In Guild Mortgage Company v. Washington Department of Revenue, the Washington Board of Tax Appeals considered whether certain fees associated with mortgage sales – guaranty fees, loan-level price adjustments (LLPAs), and lender credits – should be included in the taxpayer’s gross income for purposes of the state’s business and occupation (B&O) tax.
The taxpayer originated residential mortgage loans and sold most to government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, which securitize the loans into mortgage-backed securities. To participate in the GSE programs, the taxpayer paid guaranty fees and LLPAs. The taxpayer also sometimes provides lender-paid credits to cover borrower closing costs in exchange for a higher interest rate. Following an audit for 2013–2017, the Department assessed B&O tax on all three of these amounts.
The Board held Guaranty fees and LLPAs are not adjustments to the selling price but are expenses incurred to sell loans to GSEs and thus cannot be deducted under Washington’s B&O tax statute. However, the Board agreed with the taxpayer that lender-paid credits were not taxable because they were a capital investment in the loan.