WIGGINS, J.
¶ 1 This case turns on interpretation of a state tax deduction statute. Former RCW 82.04.4292 (1980) provided that in computing their business and occupation (B & O) tax, banks and financial institutions could deduct from their income "amounts derived from interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties."
¶ 2 We hold that Cashmere cannot claim the deduction because its investments in REMICs and CMOs were not "primarily secured" by first mortgages or trust deeds. Cashmere's investments in REMICs and CMOs gave it the right to receive defined income streams from a pool of mortgages, trust deeds, and mortgage-backed securities, held in trust for investors. The ultimate source of cash flow was mortgage payments. However, Cashmere's investments were not backed by any encumbrance on property nor did Cashmere have any legal recourse to the underlying trust assets in the event of default. Thus, Cashmere's investments were not "primarily secured" by mortgages or trust deeds. We affirm the Court of Appeals and deny Cashmere the deduction.
¶ 3 A mortgage-backed security (MBS) is a type of tradable asset entitling its owner to principal and interest payments from a pool of mortgages.
¶ 4 The secondary market buyer acquires the right to receive the borrower's principal and interest payments on the home loan and also the right to foreclose on the home if the borrower fails to make timely payments.
¶ 5 A simple type of mortgage security is known as a pass-through security. Investors who purchase a pass-through security own a portion of each of the underlying mortgage loans in the pool and are entitled to a pro rata share of principal and interest payments. The mortgages underlying the securities remain largely intact; any division of interest between investors is accomplished through warranties or proportionate ownership of those whole loans. The cash flows from these investments "pass through" from borrowers to investors. Thus, cash flows may vary from month to month depending on the actual payments borrowers make on the mortgages in the pool.
¶ 6 Pass-through securities may be pooled again to serve as collateral for a more complex type of mortgage security known as a collateralized mortgage obligation (CMO) or, since 1986, a real estate mortgage investment conduit (REMIC). CMOs and REMICs (terms that are often used interchangeably) are essentially the same type of investment instrument; REMICs are more recent, and they enjoy certain federal tax benefits.
¶ 7 To create a REMIC, a secondary market buyer pools MBSs and/or whole mortgage loans and deposits them into a REMIC trust account. The securities and mortgages in the pool are divided into individual principal and interest payments due under each instrument:
Cashmere Valley Bank, 175 Wash.App. at 412 n. 9 [305 P.3d 1123]. The REMIC issuer reconfigures these payments into new combinations of principal and interest called "tranches."
¶ 8 Investors buy securities in the different tranches, which entitle the investors to a specific payment stream. The issuing trust collects principal and interest from the underlying assets and then pays out distributions to the different tranches based on the terms of the security. Usually, this creates a
¶ 9 Unlike pass-through investors who purchase slices of each mortgage in the pool, REMIC investors purchase fractional shares in the different tranches. That tranche may have a claim on principal payments, interest payments, or both. Typically, investors are not promised that they will receive 100 percent return on their initial investment. They are merely buying a cash flow over time and assume that, overall, this cash flow will equal more than the initial investment.
¶ 10 Cashmere Valley Bank operates 11 branch banks in several central Washington cities. Cashmere's business includes banking, mortgage, insurance, investment, and leasing services. Between 2004 and 2007, Cashmere invested some of its surplus capital in REMICs.
¶ 11 During discovery, Cashmere identified six REMICs as representative of all of its investments during this tax period: two Federal Home Loan Mortgage Corporation ("Freddie Mac") REMICs, two Federal National Mortgage Association ("Fannie Mae") REMICs, and two private-label REMICs. The underlying loans in the various REMICs were primarily secured by first mortgages or deeds of trust on nontransient residential real properties.
¶ 12 One exemplar REMIC is the Fannie Mae REMIC Trust 2000-38. The assets held by the Fannie Mae REMIC Trust 2000-38 are not mortgage loans, but MBSs called Fannie Mae MBS and Ginnie Mae (Government National Mortgage Association) certificates. Fannie Mae essentially had rights to a cash flow from purchasing MBSs. It divided the cash flow into tranches and sold interests in the tranches to different investors, including Cashmere. This REMIC offered 16 tranches designated by letters. About one-half of classes were bonds paying fixed interest and several classes had floating interest rates. One class paid principal only, and two classes paid interest only.
