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#20160 - 06/10/02 03:43 PM Requiring Tax Returns
Anonymous
Unregistered

Can we decline a borrower an mortgage loan if they have not filed tax returns? The applicant meets required underwriting standards but diclosed to use that they have not filed tax returns in the last two years because "they are not required when you are receiving a refund".
I understand that this declination does not violate any of the prohibited basis of Reg B. My concern is that we originate and close loans without the full tax returns all the time. This is more a concern of the underwriter.
Note: We did not require the tax returns, until the borrower disclosed to us that they have not filed in two years.

Does this put us in a risk position for fair lending violations considering that we do not always require a borrower to supply tax returns?

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#20161 - 06/10/02 05:21 PM Re: Requiring Tax Returns
SJB Offline
Diamond Poster
SJB
Joined: Jun 2002
Posts: 1,210
California
Did these applicants just waive their refund and give it to the IRS? I think you have to file a return to get your refund. Something here just doesn't pass the sniff test.

As far as Reg B, unless you are waiving or requiring tax returns (intentially or otherwise) on a prohibited basis it is not a problem. Lack of consistency is the biggest cause of Reg B problems so you should determine why this inconsistency exists and if there is a logical explanation and no disparate impact on minority applicants, you should be OK. Rather than go through all that analysis, I think you would be better off enforcing a consistent policy.
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#20162 - 06/10/02 07:27 PM Re: Requiring Tax Returns
David Dickinson Offline
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David Dickinson
Joined: Nov 2000
Posts: 18,765
Central City, NE
You asked "Can we decline a borrower an mortgage loan if they have not filed tax returns?" You can deny anyone for any reason. Would you make a loan to a known drug dealer, even if all of their underwriting information passes your tests? I hope not.

I don't buy "they are not required when you are receiving a refund". If I have an income, I must file a tax return (with some exceptions).

You also asked "Does this put us in a risk position for fair lending violations considering that we do not always require a borrower to supply tax returns?"
It shouldn't. This is not a fair lending issue as long as your decision to deny is based on the information you posted, not because of their race, sex, age, etc.
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http://www.bankerscompliance.com

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#20163 - 06/10/02 10:04 PM Re: Requiring Tax Returns
Princess Romeo Offline

Power Poster
Princess Romeo
Joined: Jun 2001
Posts: 8,272
Where the heart is
One thing to consider is that an examiner will review decline reasons against your loan policy. So, if you don't have something in your loan policy addressing this issue, consider adding it to policy now.

Then, if the same situation comes up at a later date, you already have in policy how to handle it. And when the examiner asks if your policy supports the decline reason, you can say "Yes."

Chances are, if this is something that would cause you to want to decline a loan now, it will cause you to want to decline a loan six months from now.

I know that we have had to amend our policy now and again because it seems that people come up with new and inventive ways to be "flaky."

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CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

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#20164 - 06/11/02 04:37 PM Re: Requiring Tax Returns
redsfan Offline
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redsfan
Joined: Dec 2000
Posts: 3,455
The Pennant Race
While I agree with Bonnie that your reasons for decline should be generally supported by your loan policy, your policy cannot cover every eventuality. This situation is so squirrely that I don't think I would amend my policy just to incorporate it. I would document the discussions with the borrowers in the file and decline them for failure to provide requested documentation and potential unknown tax liability.

In this instance, your applicant has disclosed that their credit capacity may be impaired due to potential tax liabilities. In fact, they may have disclosed to you that they have committed illegal acts by failing to file required tax returns.

The Internal Revenue Code requires all individuals with income in excess of a certain amount to file income tax returns. Just because they may have overpaid does not relieve them from that responsibility. Taxpayers who fail to file are subject to penalties.

The applicant cannot be assured that they have no tax liability for the years they have not filed until the IRS has received their returns and had adequate opportunity to assess whether or not they are accurate and correct.

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