Unexpected Provision in the Senate Tax Bill Impacts Institutions With Mortgage Servicing Rights

As the Republican tax proposals continue to evolve through the House and Senate, one unexpected provision in the Senate bill released November 21, 2017, has come to light that may impact community banks, mortgage companies, and other financial institutions that service loans.

Section 13221 of the Senate tax bill requires that for accrual basis taxpayers, which would include most C Corporation banks and mortgage companies, any item of income that is recognized for financial statement purposes must also be recognized for tax purposes.

Under generally accepted accounting principles (GAAP), financial institutions are required to recognize servicing income and record a servicing asset at the time a loan is sold if servicing is retained.  However under current tax law, financial institutions generally are not required to pay tax on their servicing income until they receive the actual cash associated with the servicing arrangement.

Though not yet finalized if the provision in the Senate bill was approved, accrual basis financial institutions would be forced to recognize taxable income immediately when servicing assets are recorded creating a taxable event before the institutions have access to the cash flow associated with the servicing.  This could be particularly detrimental to institutions that are tight on liquidity and could force some institutions to sell their loans servicing released.

The Senate discussion on the tax proposals is moving quickly.  If your institution has significant mortgage servicing assets, please consider contacting your representatives regarding this important issue.

  • Financial Institutions Principal
  • CliftonLarsonAllen
  • Peoria, IL
  • 309-495-8842

Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.

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