Reissuance of Mortgage Credit Certificates

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8692]

RIN 1545-AR57

Reissuance of Mortgage Credit Certificates

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations relating to the

reissuance of mortgage credit certificates. Changes to the applicable

law were made by the Tax Reform Act of 1984. The regulations provide

guidance to issuers and holders of mortgage credit certificates.

EFFECTIVE DATE: These regulations are effective December 17, 1996.

FOR FURTHER INFORMATION CONTACT: L. Michael Wachtel, (202) 622-3980

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document adds final regulations to the Income Tax Regulations

(26 CFR part 1) to provide guidance under section 25(e)(4) of the

Internal Revenue Code (Code) with respect to the reissuance of mortgage

credit certificates. Section 25(e)(4) was added to the Code by section

612 of the Tax Reform Act of 1984, 98 Stat. 494, 905.

On December 22, 1993, temporary regulations (TD 8502) relating to

refinancing under section 25(e)(4) were published in the Federal

Register (58 FR 67689). A notice of proposed rulemaking (REG-209574-92,

previously FI-47-92) cross-referencing the temporary regulations was

published in the Federal Register for the same day (58 FR 67744).

Written comments responding to these notices were received. There

were no requests to appear in response to publication of a notice of a

hearing in the Federal Register (61 FR 15204). Therefore, no public

hearing was held. After consideration of all the comments, the proposed

regulations under section 25(e)(4) are adopted as revised by this

Treasury decision, and the corresponding temporary regulations are

removed. The comments and revisions are discussed below.

Explanation of Provisions and Summary of Comments

The temporary regulations permit the reissuance of a mortgage

credit

[[Page 66213]]

certificate on or after December 22, 1992, but no later than 1 year

after the date of the refinancing. Commentators thought this

unnecessarily limited eligibility for the reissuance of a certificate

and limited the flexibility of State and local governments. The final

regulations, reflecting the goal of giving State and local governments

maximum flexibility to administer mortgage credit certificate programs,

remove these limits. A State or local government may reissue a

certificate to any person who refinanced a mortgage for which a

mortgage credit certificate was issued and who meets the other

requirements for a reissued certificate. The credit for prior years is

available to the extent that the certificate holder may file a claim

for refund.

The temporary regulations provide that the certified mortgage

indebtedness amount on the reissued certificate cannot exceed the

remaining balance of the certified mortgage indebtedness amount on the

existing certificate. Commentators suggested that the final regulations

permit the indebtedness amount on the reissued certificate to include

costs such as closing costs of the refinancing loan. This

recommendation was not implemented in the final regulations because

section 25(e)(4) of the Code limits the amount of the reissued

certificate to the outstanding balance of the existing certificate.

The temporary regulations provide that the reissued certificate may

not result in an increase in the credit that would otherwise have been

allowable to the holder under the existing certificate for any taxable

year. In the case of a series of refinancings, the amount allowable on

the refinanced loan would be the amount allowable on the original loan,

rather than the immediately preceding refinanced loan.

A holder of a mortgage credit certificate who refinances a fixed

rate loan can determine the amount of interest that would have been

paid for any taxable year on the refinanced loan from an amortization

schedule that projects interest and principal payments over the life of

the loan. By applying the mortgage credit rate to the amount of

interest, the holder can calculate the amount of tax credit that would

have been allowable for the taxable year.

The amount of tax credit that would have been allowable for a

taxable year is not as easily calculated by a holder of a mortgage

credit certificate who refinances a variable rate loan because the

holder cannot project an amortization schedule for the refinanced loan.

Instead, each year the holder must calculate the amount of interest

that would have been paid on the refinanced loan under the interest

rate in effect for that year and then calculate the tax credit that

would have been allowable. This procedure was described as burdensome

by various commentators.

The final regulations continue to reflect the statutory requirement

that the reissued certificate not result in an increase in the credit

that would otherwise have been allowable to the certificate holder

under the existing certificate for any taxable year. The final

regulations, however, permit a certificate holder who refinances a

variable rate loan with either a variable rate loan or a fixed rate

loan to determine the xamount of credit that would have been allowable

by using an alternative method instead of calculating the amount based

on the actual interest that would have been paid on the refinanced

loan. Under the alternative method, the credit that would have been

allowable is computed using an amortization schedule of a hypothetical

self-amortizing loan with level payments projected to the final

maturity date of the refinanced loan. The interest rate of the

hypothetical loan is the annual percentage rate (APR) of the

refinancing loan determined for purposes of the Federal Truth in

Lending Act. The principal of the hypothetical loan is the remaining

outstanding balance of the certified mortgage indebtedness specified on

the existing certificate.