¶ 13 Cashmere purchased a Z class bond in this REMIC, which received a fixed interest rate of 7.00 percent during the time Cashmere owned this investment. Notably, the weighted average coupon rate for the mortgage loans comprising the pools in the underlying MBSs ranged from 7.25 percent to 9.50 percent. So there was no direct correlation between the interest mortgage borrowers paid and interest Cashmere received. In addition, because the Z class represented an "accrual" bond, interest was not paid to the Z class as it was received. Rather, interest was first paid to two other bond classes with equivalent amounts added to the principal amount of the Z class bond.
¶ 14 Another exemplar REMIC is the Washington Mutual REMIC (WAMMS 2004-R4), a private-label REMIC. This REMIC had nine regular classes and an R class. In addition, it offered three private certificates that provided credit enhancement to the offered certificates. As losses came in, these losses were allocated first to the privately held certificates and then up the waterfall starting with the most junior tranches. In addition, to protect senior tranches from prepayment risks, this REMIC had a "shifting interest" credit enhancement. Thus, if borrowers prepaid their mortgages in the first year, the money would be locked up for a certain period of time to allow senior tranche holders to receive some interest on their investments before being paid off. Cashmere invested in Tranche III-A of this REMIC — a senior tranche with a 7.5 percent fixed interest rate.
¶ 15 The Department of Revenue (DOR) audited Cashmere's books and records for
¶ 16 The parties filed cross motions for summary judgment, filing excerpts from depositions of three experts. Michael Gamsky testified that REMIC investments are not secured transactions because issuers do not pledge any property as security for the investments. He explained that investors who purchase REMIC certificates are beneficiaries of a trust and they have contractual rights under the pooling and servicing agreement, but they are not secured investors.
¶ 17 Professor Alan Hess testified and prepared a report on behalf of Cashmere for this case. He believes that "[t]he values of mortgage-backed securities derive from investors' beliefs that homeowners will attempt to honor their mortgage obligations." Clerk's Papers (CP) at 577 (Ex. 11). Thus, he opined that from an economic perspective, the primary security for a REMIC is the repayment obligation of mortgage borrowers. Chirag Shah explained the process of creating REMICs and CMOs. In addition, parties deposed Alan Crain, the chief financial officer of Cashmere at the time of these investments, who explained Cashmere's investments.
¶ 18 After reviewing the evidence, the superior court granted summary judgment to DOR. The Court of Appeals affirmed, holding that Cashmere's investments were not primarily secured by first mortgages or deeds of trust because Cashmere had no power to institute foreclosure proceedings. Cashmere Valley Bank, 175 Wash.App. at 418, 305 P.3d 1123. Thus, the bank's investments were not secured and the deduction did not apply. Id. at 418-19, 305 P.3d 1123. Cashmere petitioned for review, and the Washington Bankers Association filed an amicus curiae memorandum in support of review. We granted review. 179 Wn.2d 1008, 316 P.3d 494 (2014).
¶ 19 The case requires us to interpret RCW 82.04.4292. Statutory interpretation is a question of law subject to de novo review. HomeStreet, Inc. v. Dep't of Revenue, 166 Wn.2d 444, 451, 210 P.3d 297 (2009); see also Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 404, 229 P.3d 693 (2010) (summary judgment also reviewed de novo). When possible, the court derives legislative intent solely from the plain language enacted by the legislature, considering the text of the provision in question, the context of the statute in which the provision is found, related provisions, amendments to the provision, and the statutory scheme as a whole. Dep't of Ecology v. Campbell & Gwinn, LLC, 146 Wn.2d 1, 9-10, 43 P.3d 4 (2002).
¶ 20 In Washington, banks and certain other financial businesses must pay B & O tax on most income from investments. RCW 82.04.4281(2)(b). One exception is a deduction in RCW 82.04.4292 for investments secured by first mortgages:
¶ 21 In HomeStreet, we held that RCW 82.04.4292 unambiguously requires a taxpayer to prove five elements:
HomeStreet, 166 Wash.2d at 449, 210 P.3d 297. All five elements of the statute must be met for the taxpayer to receive a deduction. Id. A taxpayer has the burden of proving that it qualifies for a tax deduction. Wash. Imaging Servs., LLC v. Dep't of Revenue, 171 Wn.2d 548, 555, 252 P.3d 885 (2011).
