation continues, "Disclosures may
be delivered or placed in the mail no later than three business
days following receipt of a consumer's application when the
application reaches the creditor by telephone, or through an
intermediary agent or broker." (Footnote 45b)
The disclosures Section 226.19(b) refers to the Consumer
Handbook on Adjustable-Rate Mortgages (CHARM) and the loan
program disclosure for the ARM product discussed with the
Our company has been experiencing a higher volume of early payment
defaulted loans over the past quarter. In your experience, what are
some of the loan characteristics we should look out for, in order
to reduce our early payment defaults?
Brett C., Valdosta, Ga.
Dear Brett C.:
We think we understand your question and what it is that you would
like to accomplish. We dont believe that your company is the only
one that is experiencing an increase in its early payment defaulted
loans. However, you may be able to mitigate some of your problems
by developing some of the standard quality control selection
processes that most mortgage companies are using. For example:
++Two- to four-unit properties;
++New construction or rehabilitation loans;
++Properties transferred within the past year;
++Substantial seller contributions;
++Non-occupying co-mortgagors or multiple mortgagors;
++Housing expense increasing by 1.5 times or more;
++Large earnest money deposits;
++Large increases in bank account balances;
++Sale of personal property for funds to close;
++Gifts or loans of funds to close;
++Self-employed borrowers; and
++Loans that are risk-assessed as "refers" by automated
This is not say that any one of these characteristics is a
definite reason for early payment defaults. However, out of the
early payment defaults we review, at least 80 percent have one or
more of these characteristics.
Nothing in this article constitutes legal advice or
represents how HUD may actually answer your questions. The answers
to these questions are based on QC-MAC's professional experience as
one of the country's leading quality control companies. If you have
a quality control or compliance question, contact QC-MAC toll free
at (888) HUD AUDIT or visit www.qcmac.com.