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Wed, 10/31/2012

The Internal Revenue Service doesn't typically leave people in a thankful mood, but proponents of electronic mortgages should feel downright cheery over a new IRS rule that goes into effect in a little more than a month.

On January 7, 2013, the IRS will begin accepting electronically-signed 4506-T and 4506-EZ documents, or the income verification forms that are part of the processing of almost every mortgage and loan modification. It's a subtle adjustment that doesn't endorse any specific technology, yet it will have a major impact on the quest to remove paper and time from the mortgage process, since the use of electronic signatures for income verification can also lead to greater use of digital signatures in other parts of mortgage lending.

"This will be a real boon for lenders and for consumers, this has been a real bottleneck," says Christine Pratt, a senior analyst at Aite Group.

IRS forms 4506-EZ and 4506-T are requests for transcripts of tax returns, and are used to vet a borrower's ability to pay off a loan, as well as to protect from fraud. The transcripts verify the income information that has already been submitted to the lender. The forms cover any type of loan, but are normally used for mortgages. Through its Income Verification Express Service (IVES) the IRS charges $2 per transcript, and lenders often hire third-party vendors to handle the IVES income verification process.

"Income verification has always caused considerable pain in the effort to remove manual steps from the mortgage process," Pratt says. "This is certainly a very strong step in the direction of making electronic processing more of a reality."

The new IRS rule won't necessarily lead to the development of new technology, but will allow existing electronic signature technology to be used to execute income verification, and open the door to broader use of electronic signatures to transmit documents between borrowers and lenders, which can speed processing since the parties don't have to be in the same location to sign documents. Mortgage lenders and technology companies had lobbied the IRS to allow electronic signatures for income verification, since the inability to do so has caused some lenders to avoid using electronic signatures for any mortgage documents.

Broader use of electronic images can save closing time, and may also improve accuracy, since all parties typically will access the documents from the same centralized location online for viewing and for electronic signatures. The providers of the technology that enables paperless processing obviously smell a renewed opportunity to spread the use of digital documents.

"We've been talking about paperless mortgages ever since Fannie Mae introduced SmartDocs [and industry standard for electronic mortgage documents] a number of years ago," says Tim Anderson, director of electronic servicers at DocMagic, a loan document compliance company, who adds there have always been lingering legal documents that required paper signatures. "With this new rule, for the first time, for all initial disclosures, virtually every one of the associated documents can be paperless. [Income verification] was one of the critical documents that was still paper-based."

Another company, eSignSystems, a division of Wave Systems (WAVX) and a participant in the Mortgage Bankers Association's IRS-related workgroup, said it was prepping its clients to add digital signature technology to the income verification request documents, a migration that will also further automate existing digital signature processes.

Anderson says fully paperless processing still isn't at the finish line. Many closing documents must still be signed on paper. "Right now the FHA does not accept electronically signed closing documents. But now that the IRS has stepped up, there shouldn't be an excuse for the FHA to not get on board with electronic signatures soon."

As featured on American Banker, November 2012.