¶ 22 There is no dispute that Cashmere is a bank, that the amount deducted was derived from interest received because of an investment, and that the underlying mortgages were, indeed, first mortgages on nontransient residential real property. At issue here is the fourth element: whether investments in REMICs and CMOs are "primarily secured by" first mortgages or deeds of trust.
¶ 23 Under the plain language of RCW 82.04.4292, a taxpayer may deduct interest income earned from investments that are "primarily secured by" first mortgages and deeds of trust on nontransient residential property. Here, Cashmere's REMIC investments are not secured by first mortgages or trust deeds. REMIC issuers promised to pay principal and interest payments according to bond terms but provided no security interest in real property to Cashmere to back their promises to pay. Thus, these are not investments secured by first mortgages or trust deeds.
¶ 24 This conclusion comports with our interpretation of RCW 82.04.4292 in HomeStreet and DOR's 1990 adjudicatory determination, to which we grant some deference. We reject Cashmere's policy argument that the deduction should apply widely because it stimulates the residential housing market; no evidence was submitted to support this claim.
¶ 25 RCW 82.04.4292 limits the deduction to "interest received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties." The statute is concerned with interest received by the taxpayer-bank; it follows inexorably in this case that the "investments or loans" must be investments or loans made by Cashmere. It also follows that the same investments or loans made by Cashmere must be "primarily secured by first mortgages or trust deeds."
¶ 26 The statute clearly allows Cashmere to deduct interest earned on any "loan" made by Cashmere directly to a home buyer in return for a promissory note and deed of trust because the loan would be "primarily secured" by a deed of trust. By allowing this deduction to the B & O tax, the legislature apparently intended to encourage banks to make loans to home buyers.
¶ 27 In addition, the statute allows Cashmere to deduct interest earned on "investments" backed primarily by first mortgages and trust deeds. Parties dispute what constitutes a qualifying investment. By the plain language of the statute, a qualifying
¶ 28 The statute does not define "secured," but it is a familiar legal term so we give it its familiar legal meaning. Rasor v. Retail Credit Co., 87 Wn.2d 516, 530, 554 P.2d 1041 (1976). Black's Law Dictionary defines "secured" as "supported or backed by security or collateral." Black's Law Dictionary 1475 (9th ed.2009). A secured creditor is "protected by a pledge, mortgage, or other encumbrance of property that helps ensure financial soundness and confidence." Id. Under the Uniform Commercial Code, a secured creditor has "the right, on the debtor's default, to proceed against collateral and apply it to the payment of the debt." Black's Law Dictionary, supra, at 425 (citing UCC § 9-102-(a)(72)). Thus, a secured party obtains two related benefits: leverage for payment or performance of the obligation and the ability to proceed against specific property if the debtor defaults. See Russell A. Hakes, The ABCs of the UCC: Article 9: Secured Transactions 2 (3d ed.2013); see also Cashmere Valley Bank, 175 Wash.App. at 417, 305 P.3d 1123 (a "secured" party necessarily has some recourse to collateral securing its investment).
¶ 29 Cashmere did not receive any interest in mortgages or deeds of trust to back its investment. The REMICs created contractual obligations or perhaps obligations on the part of the REMIC trustees, but Cashmere received no security for the investments. While it is true that the interest received by Cashmere from the REMICs ultimately comes from promissory notes secured by mortgages and deeds of trust, Cashmere has no interest in the underlying mortgages and deeds of trust and is not a beneficiary of those instruments.
¶ 30 Cashmere's investments merely gave Cashmere the right to receive specific cash flows generated by the assets of the trust at specific times. But if the REMIC trustee failed to pay Cashmere according to the terms of the investment, Cashmere had no right to sell the mortgage loans or the residential property or any other asset of the trust to satisfy this obligation. Cf. Dep't of Revenue v. Sec. Pac. Bank of Wash. Nat'l Ass'n, 109 Wn.App. 795, 808, 38 P.3d 354 (2002) (deduction allowed because mortgage companies transferred ownership of loans to taxpayer who could sell the loans in event of default). Cashmere's only recourse would be to sue the trustee for performance of the obligation or attempt to replace the trustee. The trustee's successor would then take legal title to the underlying securities or other assets of the related trust. At no time could Cashmere take control of trust assets and reduce them to cash to satisfy a debt obligation. Thus, we hold that under the plain language of the statute, Cashmere's investments in REMICs are not primarily secured by mortgages or deeds of trust.
