Taxpayers will ease banks’ costs in mortgage deal

Consumer advocates said banks are getting off easy in settlements with the government over mortgage practices that led to improper foreclosures.

Mary Altaffer/Associated Press/File 2011

Consumer advocates said banks are getting off easy in settlements with the government over mortgage practices that led to improper foreclosures.

WASHINGTON — Consumer advocates say mortgage lenders are getting off easy in a deal to settle charges 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 business cost. The result: It’s fully tax-deductible.


Critics argue that big banks bailed out by taxpayers during the financial crisis are again favored over the victims of their mortgage abuses.

‘‘The government is abetting the behavior by not preventing the deduction,’’ said Senator Charles Grassley, Republican of Iowa. ‘‘The taxpayers end up subsidizing the Wall Street banks.’’

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Twelve lenders will pay more than $9 billion to compensate people whose homes were seized improperly in abuses such as ‘‘robo-signing,’’ when banks approved foreclosures without properly reviewing documents. The settlements help eliminate huge potential liabilities for the banks.

Many consumer advocates say regulators settled for too low a price. But the price the banks will pay will be further eased by the tax-deductibility of their settlement costs. A fine or other outright penalty would not be tax-deductible.

Taxpayers ‘‘should not be subsidizing or in any way paying for these corporations’ wrongdoing,’’ said Phineas Baxandall, a senior analyst at the US Public Interest Research Group, a consumer advocate.


Several of the banks didn’t immediately respond to requests for comment. Bank of America declined to comment.

Senator Sherrod Brown, Democrat of Ohio, wants regulators to bar the tax deductibility of the lenders’ costs. Brown made his argument in a letter to the Federal Reserve, Comptroller of the Currency, and other regulators.

The Fed and the comptroller negotiated the foreclosure settlements with the banks.

‘‘It is simply unfair for taxpayers to foot the bill for Wall Street’s wrongdoing,’’ Brown wrote. ‘‘Breaking the law should not be a business expense.’’

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