How Form 4506-T Keeps Fraud in Check

Lending and borrowing are the two sides of a seesaw that keeps the delicate balance in an economy. Any process that might impair this balance should be dealt with utmost care. People need to be patient and understand that certain procedures take time and that the 4506-T form is not just another lengthy document but a powerful tool to mitigate fraud. 4506-T is an important quality-control process that lenders use to verify an applicant’s income and to detect any apparent fraud.

To understand the importance of form 4506-T and why it was introduced, let’s rewind to the period when the housing market was flourishing. During the early 2000 boom, lenders slacked in their due diligence before approving loans, allowing home buyers to simply state their incomes instead of supporting it with tax return documents from the IRS. Some of the loans that were approved turned out to be based on dubiously inflated incomes, which enabled buyers to get larger loans. In fact, some of the loans approved were too large to be justified by the borrower’s actual income. The inability to repay mortgages, which arose from the fraudulent applications, resulted in a rapid increase in the number of foreclosures across the nation. And this in turn led to the downward spiral of the housing market.

This was when Fannie Mae introduced Form 4506-T, which lets lenders request the IRS for tax return transcripts for specific years. The form has been very effective ever since it has been introduced

The 4506-T is important for both lenders and borrowers and as it helps avoid fraudulent loans from getting passed; thus playing a big role in stabilizing and powering the economy.