This blog was last updated on June 27, 2021
Several industry trade groups, including the American Bankers Association (ABA), Mortgage Bankers Association (MBA), Housing Policy Council of the Financial Services Roundtable and Consumer Mortgage Coalition, sent a letter to the Senate Finance Committee requesting flexibility in regard to proposed new rules for Form 1098, Mortgage Interest Statement. These new instructions will require that additional information is entered on the form.
The main concern noted by the authors was that the Jan. 1 start date for the rules would not give servicers enough time to adapt their systems, according to the MBA. This could result in inaccurate tax reporting. They also said more clarity is needed for certain definitions.
“Servicers, and especially smaller servicers, are not in a position to carry out another systems change on short notice,” the letter said. “A change in Form 1098, if begun early during a calendar year, can reasonably take several months. If the change process begins late in a calendar year, it takes longer.”
The letter went on to say that this amount of time is necessary because servicers and vendors will need a few weeks to test the changes and work out any bugs.
Setback with data collection
Form 1098 currently requires that servicers report information on interest payments on consumer home loans, the amount of interest and points received on the mortgage during the calendar year and the payee’s name and address. The proposed changes are part of the Preserving America’s Transit and Highways Act of 2014 and will require that the following information be present on 1098 forms:
- Address of the collateral property
- Unpaid principal balance
- Real estate taxes paid from an escrow account
- Loan origination date
- Whether the loan was a refinance during the calendar year
The letter said that many servicers do collect this information when they board new loans onto their systems. However, because only some of those details are currently used for tax reporting purposes, servicers don’t have technology in place to automatically retrieve the data and populate it on 1098 forms based on the manner in which it is currently archived.
Furthermore, some servicers use different systems for each of their loan products, which will mean retooling and testing for each one, and it is common for some to use one or more third-party vendors to outsource their tax compliance obligations.
Need for IRS clarification
The MBA said in addition to time for servicers to adapt their systems, there needs to be guidance from the IRS. Although the updated 1098 form would require a yes or no answer to whether a loan was a refinance within the calendar year, the definition of this term is not always as clear cut.
“Loan modifications or loan assumptions…are not clearly susceptible to a binary categorization as a refinance or not a refinance,” the letter said. “Servicers will report as required, but reporting whether a loan is a refinance may not provide the IRS with information it needs. A refinanced loan may be acquisition debt, home equity debt or a combination of the two, and the tax treatment of each differs.”
It continued to say that lenders and servicers could supply the agency with information that can be used to come to a clear definition. As a result of this and the aforementioned considerations, the trade groups requested that changes to Form 1098 become effective for statements due after Dec. 31, 2015. They also requested an April 15, 2015 deadline for the IRS to issue final guidance materials on the matter.