A certificate holder who refinances a variable rate loan may use

the alternative method or may compute the actual amount of credit that

would have been allowable. However, the method chosen must be

consistently applied by the holder beginning with the first taxable

year for which the tax credit based upon the reissued certificate is

claimed.

The temporary regulations do not address whether a refinancing loan

is a financing that is subject to the recapture provisions of section

143(m) if the refinanced loan was not subject to recapture. The final

regulations provide that the refinancing loan underlying a reissued

mortgage credit certificate that replaces a mortgage credit certificate

issued on or before December 31, 1990, is not a federally subsidized

indebtedness that is subject to the recapture provisions of section

143(m) of the Code.

Commentators asked for clarification of whether additional volume

cap was required in order to reissue a mortgage credit certificate and

whether additional reporting was required by the issuer of a reissued

mortgage certificate. Reissuance of a mortgage credit certificate

relates to refinancing by a mortgage credit certificate holder of a

mortgage loan on the holder's principal residence. Volume cap was

required to be obtained in connection with the program under which the

original certificate had been issued. Because the reissued certificate

is replacing the existing certificate, it is treated as issued in

connection with the original program, and additional volume cap is

unnecessary for the reissuance. For similar reasons, no additional

reporting is required by an issuer of a reissued mortgage credit

certificate.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. It also has been

determined that section 553(b) of the Administrative Procedures Act (5

U.S.C. chapter 5) does not apply to these regulations, and because the

notice of proposed rulemaking preceding the regulations was issued

prior to March 29, 1996, the Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to section 7805(f) of the Internal

Revenue Code, the notice of proposed rule making preceding these

regulations was submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Drafting Information

The principal author of these regulations is L. Michael Wachtel,

Office of the Assistant Chief Counsel (Financial Institutions and

Products), IRS. However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by

removing the entry for Sections 1.25-1T--1.25-8T and adding entries in

numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.25-1T also issued under 26 U.S.C. 25.

Section 1.25-2T also issued under 26 U.S.C. 25.

Section 1.25-3 also issued under 26 U.S.C. 25.

[[Page 66214]]

Section 1.25-3T also issued under 26 U.S.C. 25.

Section 1.25-4T also issued under 26 U.S.C. 25.

Section 1.25-5T also issued under 26 U.S.C. 25.

Section 1.25-6T also issued under 26 U.S.C. 25.

Section 1.25-7T also issued under 26 U.S.C. 25.

Section 1.25-8T also issued under 26 U.S.C. 25. * * *

Par. 2. Section 1.25-3 is added to read as follows:

Sec. 1.25-3 Qualified mortgage credit certificate.

(a) through (g)(1)(ii) [Reserved] For further guidance, see

Sec. 1.25-3T(a) through (g)(1)(ii).

(g)(1)(iii) Reissued certificate exception. See paragraph (p) of

this section for rules regarding the exception in the case of

refinancing existing mortgages.

(g)(2) through (o) [Reserved] For further guidance, see Sec. 1.25-

3T(g)(2) through (o).

(p) Reissued certificates for certain refinancings--(1) In general.

If the issuer of a qualified mortgage credit certificate reissues a

certificate in place of an existing mortgage credit certificate to the

holder of that existing certificate, the reissued certificate is

treated as satisfying the requirements of this section. The period for

which the reissued certificate is in effect begins with the date of the

refinancing (that is, the date on which interest begins accruing on the

refinancing loan).

(2) Meaning of existing certificate. For purposes of this paragraph

(p), a mortgage credit certificate is an existing certificate only if

it satisfies the requirements of this section. An existing certificate

may be the original certificate, a certificate issued to a transferee

under Sec. 1.25-3T(h)(2)(ii), or a certificate previously reissued

under this paragraph (p).

(3) Limitations on reissued certificate. An issuer may reissue a

mortgage credit certificate only if all of the following requirements

are satisfied:

(i) The reissued certificate is issued to the holder of an existing

certificate with respect to the same property to which the existing

certificate relates.

(ii) The reissued certificate entirely replaces the existing

certificate (that is, the holder cannot retain the existing certificate

with respect to any portion of the outstanding balance of the certified

mortgage indebtedness specified on the existing certificate).

(iii) The certified mortgage indebtedness specified on the reissued

certificate does not exceed the remaining outstanding balance of the

certified mortgage indebtedness specified on the existing certificate.

(iv) The reissued certificate does not increase the certificate

credit rate specified in the existing certificate.

(v) The reissued certificate does not result in an increase in the

tax credit that would otherwise have been allowable to the holder under

the existing certificate for any taxable year. The holder of a reissued

certificate determines the amount of tax credit that would otherwise

have been allowable by multiplying the interest that was scheduled to

have been paid on the refinanced loan by the certificate rate of the

existing certificate. In the case of a series of refinancings, the tax

credit that would otherwise have been allowable is determined from the

amount of interest that was scheduled to have been paid on the original

loan and the certificate rate of the original certificate.

