Capital Briefs: FDIC Warns Against Use of 'Rule of 78s'

The Federal Deposit Insurance Corp. is warning banks not to use the so-called "Rule of 78s" accounting method when reporting interest income on call reports for loans originated after Jan. 1.

"The Rule of 78s normally should not be used to report interest income in the quarterly Reports of Condition and Income even if it is used for federal income tax purposes," the FDIC said in a letter last week to the chief executives of 6,000 state-chartered banks.

The Rule of 78s is a way to minimize taxes due on interest earned on some amortized short-term consumer credits that require regular loan payments. The loans must be for less than five years and cannot include a balloon payment.

The Internal Revenue Service in 1997 eliminated use of the Rule of 78s. However, many banks were unable to alter their tax treatment for these loans last year. As a result, the IRS amended its rules so banks could continue to use it until the start of their fiscal year in 1999. The FDIC letter is available at www.fdic.gov.

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