Government shutdown obstructs credit card applications

Lack of IRS income verification throws wrench into loan processing

The 9-day-old  government shutdown has put a hitch in the U.S. credit system by closing the Internal Revenue Service's income verification office, and some credit card applications are among the loans getting caught in the bottleneck.

Card issuers don't routinely check applicants' incomes, as mortgage lenders do, but a slice of card applications is being held up, experts said, and the effects will deepen the longer the outage continues.

The shutdown "will certainly have an effect," said Daniel Kreis, director of portfolio management for consultant First Annapolis in Maryland. "Some organizations rely on (IRS verification) ... if there's a question mark about income."

Government shutdown obstructs credit applications

Under the Credit CARD Act of 2009, card issuers are required to consider an applicant's ability to pay before extending credit or increasing credit limits. Although card lenders can use statistical models to evaluate the income claimed by applicants, IRS data is the gold standard when it comes to double-checking income.

"If someone's response isn't consistent -- say, they're a construction worker making $100,000 a year -- they'll flag it and say 'this doesn't look right,'" Kreis said.

The IRS Income Verification Express Service program supplies verified copies of W-2 forms, tax returns or other documents, called "tax transcripts." Individuals use form 4506-T to give their lender access to their IRS information. But IRS offices have been closed since the federal fiscal year began Oct. 1 without renewed spending authority for nonessential government functions.

Experts estimate that only about 2.5 percent to 5 percent of the credit applications affected by the shutdown are credit card loans; but that is bound to affect thousands of applicants in a U.S. market with more than 175 million credit card users.

At credit bureau Equifax, which processes IRS income verification requests for lenders, a backlog is building up at the rate of many thousands of forms per day, said Michael Kuentz, senior vice president of the workforce solutions business. He estimated that 95 percent of the volume is linked to mortgages, with auto loans and credit cards splitting the remaining 5 percent.

"In the card space, some different card issuers are (using IRS verification) for credit line increases, or a particular type of card they're trying to market," he said. However,  he added, card issuers can switch to other verification sources, such as the employer-provided data available through Equifax's The Work Number service.

For mortgages, it's a different story. The mortgage packaging entities Fannie Mae and Freddie Mac require IRS income verification for loans they buy.

"Lenders processing loans that need tax transcripts, Social Security number verification, or FHA home loans face longer delays," Mortgage Bankers Association President David Stevens said in a statement calling for an end to the government shutdown.

Even for home loans, however, there are signs of flexibility, given the shutdown of IRS operations.

"Fannie and Freddie are working with lenders -- hopefully to allow those loans to funnel through," Kuentz said. Lenders may document loans using tax returns supplied by the borrower, which can be verified when the IRS reopens.

Among large credit card issuers, Capital One said it doesn't use IRS income verification, and Bank of America said its card lending process is unaffected. Chase Bank wouldn't comment, and others did not immediately respond.

Regions Bank, a super-regional lender based in Birmingham, Ala., is seeing a minimal hit on its credit card business, spokeswoman Evelyn Mitchell said, and is working to keep mortgage loans on track.

Regions is collecting mortgage applicants' authorization forms to release IRS figures for future use. Meanwhile, the bank continues to process mortgage applications, she said, as long as there are other sources of income verification and no anomalies. "We want to work with our customers," she said, "and we want them to apply for mortgages."   

See related: Card issuers ready to check cardholder income, assetsGuide to the Credit CARD Act of 2009

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Updated: 02-16-2019