Mortgage lenders are asking growing numbers of home buyers and refinancers to waive their financial privacy rights at settlement. They are demanding that consumers leave undated a key IRS tax document -- Form 4506 -- and are thereby opening home buyers' tax returns to prying eyes for months or years in the future.

The IRS is aware of the problem, but says it has no current solution. That leaves the issue in the hands of consumers themselves, or the real estate and mortgage brokerage professionals who advise them.

Here's what's happening in a nutshell: Lenders increasingly are requiring borrowers to sign a waiver form that countermands the explicit instructions of Form 4506 that are designed to protect taxpayers' financial privacy. That IRS form, widely used by mortgage lenders to detect fraud, grants mortgage companies and others the right to request and receive as many as four years worth of a loan applicant's federal income tax returns.

Form 4506 instructs consumers to sign and date the form. The date is significant because 4506 only has a 60-day life once it's signed and dated. Lenders and others can only obtain consumers' tax returns within 60 days of the date on the form. The purpose, according to the IRS, is to limit the potential for privacy abuse.

But lenders are now using a preprinted lending industry form that extends the life of an IRS Form 4506 indefinitely. One version of the waiver used by Connecticut-based Mortgage Lenders Network USA, Inc., reads as follows: "Form 4506 Disclosure Statement: I/we (the borrowers) have signed the IRS Form 4506 without dates and I/we give Mortgage Lenders Network USA, Inc. its successors and assigns, permission to date and use it for auditing purposes."

The home buyers' printed names and signatures then follow, plus the date they agreed to waive their privacy rights. MLN's general counsel, Steve Olearcek, said the waiver is used because secondary market investors, such as Freddie Mac, want to be able to pull taxpayers' returns or tax transcripts months down the road, when they quality-check new loan acquisitions.

Freddie Mac spokesman Douglas Robinson said the corporation does not encourage lenders to deliver loan packages with undated 4506s. That "is not our policy, and never has been our policy," said Robinson.

However, some mortgage brokers and lenders say that secondary market investors -- including Freddie Mac -- do in fact prefer undated 4506 forms, even if they don't have a written policy requiring it. They say that some private mortgage insurers also urge lenders to obtain the form undated.

But what's the real issue here for home buyers? Simple: Do they want to give what amounts to an unrestricted fishing license to unknown persons to go rummaging around in their confidential federal tax filings, months or even years down the road? Do they want banks to use their IRS filings to market products and services to them, or even sell their private information to others?

Since the IRS acknowledges there are no enforcement controls over what ultimately happens to tax information provided via Form 4506, as many as four years of your returns could end up on the Internet, or get passed along to an unlimited number of snoops and sales hucksters. With your official income data files in hand, there is no end to the mischief that could be done with them.

All this simply because you -- or your real estate client -- needed a mortgage? Doesn't the IRS have ways to enforce its own instructions on its own forms? Oddly the IRS says it's got no authority to enforce rules on how its forms get used.

"The IRS certainly encourages everyone to use (Form 4506) as the instructions say they should be used," said Michelle Lamishaw, an IRS spokeswoman. "However, if people choose to enter into different kinds of relationships with their banks, that is their choice."

But what about when banks make signing the 4506 date-waiver form mandatory to close a mortgage? That doesn't sound like a voluntary sort of "relationship" that borrowers "choose" to have with their lenders. It sounds like an order.

The only corrective step, under the circumstances, seems to be for Realtors and mortgage brokers to alert their clients to the problem, and to guide them to lenders who play according to the federal rules.

The potential loss of four years worth of financial privacy should never be a mandatory feature of buying a home and getting a mortgage.

Published: March 22, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.