FASB Loan Commitments
Last Updated: April 1, 2004
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
The objective of this project had been to clarify FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, (as amended) with respect to determining the fair value of loan commitments (including interest rate lock commitments). Specifically, the project had been intended to address two issues:
- What information an entity should use to determine the fair value of a loan commitment that is accounted for as a derivative under Statement 133 (as amended)
- Whether a loan commitment should ever be reported as an asset by the issuer of that commitment.
Decisions Reached at the Last Meeting
On March 31, 2004, the Board discussed what urgency was appropriate for the loan commitments project and decided to remove that project from its agenda. In October 2003, an important factor cited by the Board in undertaking this project was the great diversity in practice among issuers of loan commitments both in determining the fair value of loan commitments that must be accounted for as derivatives and in whether such commitments can ever be reported by the issuer as assets. However, on March 9, 2004, the SEC staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments, that addresses the accounting for loan commitments entered into after March 31, 2004. Thus, the current diversity in practice is expected to significantly decrease in the near future, thereby reducing the urgency of the project.
All work on this endeavor as a separate project will cease.
Summary of Tentative Decisions
The Board initially added the project to its agenda, but removed it on March 31, 2004, because SEC action significantly reduced the need for a separate project on loan commitments.
Board Meeting/Public Meeting Dates
Below is a list of the FASB Board/Public meetings. Minutes for meetings beginning with October 1, 2003, are available on the FASB website.
|March 31, 2004||Board MeetingThe Board decided to remove this project from its agenda|
|December 3, 2003||Board MeetingDiscussion of loan commitments with representatives of the Mortgage Bankers Association of America|
|October 1, 2003||Board MeetingAgenda decision whether to add a project to the Board’s technical agenda|
History and Background
Loan commitments that relate to a mortgage loan that will be held for sale should be accounted for, by the issuer of the loan commitment, as derivative instruments at fair value under Statement 133 (as amended). Loan commitments that relate to mortgage loans that will be held for investment purposes and loan commitments to originate other types of loans (that is, other than mortgage loans) are not accounted for as derivative instruments under Statement 133 (as amended) and instead are accounted for pursuant to FASB Statements No. 65, Accounting for Certain Mortgage Banking Activities, and No. 91, Accounting for Nonrefundable Fees & Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, as applicable. The holder of a commitment to originate any type of loan (that is, the potential borrower) cannot account for that loan commitment as a derivative instrument.
The two issues being addressed in this project were raised by a Derivatives Implementation Group (DIG) member and scheduled for discussion as Agenda Item 15-1 at the March 15, 2001 meeting, which was the last time the DIG members met to discuss issues. Agenda Item 15-1 was one of two issues that were not discussed at that meeting due to a shortage of time. In late 2003, there was diversity in practice in determining the fair value of loan commitments that must be accounted for as derivatives, as well as diversity among the issuers of such commitments in whether those commitments can ever be reported as assets. Consequently, the Board was seeking a resolution for those issues.
At the educational Board meeting on December 3, 2003, the MBAA representatives explained the process for issuing single-family residential mortgage loan commitments (interest rate lock commitments), their terms and other characteristics, and related valuation issues, as well as the differences between commercial loan commitments and single-family residential mortgage loan commitments. Those representatives also discussed the rationale supporting the view of some of their members that the issuer of a loan commitment should be permitted to report that commitment as an asset. They also provided examples of the diversity in practice among those issuers of loan commitments that, under certain circumstances, report those commitments as assets.
On December 11, 2003, the SEC staff announced that it would soon release a Staff Accounting Bulletin (SAB) that would require all registrants to begin accounting for their issued loan commitments (including interest rate lock commitments) subject to Statement 133 as written options that would be reported as liabilities until either they are exercised (and a loan is made) or they expire unexercised. On March 9, 2004, the SEC staff issued Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to Loan Commitments, that addresses the measurement of loan commitments that are accounted for as derivatives under Statement 133 (as amended) and are entered into after March 31, 2004. Specifically, the response to Question 1 in SAB 105 indicates that, in recognizing a loan commitment at fair value, a bank may not consider the expected future cash flows related to the associated servicing of the loan. Because SAB 105 is expected to reduce significantly the then-current diversity in practice in the near future, the Board decided at the March 31, 2004, to drop the project and remove it from the Board’s technical agenda.
Senior Project Manager