FirstPlus Financial Group Inc. is once again rejiggering its accounting, saying it went too far in adopting more conservative practices last year. The company said it would assume a prepayment rate of 21% on the loans it securitizes. That's more conservative than the 12% it used before last fall, but more lenient than the 33% it adopted then.
When consumers prepay their loans, profits that lenders had assumed they would earn from selling the loans are wiped out.
The Dallas specialist in high-loan-to-value loans restated earnings for the December and March quarters to reflect the change. The company no says it earned $11.6 million in the December quarter, up from the $8.6 million reported earlier, and $19.8 million in the March quarter, up from $17 million.
The move is a sharp turnaround for FirstPlus, which last fall practically eliminated gain-on-sale accounting in the wake of an industrywide furor over the reliability of the practice.
At the time FirstPlus said it would assume a 33% prepayment rate. The company's decision then not to retroactively apply that prepayment rate to loans already made upset analysts and some other lenders, who complained then that FirstPlus was in effect keeping two different sets of books.
The Securities and Exchange Commission has reportedly been in contact with accounting firms over the use of gain-on-sale accounting.
FirstPlus' revision is not "in response to the SEC," said chief executive Daniel T. Phillips during a conference call on the subject. The company has never had any formal contact with the SEC, he said, and its restatement instead is the result of an "ongoing process" since December to try to accurately model securitizations.
"Extreme market uncertainties resulted in FirstPlus using a discount rate" to value its interest-only assets, the company said in a written statement. "After further consideration," FirstPlus has concluded that the value of these assets was understated, the company said.
Separately, FirstPlus announced Monday that it was rolling out a new first mortgage loan that requires no down payment and will let potential homeowners borrow up to 125% of the value of a home when they buy it.
The loan will be targeted toward consumers who have good credit but no cash on hand for a down payment, FirstPlus said. The company's FirstPlus Freedom division, Salt Lake City, has already begun offering the loan to Utah, Nevada, and Colorado residents and will make the loans.
Consumers have been using high-LTV loans to consolidate higher-rate credit cards.
