USA Proper recognition of deferred loan origination fees and costs?

[Tommy Barzola]

Good day all

Under FASB 91, as a lender we are to recognize loan origination fees and costs over the life of the loan. In my office there is some discrepancy of how we go about accounting for this. Can someone explain the proper way to record these fees?

Since we are not allowed to record income at origination, how do we recognize cost incurred to set up the loan (ie. employee salaries/benefits and other costs to originate the loan)? and do we record fees and costs separately or as a net figure?

Thank you
Tommy

 

[kirby]

FASB 91 loan fees are a huge pain to deal with. Check into your loan software to see if it can help do the GL entries.
So here is the 50,000 foot view:
The loan origination fee used to be booked as income on receipt. The acctg rule makers said no - needs to be recognized over the term of the loan. Also, the acctg rule makers said to be fair, the expenses involved in generating that loan can also be recognized over the term of the loan.
So, on the fee side, you have to record the fee using the interest method (not straight line) over the term of the loan. If you have loan software it should be able to do this.
On the expense side it is trickier. Here you need to do a formal study of the (standard) cost to originate a loan. This is where you take into account salaries of sales people, loan back office people and related costs. So typically companies develop a standard cost for loan origination (or many such costs if you have a variety of different loan products that cost different amounts to generate -e.g. small auto loan vs huge commercial loan). Then you put that amount into your loan system to be amortized as a cost.
As a result of all this you will now have on your balance sheet a deferred asset (the unamortized loan costs) and a deferred liability ( the unearned loan fee) . When you record the standard origination deferral, the entry is DR Initial Direct Loan Origination Cost Asset and CR a Contra Salaries Expense Account " IDC Salaries Offset" for example.
Some loan systems have a field to hold the fee amount and one to hold the cost amount.
Anyway, it is a lot of (thankless) work and many times the FASB 91 interest method calculations in the loan system can yield weird incorrect results. In those cases, companies just give up and use st line and let the auditors estimate the possible resulting error as a (hopefully) waived adjusting entry.

Good Luck - hope this helped

 

[Tommy Barzola]

Thanks Kirby! I had a good idea of the process but this is great clarification. As for the cost contra expense entry, you would basically be lowering your overall expense for the month in which you originate the loan and recognizing a portion of the expense each month (debiting expense for amortization) until that deferral is wiped clean (for the life of the loan) correct?
I believe our software does have fields for fees and costs, so if we input the total origination fees collected and our standard cost into the appropriate fields, the software should be able to do the rest... i think?

Also, what is the proper recognition of fees collected which are simply forwarded to other parties/vendors (we collect no income)? Are they treated as deferred fees and deferred costs?

Thanks again
Tommy

 

[kirby]

"As for the cost contra expense entry, you would basically be lowering your overall expense for the month in which you originate the loan and recognizing a portion of the expense each month (debiting expense for amortization) until that deferral is wiped clean (for the life of the loan) correct?
Yes

I believe our software does have fields for fees and costs, so if we input the total origination fees collected and our standard cost into the appropriate fields, the software should be able to do the rest... i think?
Yes, but you have to review the results frequently. If the system is amortizing per FASB 91 it has to use the interest method. Many systems have trouble with that and that's when many folks just use st line.

Also, what is the proper recognition of fees collected which are simply forwarded to other parties/vendors (we collect no income)? Are they treated as deferred fees and deferred costs?
Depends on what is the agreement. If the fee is yours to earn and the payment out just happens to be equal to the fee, apply FASB 91 to the fee. If the fee, per agreement, is not yours, then no fee and so no FASB 91 to apply.

 

[Tommy Barzola]

Also, what is the proper recognition of fees collected which are simply forwarded to other parties/vendors (we collect no income)? Are they treated as deferred fees and deferred costs?
Depends on what is the agreement. If the fee is yours to earn and the payment out just happens to be equal to the fee, apply FASB 91 to the fee. If the fee, per agreement, is not yours, then no fee and so no FASB 91 to apply.

Not sure I understand that part. There are a number of "costs" which are included in our standard cost calculation in which we recognize no income and just act as an intermediary, ie. recording fees, appraisals, credit reports, etc. We simply pass the charge onto the borrower (unless charging origination points count toward these items?). In that case would we factor them in as deferred fees and deferred costs?

 

[kirby]

When you pass the costs on to the borrower, presumably they pay you for that as a fee. That is your loan fee to be earned FASB 91 style.
If the costs that were passed on were directly involved in the loan origination process they should already be a part of your cost analysis for a standard deferral.

 

[Tommy Barzola]

So we would count it as a deferred fee and a deferred cost. Thanks!

 

[Tommy Barzola]

Actually from the pronouncement.. statement “does not apply to costs that are incurred by the lender in transactions with independent third parties if the lender bills those costs directly to the borrower” it sounds like we can allow those fees and costs to offset each other and not defer them. Which would probably make it a little easier