Regulators Advise on Accounting, Reporting Commitments to Originate, Sell Mortgage Loans

ALEXANDRIA, Va. – The NCUA has joined with the Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation and Office of Thrift Supervision in distributing an "Interagency Advisory on Accounting and Reporting for Commitments to Originate and Sell Mortgage Loans." Specifically, the interagency advisory No. 05-01 issued earlier this month, provides supplemental guidance on the "appropriate accounting and reporting commitments to: (1) originate mortgage loans that will be held for resale, and (2) sell mortgage loans under mandatory delivery and best efforts contracts." According to the advisory, based on the Agencies' review of regulatory reports, "some financial institutions may not be following the appropriate accounting and reporting for commitments to originate mortgage loans that will be held for resale and commitments to sell mortgage loans. Accordingly, this Advisory provides additional guidance on the application of GAAP." The advisory reminds credit unions that "commitments to originate mortgage loans that will be held for resale are derivatives and must be accounted for at fair value on the balance sheet by the issuer." In addition, "All loan sales agreements, including both mandatory delivery and best efforts contracts, must be evaluated to determine whether the agreements meet the definition of a derivative under Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities.Institutions should also account for loan sales agreements that meet the definition of a derivative at fair value on the balance sheet." The advisory discusses the characteristics a credit unions should consider when determining whether mandatory delivery and best efforts contracts are derivatives and the accounting and regulatory reporting treatment for both commitments to originate mortgage loans that will be held for resale and those loan sales agreements that meet the definition of a derivative. It further addresses the guidance that should be considered in determining the fair value of derivatives. -