(A) In the case of a refinanced loan that is a fixed interest rate

loan, the interest that was scheduled to be paid on the refinanced loan

is determined using the scheduled interest method described in

paragraph (p)(3)(v)(C) of this section.

(B) In the case of a refinanced loan that is not a fixed interest

rate loan, the interest that was scheduled to be paid on the refinanced

loan is determined using either the scheduled interest method described

in paragraph (p)(3)(v)(C) of this section or the hypothetical interest

method described in paragraph (p)(3)(v)(D) of this section.

(C) The scheduled interest method determines the amount of interest

for each taxable year that was scheduled to have been paid in the

taxable year based on the terms of the refinanced loan including any

changes in the interest rate that would have been required by the terms

of the refinanced loan and any payments of principal that would have

been required by the terms of the refinanced loan (other than

repayments required as a result of any refinancing of the loan).

(D) The hypothetical interest method (which is available only for

refinanced loans that are not fixed interest rate loans) determines the

amount of interest treated as having been scheduled to be paid for a

taxable year by constructing an amortization schedule for a

hypothetical self-amortizing loan with level payments. The hypothetical

loan must have a principal amount equal to the remaining outstanding

balance of the certified mortgage indebtedness specified on the

existing certificate, a maturity equal to that of the refinanced loan,

and interest equal to the annual percentage rate (APR) of the

refinancing loan that is required to be calculated for the Federal

Truth in Lending Act.

(E) A holder must consistently apply the scheduled interest method

or the hypothetical interest method for all taxable years beginning

with the first taxable year the tax credit is claimed by the holder

based upon the reissued certificate.

(4) Examples. The following examples illustrate the application of

paragraph (p)(3)(v) of this section:

Example 1. A holder of an existing certificate that meets the

requirements of this section seeks to refinance the mortgage on the

property to which the existing certificate relates. The final

payment on the holder's existing mortgage is due on December 31,

2000; the final payment on the new mortgage would not be due until

January 31, 2004. The holder requests that the issuer provide to the

holder a reissued mortgage credit certificate in place of the

existing certificate. The requested certificate would have the same

certificate credit rate as the existing certificate. For each

calendar year through the year 2000, the credit that would be

allowable to the holder with respect to the new mortgage under the

requested certificate would not exceed the credit allowable for that

year under the existing certificate. The requested certificate,

however, would allow the holder credits for the years 2001 through

2004, years for which, due to the earlier scheduled retirement of

the existing mortgage, no credit would be allowable under the

existing certificate. Under paragraph (p)(3)(v) of this section, the

issuer may not reissue the certificate as requested because, under

the existing certificate, no credit would be allowable for the years

2001 through 2004. The issuer may, however, provide a reissued

certificate that limits the amount of the credit allowable in each

year to the amount allowable under the existing certificate. Because

the existing certificate would allow no credit after December 31,

2000, the reissued certificate could expire on December 31, 2000.

Example 2. (a) The facts are the same as Example 1 except that

the existing mortgage loan has a variable rate of interest and the

refinancing loan will have a fixed rate of interest. To determine

whether the limit under paragraph (p)(3)(v) of this section is met

for any taxable year, the holder must calculate the amount of credit

that otherwise would have been allowable absent the refinancing.

This requires a determination of the amount of interest that would

have been payable on the refinanced loan for the taxable year. The

holder may determine this amount by--

(1) Applying the terms of the refinanced loan, including the

variable interest rate or rates, for the taxable year as though the

refinanced loan continued to exist; or

(2) Obtaining the amount of interest, and calculating the amount

of credit that would have been available, from the schedule of equal

payments that fully amortize a hypothetical loan with the principal

amount equal to the remaining outstanding balance of the certified

mortgage indebtedness specified

[[Page 66215]]

on the existing certificate, the interest equal to the annual

percentage rate (APR) of the refinancing loan, and the maturity

equal to that of the refinanced loan.

(b) The holder must apply the same method for each taxable year

the tax credit is claimed based upon the reissued mortgage credit

certificate.

(5) Coordination with Section 143(m)(3). A refinancing loan

underlying a reissued mortgage credit certificate that replaces a

mortgage credit certificate issued on or before December 31, 1990, is

not a federally subsidized indebtedness for the purposes of section

143(m)(3) of the Internal Revenue Code.

Sec. 1.25-3T [Amended]

Par. 3. Section 1.25-3T is amended by removing paragraphs

(g)(1)(iii) and (p).

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: November 27, 1996.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 96-31772 Filed 12-16-96; 8:45 am]

BILLING CODE 4830-01-U