¶ 31 The Department of Revenue has similarly determined that investments in REMICs do not qualify for the deduction. DOR is charged with enforcing the tax code and hence has the authority to interpret it. Ass'n of Wash. Bus. v. Dep't of Revenue, 155 Wn.2d 430, 440, 120 P.3d 46 (2005) (holding that DOR has implied authority to adopt interpretive rules); RCW 82.32.300 (administration of chapters 82.04 through 82.27 RCW of this title is vested in DOR). Although a DOR determination is not binding on this court, an agency's adjudicatory action is generally granted some deference. See Leonard v. City of Bothell, 87 Wn.2d 847, 557 P.2d 1306 (1976); Impecoven v. Dep't of Revenue, 120 Wn.2d 357, 363, 841 P.2d 752 (1992) (considerable deference given to interpretation by agency charged with enforcing statute). In addition, we accord deference to an interpretation of law in matters involving the
¶ 32 In a 1990 determination, DOR explained why interest earned from investments in REMICs does not qualify for the mortgage tax deduction. See Wash. Dep't of Revenue, Determination No. 90-288, 10 Wash. Tax Dec. 314 (1990). A savings and loan association sought a refund of B & O taxes assessed on interest earned from investments in REMICs. The taxpayer argued that because interest received from investments in pass-through securities is deductible, interest received on REMICs should be too. DOR rejected the deduction, explaining that with pass-through securities, the issuer holds the mortgages in trust for the investor. In the event of individual default, the issuer, as trustee, will foreclose on the property to satisfy the terms of the loan. In other words, the right to foreclose is directly related to homeowner defaults — in the event of default, the trustee can foreclose and the proceeds from foreclosure flow to investors who have a beneficial ownership interest in the underlying mortgage. Thus, investments in pass-through securities are "primarily secured by" first mortgages.
¶ 33 By contrast, with REMICs, a trustee's default may or may not coincide with an individual homeowner default. So, there may be no right of foreclosure in the event a trustee fails to make a payment. And if a trustee can and does foreclose, proceeds from the sale do not necessarily go to the investors. Foreclosure does not affect the trustee's obligations vis-à-vis the investor. Indeed, the Washington Mutual REMIC here contains a commonly used form of guaranty: "For any month, if the master servicer receives a payment on a mortgage loan that is less than the full scheduled payment or if no payment is received at all, the master servicer will advance its own funds to cover the shortfall." "The master servicer will not be required to make advances if it determines that those advances will not be recoverable" in the future. At foreclosure or liquidation, any proceeds will go "first to the servicer to pay back any advances it might have made in the past." Similarly, agency REMICs, like the Fannie Mae REMIC Trust 2000-38, guarantee payments even if mortgage borrowers default, regardless of whether the issuer expects to recover those payments. Moreover, the assets held in a REMIC trust are often MBSs, not mortgages. So, if the trustee defaults, the investors may require the trustee to sell the MBS, but the investor cannot compel foreclosure of individual properties.
¶ 34 DOR also noted that it has consistently allowed the owners of a qualifying mortgage to claim the deduction in RCW 82.04.4292. But the taxpayer who invests in REMICs does not have any ownership interest in the MBSs placed in trust as collateral, much less any ownership interest in the mortgage themselves. By contrast, a pass-through security represents a beneficial ownership of a fractional undivided interest in a pool of first lien residential mortgage loans. Thus, DOR concluded that while investments in pass-through securities qualify for the tax deduction, investments in REMICs do not. We should defer to DOR's interpretation because it comports with the plain meaning of the statute.
