Lenders have been taking a closer look at a proposal issued a few weeks ago by the Financial Accounting Standards Board that they had feared would be unnecessarily burdensome.
The proposal, which is expected to be approved within a month, requires lenders to measure declines in value within their mortgage servicing portfolios by segment and deduct the impairment from earnings. Declines in one segment may not be offset by improvements in other segments.
"We were disappointed in that it wasn't the best answer to the issue of impairment," said Allison Utermohlen, senior director of financial management at the Mortgage Bankers Association.
Lenders had complained that segmentation was costly and difficult to implement, and that measuring only impairment and not improvement would distort their financials.
But after looking more carefully at the details of the rule, lenders have decided they can live with it.
The reason for the change of heart is that the rule permits lenders to choose their own segmentation criteria - by geography, by interest rate, by loan-to-value ratio, etc. - rather than specifying what criteria and how many should be used. A large number of segments would be costlier to deal with and would likely produce larger impairment figures.
"We're also pleased to see that impairment will be charged to an impairment allowance reserve account," said Ms. Utermohlen. Such an account, while it will affect reported earnings, can fluctuate up and down as impairment changes and is a more lenient provision than requiring a permanent writedown, she said.
Ms. Utermohlen says she has now turned her attention to an industry task force that will try to head off problems that lenders may have with their accounting firms.
"We already envision situations where clients and their auditors argue whether four or six or eight or 12 strata are appropriate," Ms. Utermohlen said. Presumably, companies would prefer fewer strata, which would produce lower impairment numbers, while auditors may push for more.
The task force will draft an implementation guide that will meet over the summer and into the fall to try and address some of the more subjective aspects of the new rule, she said.
"We want not only to provide guidance to our members but also hopefully minimize the disputes between members and auditors. Accountants will be included on the task force," Ms. Utermohlen added.