Ask the QC-XpertsQC-MACIRS Form 4506, CHARM booklet, early payment defaulted loans Dear QC-MAC: 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. Dear QC-MAC: 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 borrower. Dear QC-MAC: 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 underwriting systems. 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.