¶ 35 In HomeStreet, 166 Wn.2d 444, 210 P.3d 297, we interpreted RCW 82.04.4292 and applied the statute to allow a deduction. HomeStreet originated mortgage loans to homeowners and then sold the loans on the secondary market. Id. at 447-48, 210 P.3d 297. It either sold whole loans (servicing released) or sold a portion of the loans while retaining the right to service the loans and receive a portion of the interest (servicing retained). Id. at 448, 210 P.3d 297. For the loans sold on a service-retained basis, borrowers continued to make principal and interest payments to HomeStreet because HomeStreet still owned a portion of the loan and serviced the loans for the secondary market lenders. Id. HomeStreet collected the payments from borrowers, paid the investors the principal and a portion of the interest, and retained a portion of the interest as a servicing fee. Id.
¶ 37 Cashmere relies on language in HomeStreet taken out of context to argue that its interest income qualifies for the deduction because the income was traceable to interest payments borrowers made on first mortgages. But, the issue here is not whether this is income derived from interest received. It is whether the investments were primarily secured by a first mortgage or trust deed (the fourth element). As explained above, Cashmere's investments were not.
¶ 38 Moreover, this case is factually distinct. Borrowers making the payments that eventually end up in Cashmere's REMIC investments do not pay Cashmere, nor do they borrow money from Cashmere. The borrowers do not owe Cashmere for use of borrowed money, and they do not have any existing contracts with Cashmere. Unlike HomeStreet, Cashmere did not have an ongoing and enforceable relationship with borrowers and security for payments did not rest directly on borrowers' promises to repay the loans. Indeed, REMIC investors are far removed from the underlying mortgages. Interest received from investments in REMICs is often repackaged several times and no longer resembles payments that homeowners are making on their mortgages.
¶ 39 Cashmere also argues that requiring a taxpayer to show that it has some legal recourse to the underlying mortgages or trust deeds conflicts with HomeStreet by adding a sixth element to the statute. DOR counters that whether a taxpayer has legal recourse to the assets in the REMIC trust addresses a fact that supports the legal conclusion that the investments are "primarily secured by" the mortgages or deeds of trust. We agree with DOR.
¶ 40 Under the statute, there is no requirement that the taxpayer have direct recourse in order for an investment to be considered "secure." However, as explained above, a secured party necessarily has some recourse to collateral securing its investment. For example, in Security Pacific, Security Pacific required mortgage companies to assign residential loans to Security Pacific in return for loaning money to those companies to make the loans. 109 Wash.App. at 798-99, 38 P.3d 354. The assignments transferred ownership of the loans to Security Pacific such that Security Pacific stood in the shoes of the mortgage companies. Id. at 808, 38 P.3d 354. If a mortgage company defaulted on its line of credit, Security Pacific resorted to the underlying loans, selling them on the secondary market. Id. at 809, 38 P.3d 354. Thus, the Court of Appeals held that Security Pacific could deduct any interest earned from the time of the assignment until it sold the loan on the secondary market. Id. at 810-11, 38 P.3d 354.
¶ 41 Accordingly, we hold that a "secured" investment must be backed by collateral and the investor must have some recourse against that collateral. Here, REMIC issuers offered no interests in mortgages or trust deeds to back their promises to pay investors. Relatedly, Cashmere has no direct or indirect legal recourse to the mortgages that underlie its REMIC investments in the event of default. Thus, we hold that Cashmere cannot claim the tax deduction.
¶ 42 We reject Cashmere's argument that RCW 82.04.4292 should be broadly construed because these deductions have a beneficial
¶ 43 We affirm the Court of Appeals and hold that Cashmere's REMIC investments are not "primarily secured by" first mortgages or deeds of trust on nontransient residential real properties. Cashmere has not shown that REMICs are secured — only that the underlying loans are primarily secured by first mortgages or deeds of trust.
¶ 44 Although these investments gave Cashmere the right to receive specific cash flows generated by first mortgage loans, the borrowers on the original loans had no obligation to pay Cashmere. Relatedly, Cashmere has no direct or indirect legal recourse to the underlying mortgages as security for the investment. The mere fact that the trustee may be able to foreclose on behalf of trust beneficiaries does not mean the investment is "primarily secured" by first mortgages or deeds of trust.
WE CONCUR. MADSEN, C.J., JOHNSON, OWENS, FAIRHURST, STEPHENS, GONZÁLEZ, GORDON McCLOUD, and YU, JJ.
