March 17, 2021
When a consumer comes to your bank requesting a loan, you need to determine their eligibility. You probably ask for some pay stubs and run a credit check. But, do you review their most recent tax filing? Here’s how a tax return can help your bank make a lending decision.
You may be surprised to know that there are no federal guidelines regarding paystubs. States can decide if employers must provide them and what information has to be included. To make matters worse, just over half of the states in the country offer any guidance to companies.
The lack of consistency means that paystubs are far from universal. As a lender, you can’t count on every stub to contain the information you need for a consumer’s file. You may have to spend time calling employers or using a verification agency to fill in a paystub’s gaps.
But, when you use a tax return to verify income, you get consistently reported data from consumer to consumer. You also get more financial information than you would from a paystub, such as a customer’s adjusted gross income (AGI). That means you won’t have to waste time chasing down other numbers. Besides, you can bet on the data’s accuracy because it’s been deemed valid by the Internal Revenue Service (IRS).
With clear and correct income information from their tax return and debt data from their credit report on hand, it’s easy to calculate the consumer’s true debt-to-income (DTI) ratio. Using their DTI, you can gauge whether or not they have sufficient resources to service additional debt. Plus, their AGI, often known as their net income, can help you determine how much money, if any, to loan them. Lending based on these metrics, you can be reasonably assured that the consumer will be able to afford the required payments.
Filing timely and accurate tax returns is part of responsibly managing one’s finances - just like maintaining a clean credit report. If a consumer has a red flag-free tax return history with no outstanding tax debt, it shows that they’re likely honest and on top of things - qualities you want to see in a customer. While filing tax returns by the annual deadline doesn’t mean that much on its own, it’s one more positive point for the consumer’s file.
Waiting for a consumer to submit their tax returns to you could delay the lending decision. ModernTax exists to expedite the process - and make it super simple for everyone involved. Using a sophisticated, secure application programming interface (API), ModernTax taps directly into the Internal Revenue Service (IRS) database. That means you can pull over 250 pieces of consumer data in about three minutes, giving you what you need to move the financial transaction forward quickly and efficiently.
As a banker, you’re tasked with making timely, accurate, and fair lending decisions. Reviewing a consumer’s tax return can help your institution make those determinations faster and based on more complete information. We encourage you to consider ModernTax so that you can seamlessly and affordably make tax return review part of your consumer verification process.