Accounting for Deferred Loan Fees Is Subject to Increasing Scrutiny

Regulatory examiners are increasingly focusing on the matter of deferred loan fees under the Statement of Financial Accounting Standards (SFAS) No. 91 (Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases). SFAS No. 91 establishes standards of financial accounting and reporting for nonrefundable fees and costs associated with “lending activities,” such as lending, committing to lend, standby letters of credit, and syndicating loans. The accounting for discounts, premiums, and commitment fees associated with the purchase of loans and other debt securities are also covered by this statement. Finally, SFAS No. 91 addresses the recognition and the balance sheet classification of nonrefundable fees and costs associated with lending activities.

In order to ensure full compliance, it is critical to understand the basis and function of SFAS No. 91. Under the statement, nonrefundable fees are defined as origination fees, points, placement fees, commitment fees, application fees, management fees, and syndication fees. Direct loan origination costs only include (a) incremental direct costs of loan origination incurred in transactions with independent third parties for that loan and (b) certain costs directly related to specified activities performed by the lender for that loan.

Regulatory examiners focus efforts on making sure that loan origination fees are deferred and recognized over the life of the loan, using the interest method, as an adjustment of yield (interest income). Direct loan origination costs are to be deferred and recognized as a reduction in the yield of the loan. Loan fees and costs and purchase premiums and discounts related to loans should be accounted similarly. Loan origination fees and related direct loan origination costs for a given loan should be offset, and only the net amount should be deferred and amortized.

For reporting purposes, amounts of loan origination, commitment, and other fees and costs recognized as an adjustment of yield must be reported as part of interest income. Amortization of other fees, such as commitment fees that are being amortized on a straight-line basis over the commitment period or included in income when the commitment expires, must be reported as service fee income.

Finally, the unamortized balance of loan origination, commitment, and other fees, costs, purchase premiums and discounts that are being recognized as an adjustment of yield pursuant to SFAS No. 91 must be reported on the balance sheet as part of the loan balance to which they relate.

If you have any questions about SFAS No. 91, please contact Deborah Puga at dpuga@mbafcpa.com or Frank Gonzalez at fgonzalez@mbafcpa.com.