Taxpayers will ease banks' costs in mortgage deal
WASHINGTON — Consumer advocates have complained that 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 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. Charles Grassley, R-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.
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 Group, 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 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 U.S. Public Interest Research Group, a consumer advocate.
Spokesmen for several of the banks in the mortgage settlement did not immediately respond to requests for comment. Bank of America and Citigroup declined to comment.
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 of the $550 million as a civil penalty. That meant it could not serve as a tax deduction for Goldman. The agency cited “the deterrent effect of the civil penalty.”
In that case, the SEC appeared to want to send a message at a time of public anger over Wall Street excess, said James Cox, a Duke University law professor.
and expert on the SEC. Cox noted that when they negotiate financial settlements, companies consider whether they can deduct some of their costs.
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. 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 payment would have been tax-deductible.
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, Sen. Sherrod Brown, D-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, U.S. 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 dated Thursday. “Breaking the law should not be a business expense.”
Unfair, too, in the eyes of Charles Wanless, a homeowner in the Florida Panhandle who is fighting his lender over foreclosure proceedings. As Wanless sees it, the government is giving help to banks that it refuses to give to troubled homeowners, who still must pay their full share of taxes.
“The government comes after us for every little bit of money we have,” Wanless said.
Bryan Hubbard, a spokesman for the comptroller's office, declined to comment on Brown's letter. Fed spokesmen could not immediately be reached for comment.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- PPG puts brand 1st in strategy to reach commercial paint market
- EPA ordered to ease limits on cross-border air pollution that involves Pennsylvania
- Travelers find Internet direct route to Priory’s spirited past in Pittsburgh’s North Side
- Pa. improves performance among competitive electric markets
- Muni bond funds stressed
- U.S. Steel posts quarterly loss, declares dividend
- Consol Energy, Range Resources report 2Q losses, plan deeper cuts
- Stocks end 5-day slide on strong Ford, UPS earnings
- Ambridge’s PittMoss takes off with help from TV show, Mt. Lebanon native Cuban
- U.S. Steel joins major producers in new dumping complaint
- Bayer sets sights beyond aspirin