Academic journal article Journal of Accountancy

Financial Accounting: EITF Update: Normal Servicing Fee Rates for SBA Loans

Academic journal article Journal of Accountancy

Financial Accounting: EITF Update: Normal Servicing Fee Rates for SBA Loans

Article excerpt

Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies Financial Accounting Standards Board emerging issues task force (EITF) consensuses as sources of established generally accepted accounting principles.

This month's column lists new EITF consensuses adopted May 18-19, 1995 (see the sidebar below for more information). In addition, the earlier consensus on determining a normal servicing fee rate for the sale of a Small Business Administration (SBA) loan is summarized.

EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700.

ISSUE NO. 94-9

EITF Issue no. 94-9, Determining a Normal Servicing Fee Rate for the Sale of an SBA Loan, addresses determining such a rate in the absence of a major secondary market maker, when applying the consensus in Issue no. 88-11, Allocation of Recorded Investment When a Loan or Part of a Loan is Sold (see EITF Update, JofA, Aug.88, page 33, for details).

The SBA was created to assist and protect the interests of small businesses. Its many services include loan guarantees to small business concerns (SBA loans) for various purposes, such as financing plant construction. SBA loans may be provided directly from the SBA or through banks and nonbank lenders that participate in government guaranteed lending programs. When a lender sells an SBA loan or an interest in one but retains the right to service the loan, the interest rate paid to the purchaser on the sold portion of the loan may be less than the contractual loan interest rate. Some of the interest retained by the seller may represent a fee for normal loan servicing and some may represent an excess servicing receivable, such as the right to receive cash flows that exceed normal servicing fees, which is equivalent to an interest-only strip on the portion of the loan sold. An interest-only strip is the interest on the loan separated from the principal and sold separately.

FASB Statement of Financial Accounting Standards no. 65, Accounting for Certain Mortgage Banking Activities, provides guidance on sales of mortgage loans and mortgage loan servicing. Paragraph 11 of Statement no. 65 says: "If mortgage loans are sold with servicing retained and the stated servicing fee rate differs materially from a current (normal) servicing fee rate, the sales price shall be adjusted, for purposes of determining gain or loss on the sale, to provide for the recognition of a normal servicing fee in each subsequent year."

FASB Technical Bulletin no. 87-3, Accounting for Mortgage Servicing Fees and Rights, addresses determining normal servicing fee rates for transactions with federally sponsored secondary market makers of mortgage loans, such as the Government National Mortgage Association (Ginny Mae), the Federal National Mortgage Association (Fanny Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). …

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