State bill could end tax break for large digital lenders

A proposed Washington State bill that aims to replenish lost wildfire prevention funding could end up removing a tax break currently benefiting large digital lenders. 

Rep. Shaun Scott, a Democrat from the Seattle area, introduced state house bill 2089 to redefine existing regulations and limit the types of companies that could take advantage of a favorable tax preference.

A current state regulation allows community banks to take a business- and occupation-related deduction for the interest received on mortgage loans. The rule was enacted in 2012 to stimulate residential lending, with "community banks" defined as "persons or an affiliate of such persons located in 10 or fewer states." 

Some lenders, though, used the opaqueness of the definition to their own benefit, the bill's sponsor alleged.

"Last summer I learned that big banks like Rocket Mortgage were taking advantage of a tax break intended for community banks," Scott wrote in a recent Facebook post. 

He introduced the bill to prevent such lenders "from hitchhiking on a tax preference meant for community financial institutions" and plans to "direct the resulting revenue to wildfire mitigation," Scott continued. 

A 2024 report from the Washington Department of Revenue found that 65% of savings earned from the tax break, representing $91.6 million, went to national digital lenders, or "placeless financial institutions," and not the smaller businesses the legislation intended to support, the bill said.

If passed, the legislation, which was named the Wildfire Alleviation Support Act, would change wording in existing rules, effectively eliminating the tax preference for "high-volume mortgage lenders" with annual origination volume of $10 billion or more. 

In total, lenders originated over 152,000 single-family mortgages in the Evergreen State in 2024, amounting to $61.5 billion, according to iEmergent's automated analysis of Home Mortgage Disclosure Act data. 

The proposal recently passed largely along party lines in the Democratic-led House of Representatives and currently sits in committee within the Senate.

No responses to inquiries from National Mortgage sent to various digital lenders, including Rocket, had been received prior to publication.   

Bill directs collected taxes to wildfire prevention

Introduction of SB2089 comes after the state reduced the originally intended funding amount of $125 million for wildfire response and mitigation planning by half for the two-year fiscal period beginning in 2025. Estimates of what could be collected from the bill to restore the lost funding range from $20 million to $30 million per year.

Scott pointed to the role of technology used in digital lending today as contributing to elevated wildfire risk in justification for the removal of tax breaks.     

"Big placeless banks conduct a greater share of their business via data centers that exacerbate warming trends that lead to forest fires. We shouldn't be subsidizing them," he wrote.

A total of 59,585 Washington State residential properties face moderate or higher wildfire risk, according to a 2025 report from Cotality. Reconstruction value of the homes would cost approximately $22.4 billion. 

The risk from natural disasters has also led to a notable acceleration of property insurance premiums across the country this decade, exacerbating affordability obstacles for homeowners. Along with rising premiums, some providers are exiting fire-prone Western markets altogether, driving the introduction of new laws that allow for the exclusion of certain types of coverage to keep insurance options available.