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Abstract: 

In TAM 200439041,1 the Service considered whether a bank servicing mortgages owned by others could include the mortgages in its loans outstanding in determining the balance of its reserve for bad debts under Section 585. The Technical Advice concluded that the bank could not do so. In the Advice, Mortgage Company originated, warehoused, sold, and serviced residential and nonresidential mortgages, but retained the rights to service the mortgages. Mortgage Company also purchased mortgage servicing rights. Mortgage Company had a subsidiary, Escrow Company, which provided loan closing and escrow services to Mortgage Company and other lenders. On Date 1, Mortgage Company reorganized its business into five affiliated corporations, including newly formed Holding Company, a chartered state savings bank (Bank), and another newly formed corporation (Mortgage Services Company). Holding Company was the parent of the affiliated group, with two wholly-owned subsidiaries, Bank and Mortgage Services Company. Mortgage Company, the former parent, and Escrow Company became whollyowed subsidiaries of Bank after the reorganization. Bank qualified as a bank under Section 581 and sold mortgages, retaining the rights to service the mortgages. It also purchased mortgage servicing rights. In the end of the affiliated group’s first taxable year ending after the reorganization, Fannie Mae mortgage servicing rights transferred to Bank in the reorganization comprised the bulk of Bank’s mortgage servicing rights. Mortgage servicing rights held by Bank were rights to receive reasonable compensation for servicing the mortgages.

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