Purpose, Background,
and Scope The Office of the Comptroller
of the Currency, the Federal Deposit Insurance Corporation, the Federal
Reserve Board, the Office of Thrift Supervision, and the National
Credit Union Administration are issuing this interagency guidance
to provide instruction to institutions and examiners about the appropriate
accounting and reporting treatment for certain loans that are sold
directly from the loan portfolio or transferred to a held-for-sale
account. This guidance applies when—
- an institution decides to sell loans that were not
originated or otherwise acquired with the intent to sell,1 and
- the fair value of those loans has declined for any
reason other than a change in the general market level of interest
or foreign-exchange rates.2
Thus, this guidance is directed toward loans
that have declined in credit quality. This would include, but not
be limited to, loans that are past due or in nonaccrual status, have
been downgraded or adversely classified (by the institution, examiners,
or an external rating agency), have fair value declines reflecting
an increase in credit spreads or spreads over the reference rate,
or have reduced liquidity related to credit factors.
Selling loans, in whole or in part, has become
an increasingly important portfolio risk-management tool for institutions
seeking to manage concentrations, change risk profiles, improve returns,
and generate liquidity. Examiners, however, have noted differences
among institutions in the accounting for and reporting of these transactions.
Specifically, accounting inconsistencies relate to how and where initial
and subsequent fair-value adjustments are recorded, and the reporting
of past-due and nonaccrual loans that have been designated as held-for-sale.
This issuance clarifies existing guidance,
3 and promotes accounting
transparency consistent with generally accepted accounting principles
(GAAP).
4 5When a decision is made to sell a loan or portion thereof
that was not originated or initially acquired with the intent to sell,
the loan should be clearly identified and transferred to the held-for-sale
(HFS) account. At the time the decision is made, a formal marketing
strategy or plan of sale is typically developed. A plan of sale may
include, for example, identification of the loans to be sold, the
expected method of sale (e.g., securitization or sale in the secondary
market), the time period expected for completion of the sale, and
an active program to find a buyer.
The transfer to the HFS account should be recorded at
the lower of cost or fair value
6 on the date the decision to sell is made. The best
evidence of fair value is a quoted market price. If no quoted market
price is available, the following should be considered when estimating
a loan’s fair value:
- recent cash sales of similar loans
- market prices of similar loans, including any information
received from brokers or dealers
- valuations received from independent loan-pricing
experts
- the loan’s expected cash flows discounted at an appropriate
interest rate
- the borrower’s public debt rating
An institution’s fair-value estimates should
be clearly supported and documented. For purposes of the bank call
report, the TFR, and the NCUA call report, institutions must report
loans held for sale at the lower of cost or fair value.
7At the time of a loan’s transfer to the
HFS account, any reduction in the loan’s value should be reflected
as a write-down of the recorded investment resulting in a new cost
basis, with a corresponding reduction in the allowance for loan and
lease losses (ALLL). To the extent that the loan’s reduction in value
has not already been provided for in the ALLL, an additional loan-loss
provision should be made to maintain the ALLL at an adequate level.
For bank call report purposes, the write-down for the
loan’s reduction in value should be reported as a charge-off in part
I of the schedule on charge-offs and recoveries on loans and leases
and changes in allowance for loan and lease losses, and the corresponding
reduction in the ALLL should be reported as an “adjustment” to the
ALLL in part II of this schedule.
8 This adjustment should be described in the explanations schedule
of the bank call report as “Write-downs arising from transfers of
loans to HFS.”
9 For TFR purposes,
the write-down for the loan’s reduction in value should be reported
as a “charge-off” in the Consolidated Valuation Allowances and Related
Data schedule.
10 For NCUA call report purposes,
the write-down for the loan’s reduction in value should be reported
as a “charge-off”
in the loan information schedule and in applicable
supplementary loan schedules.
11For financial-reporting purposes, reductions in the ALLL
for loans transferred to the HFS account, if material, should be separately
disclosed and appropriately described in the presentation of the activity
in the ALLL during the period.
Subsequent Declines in Value After
a loan or group of loans is transferred to the HFS account, these
assets must be revalued at each subsequent reporting date until sold
and reported at the lower of cost or fair value. Any declines in value
(including those attributable to changes in credit quality) and recoveries
of such declines in value occurring after the transfer to the HFS
account should be accounted for as increases and decreases in a valuation
allowance for HFS loans, not as adjustments to the ALLL. Changes in
this valuation allowance should be reported in current earnings.
12 The valuation allowance for HFS loans cannot be reduced below
zero (i.e., cannot have a debit balance). Such valuation allowances
should not be reported as part of the ALLL and are not eligible for
inclusion in tier 2 capital for risk-based capital purposes.
Furthermore, for financial-reporting
purposes, when these income or expense amounts relating to increases
or decreases in the valuation allowance are material, they should
be separately disclosed and appropriately described either on the
face of the income statement or in the notes to the financial statements.
Past-Due and Nonaccrual IssuesLoans transferred to the HFS account should continue
to be accorded the same past-due and nonaccrual treatment as other
loans and should be reported as past due or nonaccrual when appropriate.
13 For regulatory-reporting purposes,
when an institution holds portions of a nonaccrual loan in both the
loan portfolio and the HFS account, the institution should report
both portions of the loan as nonaccrual until the loan meets the requirements
for restoration to accrual status. All portions of the nonaccrual
loan are required to be reported in the same manner because the entire
amount is dependent on the same source of repayment.
Issued jointly by the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, the Office of Thrift Supervision, and
the National Credit Union Administration March 26, 2001 (SR-01-12).
