Servicers may need to pay taxes on their income upfront under the proposed Senate tax bill, according to the Mortgage Bankers Association and the Consumer Mortgage Coalition.

A provision in the bill related to the tax deferral of certain income may have been intended to apply more to an issue in the credit card market, but as written, it applies more broadly to servicers as well, according to Anne Canfield, executive director of the Consumer Mortgage Coalition.

"For tax purposes it used to be that as you earned the income you'd pay taxes in each year the income is earned. This would accelerate and move forward all the income to year one for that asset," said Canfield, who is a partner at consultancy Michael Best Strategies in Washington, D.C.

Anne Canfield
Anne Canfield is a partner at consultancy Michael Best Strategies in Washington, D.C.

The provision in the bill that cleared the Senate Finance Committee last week "would have a very serious impact on nonbank mortgage servicers" and smaller servicers because of their relative lack of capital resources, she said.

And even larger bank mortgage servicers "would be severely impacted and the value of mortgage servicing rights would be impacted negatively," Canfield added.

To head off these concerns, "the industry has been working frantically to try to make sure that the provision is more focused and exempts mortgage servicers, or it's addressed in one way or another," she said, noting that the bill is on a fast track.

"This bill is going to be on the Senate floor on Thursday, that's the current plan," Canfield said.

The Mortgage Bankers Association is recommending that servicing concerns related to the bill's language could be addressed by including an exemption for income from mortgage servicing income or a modification that calls for "coordination with special rules for mortgage servicing and long-term contracts.

"Another viable alternative would be a statement included in the committee description of the provision that clearly states that the provision is not intended to eliminate the [deferred tax liability] treatment of MSR income under the tax laws, which could be followed by a technical amendment at a future date."

"This would not be the preferred alternative, but would be satisfactory as long as the statement is made a part of Treasury's consideration when drafting accompanying regulations for this provision," according to the MBA.

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