TVSG client launches revolutionary tool for credit-scoring industry
An innovative tax-return scoring system that could help some of the estimated 54 million Americans who are "unscorable" under traditional credit-scoring methods and the lenders who are trying to assist them has been developed by a Phoenix entrepreneur.
The 4506-T Deluxe Tax Return Score is the brainchild of EZ Doc Corporation, whose president, Randall Sorensen, has launched the software with help from a transdisciplinary program at ASU. Students in the ASU Technology Ventures Services Group, housed in the College of Law, consulted with Sorensen, under the tutelage of TVSG Director Eric Menkhus, a Clinical Professor of Law.
According to the U.S. Public Interest Research Group, nearly 80 percent of credit reports have errors. Sorensen's product is an unconventional alternative that performs 37 diagnostic tests on an individual's tax return, including identifying key negative consumer behaviors which then enable the model to more accurately predict the taxpayer's creditworthiness. Using a series of mathematical algorithms, the system compares the tax return with national statistics compiled from 143 million tax returns, then converts the data into a tax score.
Results, available within 24 hours, are in the form of a one-page summary analysis of the client's tax transcripts, which assigns both a numeric score and a letter grade, and provides specific suggestions for the lender or attorney to consider in completing their documentation.
"The major advantage of the tax score over a credit score is that it's based on income, and provides an indicator of an individual's financial strength beyond a traditional credit rating," said Sorensen, a CPA and forensic accounting expert. "The 4506-T Deluxe Tax Return Score provides additional means for lenders to score individuals, such as identifying all sources of a client's income, excess tax ratios and negative business income, as well as red-flagging potential identify theft and tax fraud."
Menkhus said the tool, when used in combination with credit scores, such as FICO, can help the elderly, immigrants and young people who find themselves in a variety of life's predicaments.
The system is more reliable because credit scores can be manipulated as the customer moves debt around his or her credit cards, Menkhus said. "But these are IRS filings, and if you amend them, you're at risk of perjury with the government," he added.
Sorensen came to ASU for help because he needed a neutral party to do the market research that would tell him whether to proceed or not. Students in the W.P. Carey School of Business performed a credibility audit, a validity of market and a focus study.. The TVSG research provided Sorensen's business with valuable third-party credibility.
"I knew we had a valuable product, but it was refreshing to find a non-biased entity that not only supported what I thought, but added several additional research and marketing avenues that I hadn't considered," he said.
The project was an opportunity for students to experience hands-on work that they often don't get in the classroom, and to be a part of product that could revolutionize the mortgage industry, Menkhus said.
"If this gets adopted as a standard or gets the market penetration that we're hoping it does, FICO scores and your ability to rely on them will be fundamentally changed within the next five to 10 years," he said. "We'll have people who made economic decisions to walk away from a house, but are still very creditworthy from a can-you-pay? standpoint, and would get dinged in the past, but otherwise should be able to pay."
Sorensen has submitted a proposal to the U.S. House Committee on Financial Services, asking that it allow the Federal Housing Administration to use the tax-scoring proposal, saying it offers a "common sense solution to a complex problem."
"Millions of Americans have been dramatically affected by the current mortgage industry," Sorensen said. "Lenders are now requiring more intense documentation and relying more and more on tax returns and other methods of determining an individual's creditworthiness. However, at the same time, FHA has shown an increased dependence on FICO scoring by requiring that an individual have a credit score of 590 to be considered for a 3.5 percent down payment. This is a dangerous stance."
The 4506-T Deluxe Tax Return Score has applications for both the legal and banking industries.
"Let's say you're an attorney and you have someone who comes to you with questions, and they don't have a FICO score, perhaps because they are young and haven't established credit, or they are immigrants and they don't use the banking system, and they don't have the money up front," Menkhus said. "This scoring system is almost like a personal cash flow analysis, and it allows the attorney to look more on a cash basis than FICO, and answer, 'Can you pay what you say you can pay?' "
Not only can Tax Return Score be used as a measure of financial strength, defense attorneys can find smoking guns by identifying undesirable behaviors, such as falsified returns, tax liabilities, excess gambling and other problems.
"I had a cleaning business owner testify in a deposition that her husband and she were putting $250,000 into their pockets every year," Sorensen said. "However, upon executing a 4506-T, I found that not only hadn't the plaintiffs reported their income, they hadn't even bothered filing. Needless to say, the case settled the next day.
Divorce and bankruptcy attorneys also can use the tool to uncover unreported income and undisclosed assets, he noted.
"As for lenders, they want to lend money - that's how they make money - but all these people had FICO scores that tanked when they walked away from their investment properties," Menkhus said. "If I were verifying their income - yeah, their FICO stinks, but they have $3,000 a month in discretionary income, and I'd want to approve them for a loan."
For more information, go to http://www.4506-tdeluxe.com/, or call Sorensen at (480) 752-0000. To listen to podcasts of Sorensen discussing the product, click here.
Janie Magruder, Jane.Magruder@asu.edu
Sandra Day O’Connor College of Law