WASHINGTON —The housing industry, lenders and consumer groups are all raising alarms over an obscure but critical provision in the law that is set to expire at the end of the year unless Congress passes a bill to continue it in the next few weeks. Those parties are hopeful the Mortgage Forgiveness Debt Relief Act will be extended during the lame duck session and continue to exempt borrowers from having to pay taxes on debt forgiveness, such as principal reductions and short sales.

Such forms of debt cancellation are also a critical part of the $25 billion mortgage servicer settlement signed in February, meaning expiration of the law would also throw a wrench in that deal. The five largest mortgage servicers agreed to use a chunk of the settlement funds to provide relief to struggling borrowers, according to American Banker, an affiliate of Credit Union Journal.

There have been several standalone bills in the House and Senate to extend the provision for one or more years, but none of those bills have been approved by their respective committees.

Observers said the most likely scenario is the passage of a one-year extension for the law with no changes to eligibility requirements. Looking beyond 2013, it's not clear how long the tax exemption will ultimately last.

Subscribe Now

Authoritative analysis and perspective for every segment of the credit union industry

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.