The Office of Thriff Supervision has issued guidance dealing with the evaluation of purchased mortgage servicing rights that the industry feels is "flexible" but still calls for an annual independent appraisal of PMSR that is more restrictive than required by some other banking agencies.
But despite the industry's acceptance of the new guidelines, it remains concerned that the underlying capital regulation dealing with valuation of identifiable intangibles, such as PMSR has yet to be adopted by the agency.
"While the industry is presuming that the limitations are already in place, the final intangible asset rule has not been published." said Gary G. Gilbert, a regulatory affairs officer with the Savings and Community Bankers of America. "Having them in place would dismiss whatever concerns there may be regarding the precise limitations that the agency will demand, and the extent of any grandfathering provisions."
Gilbert noted that the proposed capital rule suggests that grandfathering of PMSR and other intangibles will be on a case-by-case basis.
While the final rule remains to be issued, the OTS said in its guidance, dated June 23, that the final regulation will delete one of three tests--the 90% of original cost limitation--for the amount of PMSR that can be included in regulatory capital.
Regarding the PMSR guidance, Gilbert noted that "the valuation guidelines are reasonable. OTS officials have made an effort to address industry concerns."
The guidance on PMSR valuation declares that an independent fair market valuation "should be obtained annually if the unamortized bookvalue of PMSR exceeds 25% of an association's core capital." The guidance said OTS may require independent PMSR valuations of troubled associations, even if the level of PMSR is less than 25% of core capital.
This provision is somewhat different than that required by some banking regulators. The FDIC requires it for savings associations, but the Federal Reserve Board does not. The Fed rules gives the agency the authority to seek an independent annual evaluation but do not mandate it.
The guidance also requires institutions to undertake a fair market valuation of PMSR itself at least quarterly. "The estimated fair market value of PMSR should be based on the prices currently paid for servicing rights that are similar to those being valued."
The guidance requires that the estimated fair market value of a portfolio of PMSR be based on "the single net price that the portfolio would reasonably be expected to sell for in the current market between an informed buyer and a willing seller."
"The estimated fair market value of PMSR should be based on the assumption that the PMSR would be marketed in portfolios of a size and compositional price, with the seller providing the customary representation and warranties." the OTS said.
The guidance also says that the fair market value should be determined through a present value, or discounted cash flow analysis that is similar to current industry practice. Under this methodology, "fair market value is determined by estimating the amount and timing of future cash flows associated with the servicing rights and discounting those cash flows using market discount rates," the guidance said.