Most lenders like to request tax return information from a borrower during the loan application process. It is the most reliable way to verify a borrower’s income. To allow this a borrower must fill out and sign a form known as IRS 4506-T: Request for Transcript of Tax Return. This is a manual process still today and one that can slow down the loan approval process.
Back in December 2013 Renaud Laplanche testified on Capitol Hill on small business lending. He was CEO of Lending Club back then and when a Congressman asked Laplanche a question as to how the government can best help he said to make IRS data more easily accessible to online lenders.
Fast forward four years and there appears to finally be some movement on this. Last week Congressman Patrick McHenry (R-NC) along with Senator Cory Booker (D-NJ) introduced a bill that would help the IRS move into the modern age and allow the automated retrieval of tax information through an API.
The IRS Data Verification Modernization Act of 2017 as it is called will require the IRS to create an API that will allow lenders to verify income in real time. Here is what Congressman McHenry had to say about this new bill:
Innovation in financial services has created more convenient and secure ways to meet the demands of American consumers. For financial innovation to succeed, however, Washington must update its information technology infrastructure to keep up with the growth and creativity in the private sector. Our federal government needs to do a better job in updating and securing its technology to make lending more accessible for all Americans. In light of the recent SEC and Equifax breaches, now is the time for Congress to take a leading role in creating a more safe and affordable process so that consumers are protected. This bill takes a small but important step in that direction by modernizing one of the most important processes in the financial system: income verification.
The Marketplace Lending Association (MLA) has been focused on this issue on Capitol Hill for over a year now. They have been involved with this bill since it was first conceived. Here is what Executive Director Nat Hoopes had to say:
A technology upgrade around the IRS 4506-T would clearly help both consumer and small business borrowers. Our industry has done outreach to both Republicans and Democrats on Capitol Hill and to the new Administration. There are now bipartisan bills being introduced in both the House and Senate, and just as important, no known opposition. That’s good progress, but the biggest challenge going forward is going to be keeping the focus on this issue until the upgrade is formally approved.
Now, assuming this bill becomes law, which is obviously not guaranteed, it will take some time before an API would be ready at the IRS. But we have to start somewhere and this bill is one small but significant step in modernizing access to our taxation records. There are already ways that lending platforms can verify income electronically – the platforms can pull data in through APIs at payroll processors like ADP and Paychex. But, of course, there are tens of millions of people that are not covered by traditional payroll processors. Most of these people who are looking for a loan do file a tax return.
In 2017, when so much information is available instantly, lending platforms should not have to wait two to eight days to hear back from the IRS to verify income. The fact that it takes congressional action to make this happen certainly tells us something about innovation at the IRS. But let’s not open that can of worms, let’s all get behind this bill and make sure the IRS can enter the modern age.
Why is this a good idea and why should taxpayers support this? I can think of a bunch of ways this goes bad. I also take this as an admission of defeat on all those magical “alternative credit models.” Very sad.
You should understand that lenders can RIGHT NOW get tax return data electronically. Before they do, there needs to be a paper signature on form 4506-T. Just name, SSN, and the signature. This is very low tech, and forgery is trivial RIGHT NOW.
A replacement scheme might have either better or worse authentication and other security aspects. Frankly I don’t see the present security situation as very good, so it isn’t hard to imagine that modernization might make it better.
Good to know. I’ve never looked at the existing system. What do you envision for a “secure” API? Something that takes the user-entered income number, encrypts it, and then polls API, getting either a “YES” or “NO” on whether it matches? (Do you have any better ideas for it?)
If implemented, at least I would expect security to be taken into account seriously this time. Nobody wants another Equifax, and nobody wants unscrupulous employees to check how much is any of us making behind our backs just because they have an API.