[Federal Register Volume 61, Number 243 (Tuesday, December 17, 1996)]
[Rules and Regulations]
[Pages 66212-66215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31772]


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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