Critical Issues Related to Foreign Lending

Foreign-based borrowers increasingly are interested in taking out loans from U.S. financial institutions, and this interest is expected to grow with the recent relaxation of lending standards by Fannie Mae and Freddie Mac. Despite the lure of an expanded customer base, some domestic banks have been reluctant to enter such transactions for fear of triggering cumbersome issues related to compliance with the Foreign Account Tax Compliance Act (FATCA). Although FATCA, in fact, would not even be implicated in most loan arrangements with foreign-based borrowers, banks should be aware of certain issues that could add to their costs by increasing both their effective tax rates and their reporting obligations.