Compensation received from Wells Fargo for Mor expensive mortgage

[Megan Wentland]

I have a client who received $8500 from Wells Fargo for full compensation with regard to a loan for Wells Fargo Financial's origination of a more expensive mortgage loan than the loan for which they may hav qualified. Is this taxable?
This check was issued in connection with the Consent Order dated July 20, 2011 between Wells Fargo and the Federal Reserve Board. The Federal Reserve Board issued a consent cease and desist order and assessed an $85 million civil money penalty against Wells Fargo.

[Koss]

Compensation

Depends on exactly what they were compensated for. Do you know if your client received compensation under Remedial Plan A or Remedial Plan B?

Your reference to "compensation with regard to a loan for Wells Fargo Financial's origination of a more expensive mortgage loan than the loan for which they may have qualified" suggests that it was under Remedial Plan B.

According to the website for this settlement--

Compensation provided to borrowers related to the Consent Order may be reportable to the Internal Revenue Service. If so, compensation information will be included on IRS Forms 1098 and/or 1099 at tax time.

Did your client get a 1099? Or a 1098 that looks weird? Or both? Or neither? [LOL]

I've seen this kind of stuff before. It's Alice-in-Wonderland. Some of these payments are based on the difference in the interest rate of the mortgage loan they actually got, and the interest rate on the mortgage loan they were eligible for. So they are effectively getting a lump-sum refund of some of the interest that they are going to pay... over the next 30 years??

How the heck does the bank account for that? Maybe by amortizing it over the remaining life of the loan, and reducing the amount of deductible interest reported each year on Form 1098?

But what if the borrower doesn't carry the loan to maturity? They may refinance, or even sell the property and pay off the loan.

Some borrowers who get this type of payment don't even own the home anymore. They may have lost it in a foreclosure or a short sale. That can make things even more complicated.

You need more info. Does your client still have the loan?

BMK