Question: We recently went to settlement on our first home. The attorney conducting the process handed us a large pile of papers and asked us to sign them. One of them was a form which would authorize our lender to get our personal financial information from the IRS. We objected but were told that this was a lender requirement. Is this legal?

Answer: Unfortunately, yes.

The general rule of thumb when dealing with mortgage loans is: "If you want the loan, you have to comply with all of the lender's requirements."

You are referring to IRS Form 4506-T, entitled "Request for Transcript of Tax Return." The IRS will not provide any third party your personal financial or tax information unless you specifically authorize it in writing.

Why does the lender require that you sign this form and give it authorization to pry into your financial affairs with the IRS?

Most people are honest and will truthfully provide the lender with an accurate picture of their financial health. The lender must determine -- based on your past income and expenses -- whether you will be able to handle the monthly mortgage payments.

Accordingly, when you make a loan application, you are asked to provide your previous two years tax returns, as well as other documentation showing the source of your income. If you are employed, the lender will want to obtain a copy of the W-2 form which your employer must provide you at the end of each year. This form lists a number of items, including the salary you earned, and the income and other taxes which have been withheld.

If you currently have a mortgage, your lender must send you (on an annual basis) form 1098, which will tell you how much mortgage interest you paid in that year.

Based on all of the information which your lender obtains, a person called "the lender's underwriter" will make a decision as to whether you are eligible for the loan, and at what interest rate.

Let's assume that within a year from settlement, you start missing your mortgage payments. Now the lender is faced with a dilemma. Should it foreclose on the property or should it try to work with you to see if you will be able to catch up and get current on your loan over the course of time?

If the lender suspects that you may have mistakenly (or fraudulently) overstated your income, or understated your expenses (or both), the lender may want to double check with the IRS to determine if the documents you originally furnished the lender were, in fact, the same documents you gave to the IRS when you filed your income tax returns.

It is not pretty, but there are people who will falsify their financial statements in order to induce a lender to make the loan.

Without form 4506-T, the IRS will not give your lender any information.

But the IRS places two important caveats at the top of the form:

• Do not sign this form unless all applicable lines have been completed. Read the instructions on page 2, and

• Request may be rejected if the form is incomplete, illegible, or any required line was blank at the time of signature.

Indeed, the IRS repeats the caution in the middle of the form: "Caution, if a third party requires you to complete Form 4506-T, do not sign Form 4506-T if lines 6 and 9 are blank."

Line 6 is a "check the box." Do you want to allow your lender to get only a transcript of your income tax return, or other information, such as a history of your tax payments and penalty assessments?

If the lender also wants copies of your W-2s or 1098s, it will have you sign Form 4506, which is entitled "Request for Copy of Tax Return." And once again, the IRS repeats the cautions referenced above.

The IRS makes every reasonable effort to protect your privacy. But too many buyers are so anxious to complete the settlement and move into their new house -- as well as being somewhat intimidated by the large volume of settlement documents -- that they just sign away, without taking the time to read each legal document and have them carefully explained by the settlement company.

Whether you are a first time home buyer or an experienced "pro," you must take all the time necessary at the settlement table to make sure that you fully understand the legal and financial ramifications of all of the documents which you are asked to sign.