Financial Accounting Standards Board Begins Hearings on Accounting Rules for Loan-Origination and Acquisition Fees

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Financial Accounting Standards Board Begins Hearings on Accounting Rules for Loan-Origination and Acquisition Fees

The Financial Accounting Standards Board begins three days of hearings today in Washington on its controversial proposal on accounting for loan-origination and acquisition fees, with the hearings likely to focus on the issue of what costs of loan originations can be capitalized.

According to the board proposal made last December, all fees associated with originating loans should be amortized over the life of the loan, while most costs would be expensed in the period in which they are incurred. Only incremental direct costs, which are narrowly defined in the proposal, could be capitalized and deferred over the life of the loan.

At an open meeting in Stamford Monday, board staff member Peter Horoszko told board members that the hearings should focus on two issues regarding direct costs of originating loans: "What costs, if any, ought to be capitalized?' and, "How would [those costs] be reliably measured?'

The staff's recommendation to the board was based on an analysis of 575 of the 817 comment letters the board received on the loan-origination fee issue, Mr. Horoszko said. The proposal would affect all lenders, but most of the criticism of the proposal has come from the thrift industry, which relies heavily on loan-fee income in its mortgage lending.

"Quite a number of respondents indicated this [proposal] would be the demise of the thrift industry,' Mr. Horoszko said.

"Other industry response was mixed,' he said. "The thrift industry was fairly united in their views.'

There is practically no chance that the board will change its position completely and continue to allow loan fees to be recognized immediately as income, but the thrift industry does stand a good chance of changing some parts of the proposal. The most likely area for change is the issue of direct costs. "That's the area we have to concentrate on,' said Bertill A. Gustafson, senior vice president and controller of Great Western Savings, Beverly Hills, Calif.

Under the board's proposal, costs that can be clearly defined in the lending process, like the use of an outside appraiser, can be capitalized and deferred over the life of the loan. But the costs of using in-house appraisal departments could not be capitalized. The expenses would have to be incurred immediately, while the loan-fee income that consumers are charged to offset these expenses would be deferred. "If all fees are deferred, all direct costs must be deferred,' said George L. Engelke Jr., executive vice president and treasurer of Astoria Federal Savings & Loan Association, Astoria, N.Y.

Commercial banks also dispute the board's proposal on direct costs. "Banks agree that costs should be capitalized if fees are amortized,' Mr. Horoszko said.

"It doesn't make economic sense,' said David Morris, vice president of Chase Manhattan Bank. …