Group Wants IRS Guidance to Help Administration of Housing Bond Programs

WASHINGTON – The National Council of State Housing Agencies is urging the Internal Revenue Service to include several items on its 2015-2016 priority guidance plan that would help state agencies effectively administer housing bond programs.

The group, which represents agencies that administer housing credit and housing bond programs and Mortgage Credit Certificates, made the recommendations in a letter sent to the IRS earlier this month.

The Treasury Department and the IRS use their guidance plan to identify and prioritize tax issues that should be dealt with through guidance. The 2015-2016 guidance plan will identify projects that Treasury and the IRS intend to work on from July 1, 2015 to June 30, 2016.

One project NCSHA would like the IRS to do is to issue final guidance on record-retention requirements for tax-exempt bonds. The IRS issued a notice in 2006 requesting comments for record retention standards for tax-exempt bond issues, but the agency has not taken any further action on the notice. NCSHA particularly wants guidance on how long muni issuers have to maintain loan files, given that the current rules on this topic “generate excessive compliance costs.”

Another project that NCSHA would like to see completed is final regulations on public approval requirements for private-activity bonds. This project is in the 2014-2015 guidance plan.

Proposed rules on this topic were released in 2008 and include several provisions that would allow PAB issuers to cut costs while still providing adequate public notice of new bond issues. The proposal also included special rules for mortgage-revenue bond issuances that would allow for less specific information to be required in public approval notices.

“NCSHA strongly recommends that IRS adopt final regulations that are consistent with the proposed rule referenced above,” the group said. “The final rule should also take into account issuers’ increasing use of the Internet and other electronic communications to communicate with their constituents.”

NCSHA would also like guidance that ensures that there are transition periods for MRB and MCC issuers to adjust to updated income limits. The group said it wants the IRS to clarify that issuers have a reasonable time period to adjust their programs to the new limits, and that any MRB loans or MCCs financed with the newly expired limits during that period will be in compliance with federal tax law.

In order for people to be eligible for MCCs or for loans financed by MRBs, they have to meet certain income limits. Currently, the IRS releases annual guidance that allows MRB and MCC issuers to use the Department of Housing and Urban Development’s program income limits for the most recent fiscal year. Generally, this guidance prohibits Housing Finance Agencies and other issuers from relying on the income limits for the fiscal years two years prior. In recent years, the IRS has not included a transition period that gives HFAs time to adjust to the new limits, according to NCSHA.

“Requiring HFAs to adopt the new limits immediately is simply untenable, and could cause HFAs to have to cancel previous commitments they made to purchase loans,” NCSHA said. “It could also cause borrowers who were depending on using an MCC to help them manage the costs of purchasing a home to have it rescinded just before closing.”

NCSHA also has a suggestion relating to IRS proposed arbitrage rules released in 2013.

Those rules would clarify that investments allocated to a tax-exempt bond issue, with some exceptions, must be valued using the fair-market method. In making this change, the rules would eliminate language in existing regulations that allows “purpose investments,” or investments made in furtherance of the bonds’ stated purpose, to be valued at present value.

This is a problem, NCSHA said, because it could mean that loans funded through MRBs would have to be marketed to market when they are entered into or transferred from bond issues. The group wants final arbitrage rules to make it clear that purpose investments can always be valued at present value.

“HFAs and other MRB issuers often accept a lower than market rate of return on their mortgages,” the group said. “Requiring that all MRB-financed mortgages be valued at market rate would contradict MRBs public purpose, which is established under federal statute.”

Additionally, NCSHA said it would like the IRS to propose a new rule that allows certain replacement proceeds to be invested at the highest possible yield, with any excess yield over the bond yield to be paid to the federal government.

Replacement proceeds are money held by the issuer or a main beneficiary of the bond issue that are substantially directly connected to the issue or its governmental purpose and would have been used for the governmental purpose if the bond proceeds weren’t. Currently, they cannot be invested at a rate above the bond yield, while other types of investments can for some time if the issuer makes yield reduction payments.

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