The Emerging Issues Task Force of the Financial Accounting Standards Board Sept. 24 approved a consensus statement that would set conditions for a lender to account for a loan arranged for by a mortgage broker as a loan purchased from the broker. The conditions, however, are not as strict as some that were considered earlier by the EITF.
In many cases. especially for mortgage banking subsidiaries of thrifts, it is more advantageous to account for the loan as purchased rather than originated.
The statement is an attempt to deal with accounting issues involved in so-called 'table funding." which refers to a transaction in which a broker originates a loan but the actual lender 'brings the funds to the table.'
The consensus statement sets the following criteria for treating the loan as purchased:
* The mortgage broker must be registered or licensed to originate and sell loans under the laws of the states or other Jurisdictions in which it conducts business.
* The mortgage broker must originate. process and close loans in its own name and be the first titled owner of the loan, with the lender becoming a holder in due course.
* The mortgage broker must be an independent third party, not a lender affiliate. As a non-affiliate, the mortgage broker must bear all the costs of business, including the costs of its place of business, including the costs of its origination operations.
* The mortgage broker must sell loans to more than one lender and not have an exclusive relationship with the lender in question.
* Indemnification of the brokers risks by the lender bars the lender from treating the loan as purchased.
The EITF consensus statement was a compromise that came out of a July meeting at which many conflicting viewpoints were expressed.
Some members, for example, had wanted mortgage brokers to meet the standards of seller/servicers for the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. Those standards require substantial net worth.
Some members also wanted the broker to actually fund the loans.
There are many nuances to the criteria adopted. For example, it might be difficult to prove that a broker is not dealing exclusively with one lender if, over an extended period. the broker deals with a single lender in order to meet commitments to that lender, even though the broker actually does have agreements with some other lenders.
The FASB staff used the illustration of a broker originating a $100,000. 30-year. fixed-rate mortgage. The borrower agrees to pay the broker a 1% origination fee plus one point at closing.
The lender funds the loan and pays the broker a $1,250 (125 basis points) servicing release premium. At closing. the lender disburses $101,250 (the principal amount plus the servicing release premium). The broker collects $3,250 (the servicing release premium plus the fees charged the borrowed.
If the loan is treated as originated by the lender. no financial statement recognition is given to the servicing rights acquired. If the loan is sold at par. the lender would recognize a loss of $1,250.
But if the loan is considered purchased from the broker, the lender would recognize a mortgage servicing asset of $1,250.
The consensus statement will be effective for transactions entered into after Sept. 24. The EITF considers issues on which there is a divergence of practice but are not considered to require formal action by FASB.