Mortgage Lending Note: New Consent Requirements of the Taxpayer First Act of 2019

By: Jonathan Hightower & Nicholas J. Gallion

December 2019

The Taxpayer First Act of 2019 (the “Act”) was signed into law on July 1, 2019. The Act implements broad reform of IRS systems and seeks to modernize IRS technology platforms. While most of the attention on the Act has been focused on internal systems and management of the IRS, there is an important note in the Act for lenders, particularly mortgage lenders. The Act includes a new requirement aiming to limit the use and disclosure of borrowers’ tax return information. Section 2202 of the Act amends 26 U.S.C. § 6103(c) by prohibiting lenders from using borrower tax information for any purpose other than the express purpose for which the borrower grants consent and prohibits disclosure of the tax information to any other persons without the express consent of the borrower. Practically, lenders ordering borrower tax transcripts must (i) provide an “express purpose” for which tax return information will be used and (ii) receive “express permission” from borrowers before sharing their tax return information with other stakeholders. Section 2202 of the Act will be effective on December 28, 2019.

For lenders, these new rules mean that simply having a signed IRS form 4506-T from a borrower will no longer be legally sufficient. In order to comply with the new rules, lenders must first receive consent from the borrower regarding the express purpose for which the borrower’s tax information will be used. Second, lenders must receive permission from the borrower prior to sharing their tax information with other parties. Even for lenders that obtain tax transcripts in connection with loans they intend to maintain in their portfolio, we recommend obtaining consent to share information to address future contingencies. Obtaining the required consents should be done at the outset of all mortgage loan originations.

To date, the IRS has not provided direction to the banking industry regarding how it will enforce these new requirements, and it has indicated that it has no plans to provide a standard form for obtaining the required consents. Certain organizations, however, have developed model language to assist lenders in meeting the requirements of the new consent rules. The Mortgage Industry Standards Maintenance Organization (“MISMO”) is one such organization, and Fannie Mae specifically cited its model disclosure in a November Selling and Servicing Notice. Use of this form requires no fee to use, although lenders are required to obtain a license before using the language. The language is drafted to require a borrower to provide consent one time that will last throughout the entire loan cycle.

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