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Bank of America has been misreporting deferred interest income from customers holding adjustable rate mortgages by “millions, if not billions, of dollars,” according to a federal class-action suit filed in San Diego.

On certain negative-amortization loan products known as “option ARMs,” a borrower was allowed to make a minimum payment consisting of a portion of the interest due on the loan, with the rest of the interest then being added to the loan balance. Such loans were frequently issued by Countrywide Financial, which B of A acquired in 2008, and largely contributed to the housing crash when the loans “re-cast,” forcing borrowers to jump from making partial interest payments to ones covering the full interest due plus an amount to reduce the loan balance each month.

All of this interest is tax-deductible for homeowners, but instead of characterizing subsequent payments of this “deferred interest” for what it is, B of A is alleged to have instead categorized these payments as a “reduction of principal,” which cannot be written off on a borrower’s tax return.

However, while calling the interest payments principal reduction hurts the borrower, it’s of great value to the bank, which then does not have to report the interest it collects as taxable income.

Lead plaintiff Richard Horn claims to be “one of millions of consumers” hurt “by B of A's wrongful accounting practices.” Horn claims inaccurate statements sent to him by the bank from 2009 through 2011 underreported his interest paid by more than $23,000.

Horn claims that B of A filed hundreds of thousands, if not millions, of incorrect IRS 1098 interest reporting forms and that the bank “has engaged in this wrongful accounting practice solely to benefit itself by reducing its public debt exposure and to avoid reporting interest income and payment of income taxes on such earned income.”

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Comments

Visduh July 16, 2012 @ 8:01 a.m.

Verrrrry interrresting! Leave it to B of A to find some way to screw the borrowers. Oh, I'm sure there are some accounting rules that can be used to support that approach, but if B of A didn't report those add-ons to the balance as interest income when they accepted the short payments and posted the revised loan balances, they cannot now claim that the catch-ups are not interest. In discovery the plaintiffs will have their chance to see just how the bank treated those add-ons. In the final analysis, if the bank did not report that interest as paid at the time it advanced the funds to cover it by adding those to the balance, they have to call it interest now. They cannot have what is convenient and profitable for themselves going both ways. But that would not prevent that bank, especially that bank, from trying.

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