Lender’s Receipt of Retained Interest on Residential Loans Sold on Secondary Market Qualifies for Deduction for “Amounts Derived From Interest”

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On June 18, 2009, the Washington Supreme Court issued a decision holding that retained interest received by a residential mortgage lender as fees for servicing loans that it sold on the secondary market on a "service-retained" basis were eligible for a deduction from Business and Occupation ("B&O") tax because they are "amounts derived as interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties." HomeStreet, Inc. v. Washington Department of Revenue, No. 80544-0, 2009 WL 1709310 (Wash. Sup. Ct., June 18, 2009). In doing so, the Court reversed a 2007 decision of the Washington Court of Appeals, Division II, which had affirmed the trial court's summary judgment in favor of the Department of Revenue holding that HomeStreet was not entitled to the deduction for retained interest received as compensation for servicing loans.

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