Exclude Mixed-Use Loans and Revolving Accounts From Reporting Requirements, Writer Urges

Bernard Rothman of the First Data Corp., Atlanta, has urged the Service to exclude mixed-use loans and revolving accounts from the reporting requirements for student loan interest payments. Mixed- income loans and revolving accounts should be excluded, Rothman says, because "the basic nature of interest calculation in revolving accounts makes it difficult or even impossible to track interest paid on individual transactions." While the Service may recommend the adoption of a method that reasonably allocates the interest payments to that portion of a loan that qualifies as a student loan, he says, in reality, "there is no reasonable method of allocation."

If the Service decides to apply the reporting requirements to revolving accounts, Rothman says, it should limit the requirements to "the entire account on single-use loan products where the 60-month time period begins at the origination of the account and no reporting is required after the first 60 months." Similarly, if the Service applies the requirements to mixed-use loans, he says, it should require all qualified transactions to be identified and certified well in advance.

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April 29, 1998

re: CC:DOM:CORP:R (IT&A:Br1)

Dear Sir or Madam:

[1] The following comments are submitted regarding the

[2] Notice 98-7 specifically includes "payments of interest made on . . . mixed use loans or revolving accounts" under the information reporting requirements of IRC section 6050S. The inclusion of these mixed use loans and revolving credit accounts under the new student loan interest reporting requirements is problematic, because the basic nature of interest calculation in revolving accounts makes it difficult or even impossible to track interest paid on individual transactions. In revolving accounts, interest is calculated based on balances from multiple transactions over a period of time (usually a month). Because payments or credits are allocated to pay off groups of transactions in the order specified by the creditor, it is rarely possible to determine when a particular transaction has been paid off and therefore is no longer accruing interest. For this reason we believe the IRS should exclude mixed use loans and revolving credit accounts from the information reporting requirements outlined in Notice 98-7 under the authority of IRC section 6050S.

[3] The IRS has suggested creditors use a "reasonable method for allocating the interest payments to the part of the loan that is certified to be a student loan" to meet the compliance requirements. In normal revolving account processing, there is no reasonable method of allocation. In order for our clients to meet interest reporting requirements, creditors will have to segregate individual qualified transactions in a mixed use account into a separate processing environment from the rest of the account. This separate processing environment is known as a "FLAP". Each "FLAP" tracks an individual transaction running through a credit account, and allows creditors to calculate the interest paid in connection with that specific transaction. Although this type of processing is available from FDR, it may not be available at all from many other processors.

[4] Even assuming this type of segregated processing is available from a processor, there are two significant issues connected to its use. First, in order to segregate transactions for "FLAP" processing, each educational advance would have to be identified prior to posting to the account, meaning the cardholder would have to notify either the bank or the merchant prior to the transaction that the advance is a qualified educational expense. By definition, qualified education transactions could occur at any merchant point of sale, through automated teller machine cash advances, or various other mechanisms. Currently, there is no method of identifying these transactions at the point of sale for segregation in the data processing system. While Notice 98-7 does require the taxpayer to provide certification as to the portion of the mixed use debt which is attributable to student loans, it does not specify whether certification must occur in advance of the transaction or how far in advance notice must be given.

[5] The second problem with segregated transaction processing is its expense. At FDR, the processing requires special programming, with significant start-up costs totaling millions of dollars, as well as additional monthly maintenance costs for each mixed use loan or revolving credit account. Because any advance from a mixed use loan or revolving account could potentially be a qualified educational expense, every such account would have to be maintained as if it might someday be used for an educational advance. Financial institutions would have to incur the costs of establishing segregated processing capability for every mixed use loan or revolving account, regardless of whether the account is ever actually used as a qualified educational loan. A separate "FLAP" would need to be established for each qualified transactions on an account. The estimated cost to a creditor of keeping ten "FLAPS" open on fifty thousand accounts would be close to one million dollars a year. This cost estimate is quite conservative, since most credit card issuers have more than fifty thousand accounts, and a cardholder is likely to have more than ten qualified transactions over the life of an account.

[6] The difficulties of tracking interest payments on specific loan transactions as described above would be eliminated if the IRS required taxpayers to designate an entire revolving credit account as a qualified educational loan; interest could be calculated and tracked on the entire balance. However, the IRS notice appears to require individual tracking of each advance for purposes of monitoring the sixty month reporting period. This limitation would necessitate the same individual transaction tracking outlined above, with the same associated costs. As a remedy, the IRS could require the entire revolving account to be treated as one loan, regardless of the timing of each individual transaction, with the sixty month limitation beginning on the date the revolving account is opened. While this would ease the compliance burden of the reporting requirements, it would restrict the deduction provided under IRC section 6050S.

[7] In summary, we would recommend that:

(1) The reporting requirement not apply to revolving accounts at all. This solution eliminates the substantial difficulties and costs associated with the information reporting requirements and addresses those processors who may not have the capability of separately processing individual transactions on an account;

(2) If the reporting requirement does apply to revolving accounts, it should only apply to the entire account on single-use loan products where the 60-month time period begins at the origination of the account and no reporting is required after the first 60 months. Similar to the reporting requirements for mortgage interest, this solution does carry some cost for processors and financial institutions, however, the cost and difficulty is substantially less than attempting to segregate individual transactions on an account for reporting, and in most cases uses technology that is already available;

(3) If the reporting requirement will apply to mixed use loans, the IRS must require that all qualified transactions be identified and certified well in advance. Without this advance notification, it is impossible for processors to comply with the new information reporting requirements. Even with the advance notification, compliance will prove extremely costly to processors and financial institutions, and still may not be possible at all from many processors due to the reprogramming requirements.

[8] Thank you for this opportunity to comment.

Sincerely,

Bernard Rothman