Consumer advocates have complained that US mortgage lenders are getting off easy in a deal to settle charges that they wrongfully foreclosed on many homeowners. Now it turns out the deal is even sweeter for the lenders than it appears: Taxpayers will subsidise them for the money they’re ponying up.
The Internal Revenue Service regards the lenders’ compensation to homeowners as a cost incurred in the course of doing business. Result: It’s fully tax-deductible.
Critics argue that big banks that were bailed out by taxpayers during the financial crisis are again being favoured over the victims of their mortgage abuses.
“The government is abetting the behavior by not preventing the deduction,” said Senator Charles Grassley (Republican-Iowa). “The taxpayers end up subsidizing the Wall Street banks after the headlines of a big-dollar settlement die down. That’s unfair to taxpayers.”
Under the deal, 12 mortgage lenders will pay more than $9 billion to compensate hundreds of thousands of people whose homes were seized improperly, a result of abuses such as “robo-signing.” That’s when banks automatically approved foreclosures without properly reviewing documents.
Many consumer advocates argued that regulators settled for too low a price by letting banks avoid full responsibility for wrongful foreclosures that victimized families. That price the banks will pay will be further eased by the tax-deductibility of their settlement costs.
Companies can deduct those costs against federal taxes as long as they are compensating private individuals to remedy a wrong. By contrast, a fine or other financial penalty is not tax-deductible.
Taxpayers “should not be subsidizing or in any way paying for these corporations’ wrongdoing,” said Phineas Baxandall, a senior tax and budget analyst at the US Public Interest Research Group, a consumer advocate.
In some rare cases, federal regulators that have reached financial settlements with companies have barred them from writing off any costs against their taxes, even if they might be legally entitled to do so. The Securities and Exchange Commission did so, for example, in 2010 in a $550 million settlement with Goldman. That case involved civil fraud charges over the sale of risky mortgage bonds before the financial crisis erupted.
It was the largest amount ever paid by a Wall Street bank in an SEC case. But the SEC defined nearly all the $550 million as a civil penalty. That meant it couldn’t serve as a tax deduction for Goldman. The agency cited “the deterrent effect of the civil penalty.”
The banks that just settled with regulators over their mortgage abuses are getting off lightly, Cox suggested. When the amount companies must pay in a settlement “is just the cost of doing business, there’s not very much deterrence value there,” he said.
At least one lawmaker, Senator Sherrod Brown (Democrat-Ohio) wants regulators to bar the tax deductibility of the lenders’ costs. Brown made his argument in a letter to Federal Reserve chairman Ben Bernanke, US comptroller of the currency Thomas Curry and other top regulators. The Fed and the comptroller’s office, a Treasury Department agency, negotiated the foreclosure abuse settlements with the banks.
“It is simply unfair for taxpayers to foot the bill for Wall Street’s wrongdoing,” Brown wrote in the letter. “Breaking the law should not be a business expense.”
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