Loan arrangement fees4/14/2024 ![]() In some cases, the timing of loan originations is such that deferred amounts are not material. If the loans are classified as held for sale, the net fees and costs should not be amortized instead, they should be written off as part of the gain or loss on the sale of the loan. That is allowed, and those standard costs should be reviewed periodically to adjust for changes in processes and costs.ĭeferred loan origination fees and costs should be netted and presented as a component of loans. We have seen most of our clients use a standard amount of deferred internal loan origination costs, based on the type of loan. All other costs should be expensed as incurred. Commissions, outside attorney costs, and a proportion of salary that relates to actual loans closed, rather than administrative and business development activities, are examples of costs that should be deferred. ![]() Examples of these activities are evaluating the borrower’s creditworthiness, negotiating the loan, processing loan documents and closing the loan. They include incremental direct costs paid to third parties and internal costs, such as employee compensation, directly related to activities for a specific loan. In general, they are the costs associated with originating a specific loan. Loan origination costs can be harder to determine. This article will review what constitutes loan origination fees and costs, how to amortize those amounts, and some special circumstances that can arise.ĭeferred loan origination fees are typically thought of as “points” on a loan-fees that reduce the loan’s interest rate-but they can also be amounts to reimburse a lender for origination costs or are fees otherwise related to a specific loan. Essentially, the FASB requires that loan origination fees and costs should be deferred and (generally) amortized as a component of interest income over the life of the loan. The accounting requirements are now codified in FASB literature in Topic 310-20, Receivables-Nonrefundable fees and other costs. The FASB stepped in and prohibited that practice and at the same time, required lenders to defer some of the origination costs as well. Some troubled thrift institutions were doing this in the S&L Crisis in the 1980s. The basic idea for deferring loan fees is to prevent lenders from writing loans with below market coupon rates and high loan origination fees and front-loading the fee income. ![]() While the accounting for deferred loan fees and costs has been around since 1986, we have seen some questions arise in the past couple years that make now a good time to revisit this topic. ![]()
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