SECTION 7. EXAMPLE

The following example illustrates the application of this revenue procedure:

.01 Facts . As part of its business, S services mortgage loans that are held by R, a REMIC that is described in Section 5.03(1) of this revenue procedure. S has developed a foreclosure prevention program to guide it in determining the risk of a foreclosure eventually becoming necessary on a loan that it is servicing. For each loan that the program identifies as presenting an undesirable risk of foreclosure, the program also attempts to determine whether a modification to the terms of the loan might materially reduce the risk of foreclosure and, if so, what modification strikes the best balance between minimizing the sacrifice of some required cash flows under the loan and maximizing the reduction in foreclosure risk.

The factors that the program generally takes into account include the borrower’s payment history on the loan; the borrower’s payment history (as reported by a credit bureau) on the borrower’s other indebtedness; the borrower’s FICO score; the loan-to-value ratio of the loan when it was originated; changes in property values in the neighborhood where the property securing the loan is located; an estimate of the current loan-to-value ratio; whether the monthly debt service under the loan has recently changed or will soon change; and, where available, any additional data obtained from the borrower (for example, changes in employment and other income sources, family medical status, uninsured losses, adverse court judgments, inheritances, etc.). Because S ’s program takes into account statistical models that were developed using extensive amounts of data involving diverse information from very many borrowers, S has found the program to be generally reliable at assessing with a high degree of accuracy whether a borrower presents an unacceptably high risk of eventual foreclosure, even when some desired information is unavailable for a particular borrower.

Borrower B is the issuer of one of the mortgage loans that is held by R . The real property securing B ’s mortgage loan is described in Section 5.01 and 5.02 of this revenue procedure. None of B ’s payments on the mortgage loan has been late in the few years that the loan has been outstanding. On the other hand, a very large increase in B ’s monthly debt service is scheduled in the near future; the loan had a high loan-to-value ratio when it was originated; home values in the neighborhood of the collateral have declined significantly; B ’s FICO score has dropped; and a credit bureau reports that B is developing a pattern of increasingly late payment on rising levels of con

§ 1.860G–2(b)(3)(i), if a change in the terms of an obligation is “occasioned by default or a reasonably foreseeable default,” the change is not a significant modification for purposes of § 1.860G–2(b)(1), regardless of the modification’s status under § 1.1001–3.

.08 Section 860F(a)(1) imposes a tax on a REMIC equal to 100 percent of the net income derived from “prohibited transactions.” The disposition of a qualified mortgage is a prohibited transaction unless the disposition is pursuant to (i) the substitution of a qualified replacement mortgage for a qualified mortgage; (ii) a disposition incident to the foreclosure, default, or imminent default of the mortgage; (iii) the bankruptcy or insolvency of the REMIC; or (iv) a qualified liquidation. Section 860F(a)(2)(A).

SECTION 4. BACKGROUND—TRUSTS

.01 Section 301.7701–2(a) of the Procedure and Administration Regulations defines a “business entity” as any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under § 301.7701–3) that is not properly classified as a trust under § 301.7701–4 or otherwise subject to special treatment under the Code.

.02 Section 301.7701–4(a) provides that an arrangement is treated as a trust if the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

.03 Section 301.7701–4(c) provides that an “investment” trust is not classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders.