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Turns out foreclosure penalties are deductible
Question of the Day
Consumer advocates have complained that the nation’s mortgage lenders are getting off easy in a deal to settle charges that they wrongfully foreclosed on many homeowners after the collapse of the housing bubble.
Now it turns out the deal is even sweeter for the lenders than it appears: Taxpayers will subsidize 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 favored over the victims of their mortgage abuses.
“The government is abetting the behavior by not preventing the deduction,” said Sen. Chuck Grassley, Iowa Republican. “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.
Regulators reached agreement this week with Goldman Sachs and Morgan Stanley. Last week, the regulators settled with 10 other lenders: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, MetLife Bank, PNC Financial Services, Sovereign, SunTrust, U.S. Bank and Aurora. The settlements will help eliminate huge potential liabilities for the banks.
Many consumer advocates argued that regulators settled for too low a price by letting banks avoid full responsibility for wrongful foreclosures that victimized families.
The price the banks ultimately 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 U.S. Public Interest Research Group, a consumer advocate.
Spokesmen for several of the banks in the mortgage settlement didn’t immediately respond to requests for comment. Bank of America declined to comment.
In some rare cases, federal regulators reached financial settlements with companies that bar 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 for the sale of risky mortgage bonds before the financial crisis erupted.
Similarly, when BP agreed in November to plead guilty and pay a record $4.5 billion in the 2010 Gulf oil spill disaster, the Justice Department got BP to agree not to deduct the cost of the settlement against its U.S. taxes.
The total BP will pay includes about $1.3 billion in fines. But it also includes payments of $2.4 billion to the National Fish and Wildlife Foundation and $350 million to the National Academy of Sciences. Normally, those payments would have been tax-deductible.
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