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America’s Community Bankers has urged the Internal Revenue Service to make changes to its proposed regulations on real estate mortgage investment conduits and financial asset securitization investment trusts. A REMIC allows lenders to securitize mortgages; a FASIT allows the securitization of such assets as credit card receivables, home equity loans and auto loans, and will help create a secondary market for acquisition, development and construction loans.

–  Under the REMIC proposal, when a residual interest in a REMIC is transferred, the bank would remain secondarily liable for the taxes owed by the buyer. By proposing to deny banks a safe harbor from the tax liability, it would be difficult to make a profit on transfers, ACB said.

ACB endorsed an alternative that would maintain the availability of a safe harbor if the sale is made to a corporation with gross assets of $100 million or more.

–  On the proposal to implement FASITs authority, which the industry has been awaiting for four years, ACB said, "It is apparent that the effort in the proposed regulations to wring every bit of tax shelter potential out of the FASIT has significantly compromised its attractiveness."

ACB identified two main issues that need to be resolved: the inability of interest-only strips to qualify as regular interests, and the requirement that debt instruments with an objective and readily determined market value must nevertheless be valued by means of an artificial statutory formula because the instruments are not traded on an established securities market.

ACB agreed with the IRS that FASITs should not be permitted to operate as banks.

This comment letter is available by fax and it is also linked.