Mortgage Lenders Get Tax Fix by Finding a Glitch in Senate Bill

(Bloomberg) -- The last-minute Republican additions to the Senate tax bill include one apparently designed to appease mortgage lenders who worried that the legislation could cost them billions of dollars and drive some small firms out of the business.

A measure offered by South Dakota Republican Mike Rounds was described as “exempting mortgage service rights from new income inclusion rule” in a list of items to be included in the “manager’s amendment” obtained by Bloomberg News. The list was confirmed by two people familiar with the plans, but plans remained fluid Friday afternoon.

Lenders say the rule -- if it didn’t exclude the servicing rights -- would have required them to pay taxes upfront on income that they might not receive for several years.

Bigger lenders said the change would have cost them billions of dollars, as the value of those income streams dropped. Smaller lenders, lacking the cash to withstand the change, said they might have to significantly change their operations.

Washington policy analysts earlier in the week said they had expected the fix and suspected the provision’s impact on mortgage lenders wasn’t realized by lawmakers until housing trade groups identified it last weekend.

A spokeswoman for Rounds didn’t immediately respond to an email seeking comment.

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