Financial accounting: EITF update: normal servicing fee rates for SBA loans.

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: [phone].

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). As is the case with SBA loans, however, Technical Bulletin no. 87-3 provides only general guidance for determining the normal servicing fee rate for sales of mortgage loans when there is no major secondary market maker.

When a portion of a loan is sold in accordance with EITF Issue no. 88-11, the seller allocates its recorded investment in the loan between the portion of the loan sold and the portion(s) retained, including any excess servicing, based on their relative fair values. This allocation is used to determine the gain or loss on the portion sold and the carrying amount(s) of the portion(s) retained.

The issue is how, for the purpose of applying Issue no. 88-11, a lender should determine a normal servicing fee rate for SBA loans in the absence of a major secondary market maker. A secondary issue is how to account for a change in the normal servicing fee rate.

The EITF reached a consensus that a seller-servicer should determine a normal servicing fee rate for an SBA loan, based on a representative survey of the direct and indirect costs of servicing (by major servicers) SBA loans plus a reasonable profit margin. The EITF observed that a recent survey of servicing costs conducted by the National Association of Government Guaranteed Lenders, at the request of the Federal Financial Institutions Examination Council, concluded that 40 basis points is a normal servicing fee rate for SBA loans. The EITF also agreed that if the seller-servicer's estimated servicing costs over the estimat ed life of the loan are expected to exceed normal servicing fees, the expected loss on servicing the loan should be accrued as of the date the loan is sold. The provisions of this consensus are effective for loan sales that close after January 19, 1995. In other words, a change to 40 basis points is a change in accounting estimate and should not be accounted for as a change in accounting principle.

RELATED ARTICLE: EXECUTIVE SUMMARY

[] EITF Issue no. 94-9 Accounting problem: For the purpose of applying EITF Issue no. 88-11, should a lender use a representative survey of major servicers' direct and indirect costs of servicing SBA loans, plus a reasonable profit margin, as the normal servicing fee rate for an SBA loan? Consensus: Yes.

By LINDA C. DELAHANTY, CPA, technical manager, and LINDA A. VOLKERT, CPA, senior technical manager, of the AICPA technical information division.