CHLA & CMLA Jointly Urge Senate to Amend Tax Bill to Address Concerns about Tax Treatment of MSRs

The Honorable Mitch McConnell                                                       The Honorable Charles Schumer
Majority Leader                                                                                      Minority Leader
United States Senate                                                                            United States Senate
Washington, DC 20510                                                                        Washington, DC 20510

November 29, 2017

Dear Leaders McConnell and Schumer:
The Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America (CMLA) are writing to express our concern about Section 13221 (Certain Special Rules for Taxable Year of Inclusion) of the tax bill recently approved by the Senate Finance Committee.
Under current law, accrual taxpayers pay taxes on income in the year that it is earned. However, the bill approved by the Committee would change the tax treatment of deferred income by requiring mortgage servicers to pay tax on the mortgage servicing right when it is created, not when cash is received as under current law. Such a change would cause significant harm to mortgage servicers, particularly many independent mortgage banks (IMBs) and other small lenders, because it would create a tax expense for servicers that must be paid up front in cash, even if the income is not yet received in cash. Many IMBs and other small lenders could no longer service mortgages, as they would not have had the cash to pay the tax when it came due. Consequently, they would need to either borrow money to make these payments, or more likely, decide to sell their loans with the servicing asset “released” to larger lenders, likely large bank servicers or hedge funds which would have the liquidity to handle this change. Furthermore, without the ability to accumulate a base of mortgage servicing rights assets on their balance sheets, IMBs and other small lenders that only originate loans would be subject to greater volatility, and have a more difficult time managing the ups and downs of the mortgage market.
While we do not believe that the Committee intended for mortgage servicers to be covered by this provision, such a change would lead to the consolidation of the mortgage servicing industry amongst the largest financial institutions by driving the small and mid-sized IMBs and other lenders out of the mortgage servicing market. In addition, consumers also could be harmed because the quality of mortgage servicing likely would diminish as small lenders exited the market and servicing rights became consolidated amongst the largest financial institutions.