Magazine article American Banker

Exam Council's Reading of New Servicing Rule Has Bankers Worried

Magazine article American Banker

Exam Council's Reading of New Servicing Rule Has Bankers Worried

Article excerpt

Banks that have gotten drunk on the servicing boom in recent years may have a bit of a hangover New Year's Day, courtesy of a new regulatory accounting rule.

On Jan. 1, a complicated Federal Financial Institutions Examination Council interim rule kicks in that will change the way financial institutions report loan servicing rights.

The regulation is meant to implement Financial Accounting Standards Board rule 125, but the exam council's interpretation of FAS 125's effect on capital is proving contentious.

Bankers are upset over a provision that could limit the amount of servicing rights that count toward an institution's Tier 1 capital requirements.

The exam council last week said banks must record on their balance sheets all nonmortgage servicing rights as "intangible" assets. That means they do not count toward the capital requirement.

Banking industry representatives said that this will cause headaches for credit card and auto loan servicers. Under the exam council's rule, even if a servicer adds millions of dollars worth of servicing rights, their balance sheets won't reflect the value of these lucrative assets, said Marti Sworobuk, president of Financial Standards Inc. This means mortgage servicers must hold additional capital to meet their reserve requirements.

"FASB has said you can recognize servicing rights as an asset and capital, but the regulators have thumbed their nose at FASB and said these things are intangible," Ms. Sworobuk said.

The exam council said the interim rule will remain in effect until banking regulators issue a final rule amending their capital regulations in light of FAS 125. …

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