Washington (March 15, 2004) -- The Securities and Exchange Commission has issued a Staff Accounting Bulletin to provide guidance on banks' extending mortgage loans with an intention to sell the loan after it's funded.
SAB No. 105, "Loan Commitments Accounted for as Derivative Statements," poses a hypothetical situation in which a bank enters a loan commitment with a customer to extend a mortgage loan at a specified rate, intending to sell the mortgage after it's funded. According to the SEC, such a commitment should be accounted for as a derivative instrument, and measured at fair value.
The bank also expects to receive cash flow related to servicing rights from servicing fees, or from selling the servicing rights into the market, the bulletin reads. But the bulletin says that incorporating expected future cash flows related to the associated servicing of the loan results in the "immediate recognition" of a servicing asset.
Servicing assets are to be recognized only once the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. No other internally developed intangible assets (such as customer relationship intangible assets) should be recorded as part of the loan commitment derivative.
The bulletin details the needed disclosures and doesn't require the accounting treatment for loan commitments accounted for as derivatives entered into on or before March 31, 2004. The text of the bulletin is available at http://www.sec.gov/interps/account/sab105.htm.
-- WebCPA staff
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