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Originally published January 17, 2013 at 8:32 PM | Page modified January 17, 2013 at 8:32 PM

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Taxpayers will ease banks’ payouts in mortgage deal

The Internal Revenue Service regards the lenders’ compensation to homeowners as a cost incurred in the course of doing business. Result: It’s fully tax-deductible.

The Associated Press

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WASHINGTON — Consumer advocates have complained that U.S. mortgage lenders are getting off easy in a deal to settle charges that 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 cost incurred in the course of doing business. Result: It’s fully tax-deductible.

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

“The government is abetting the behavior by not preventing the deduction,” said Sen. Charles Grassley, R-Iowa. “The taxpayers end up subsidizing the Wall Street banks after the headlines of a big-dollar settlement die down. That’s unfair to taxpayers.”

Under the deal, 12 mortgage lenders will pay more than $9 billion to compensate hundreds of thousands of people whose homes were seized improperly, a result of abuses such as “robo-signing.” That’s when banks automatically approved foreclosures without properly reviewing documents.

Regulators reached agreement this week with Goldman Sachs and Morgan Stanley. Last week, the regulators settled with 10 other lenders. The settlements will help eliminate huge potential liabilities for the banks.

Companies can deduct the settlement costs as long as they are compensating private individuals to remedy a wrong. By contrast, a fine or other financial penalty is not tax-deductible.

Taxpayers “should not be subsidizing or in any way paying for these corporations’ wrongdoing,” said Phineas Baxandall, a senior tax and budget analyst at the U.S. Public Interest Research Group, a consumer advocate.

At least one lawmaker, Sen. Sherrod Brown, D-Ohio, wants regulators to bar the tax deductibility of the lenders’ costs.

“It is simply unfair for taxpayers to foot the bill for Wall Street’s wrongdoing,” Brown wrote in the letter dated Thursday. “Breaking the law should not be a business expense.”

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