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Secondary market.

Recent actions of the banking and thrift regulators tell a good news/bad news story. The good news involves the regulators' capital treatment of purchased mortgage servicing rights (PMSR). The bad news involves the FDIC's characterization of table-funded loans as "originations" rather than "purchases."

Capital treatment of PMSRs

On January 21, 1992, the Federal Reserve Board (Fed) approved the publication of a proposed interagency rule that was developed in conjunction with the OCC, FDIC and OTS to achieve uniformity in the capital treatment of PMSRs and other intangible assets.

Expanded inclusion of PMSRs--The proposal will greatly benefit mortgage lending divisions and mortgage banking affiliates of bank holding companies, state member banks and national banks by increasing the amount of PMSRs that generally can be included in Tier 1 capital. PMSRs and purchased credit card relationships (PCCRs), in aggregate, can be included in capital up to 50 percent of Tier 1. There is a 25 percent of Tier 1 sublimit on PCCRs because the quality and marketability of this intangible asset is not as great as that for PMSRs. The 50 percent of Tier 1 cap would be an increase from the general 25 percent cap on PMSRs imposed by the OCC and the Fed. (The Fed's cap was implicit; the regulations allow a case-by-case approach.)

Elimination of deduction policy--The greatest victory, however, comes after considerable debate and correspondence between MBA and the Fed staff involving the treatment of PMSR in the context of bank holding company applications to expand. The Fed is proposing to eliminate its "deduction of intangibles" policy that requires the entire value of PMSRs to be deducted from capital when considering a bank holding company's application to expand. The board, however, will continue to use its discretion on a case-by-case basis to require the deduction of all intangibles if warranted by the condition of the organization.

Valuation--In order to implement provisions of the FDIC Improvement Act of 1991 and to create uniformity among the regulatory agencies, the Fed is proposing that PMSRs be reported for capital purposes at the lesser of:

* 90 percent of fair market value of the PMSR; * 90 percent of the original purchased price or; * 100 percent of the remaining unamortized book value of

the PMSRs.

Banks will have to review the book value of their PMSRs and PCCRs at least quarterly and make adjustments to values when necessary. The book value of these assets cannot exceed the discounted amount of their estimated future net income.

Comment period--The proposed rule will appear in the Federal Register within two weeks of the January 21 meeting with a 30-day comment period thereafter. Following review of comments, a final rule will be adopted and implemented by the Fed, OCC, FDIC and OTS.

Characterization of table-funded loans

An issue that has been debated by mortgage banking wholesalers and their accountants is whether, under generally accepted accounting principles (GAAP), wholesalers may capitalize the acquisition cost incurred to purchase a loan from an originator where that loan has been funded at the closing table by the wholesaler. If the answer is yes, the wholesaler can show all or a portion of this acquisition cost on its balance sheet as an asset. If the answer is no, the wholesaler must treat the transaction as an origination that must be expensed. The problem has become more serious recently, because the FDIC has jumped into the picture and demanded that two of the institutions it supervises re-characterize its purchases as originations.

The FDIC maintains it does not have a formal policy on the issue and is not in the process of developing one. The two cases referred to involve situations where field examiners asked headquarters for guidance on the issue. The FDIC admits it is not sure which table-fundings should be classified as originations or purchases. The FDIC maintains, however, that the following facts would make it suspicious that a table-funded purchase is really an origination by the wholesaler's agent:

* the originator had never funded any loans; * the originator lacked the ability or capacity to close any

loans; * the originator did not use its own underwriting rules and

guidelines; * the wholesaler re-underwrote the loan before closing.

Some accounting firms that have debated the issue look at these additional facts that would support the conclusion that the transaction was an origination by the purchaser:

* the originator does have enough financial strength to

meet repurchase obligations; * the originator assumes no interest rate risk;

* the originator sells its loans to only one wholesaler; * the purchase price of the loan is not comparable to

industry pricing; * the wholesalers contribute to the fixed cost of the

originator's business and the originator does not have its own

employees; * the originator does not have most of the FHA, GNMA,

FNMA and FHLMC approvals to do business or the

originator is just a "sponsored" FHA correspondent; (i.e, the

originator could not qualify as a stand-alone entity.)

There are various and sundry fact patterns that exist in correspondent/wholesaler relationships. MBA will be working with the accounting industry and the FDIC to come up with reasonable operating guidelines.
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Author:Taliefero, Michael S.
Publication:Mortgage Banking
Date:Feb 1, 1992
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