The Emerging Issues Task Force of the Financial Accounting Standards Board will consider a draft consensus at its Sept. 24 meeting that would 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 by the EITF.
In many cases, especially for mortgage banking subsidiaries of thrifts, it is more advantageous to account for the loan 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 draft consensus statement "is a lot more specific than previous guidance, but it is consistent with that guidance," said Brian Smith, executive vice president of the Savings and Community Bankers of America.
Smith said it would have an impact on mortgage banking subsidiaries that carry mortgage servicing portfolios. Typically, they would like to treat the loans as purchased because it would allow them to show the mortgage servicing as having a value on their books rather than as an off-balance-sheet item.
"These guidelines are not as strict as some they considered," said Dorsey Lee Baskin, national technical director for depository institutions at Arthur Andersen & Co.
He noted that the EITF had considered requiring mortgage brokers to meet the standards of seller/services for the Federal National Mortgage Association and the Federal Home Loan mortgage Corporation, which include substantial net worth.
The draft also does not include a requirement that brokers actually fund the loans, another alternative that had been considered.
The draft concesus statement set the following criteria for treating the loan as purchased:
* The mortgage broker must be registered, licensed and meet all applicable regulation necessary 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 loan 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 and not an affiliate of the lender. As a non-affiliate, the mortgage broker must bear all of 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.
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 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 borrower).
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.