Seal of the Board of Governors of the Federal Reserve System BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 01-12 (SUP)
May 10, 2001

TO THE  OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND TO EACH BANKING ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE

SUBJECT:   Interagency Guidance on Loans Held for Sale

                     On March 26, 2001, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration (the Agencies) issued the attached interagency guidance on the appropriate reporting treatment for loans that an institution intends to sell.  Consistent with generally accepted accounting principles (GAAP), the guidance directs institutions:

  • To report loans that are held-for-sale (HFS) at the lower of cost or fair value;
  • To report reductions in the value of loans transferred to the HFS portfolio through a write-down of the loan to fair value upon transfer.  At the same time, there should be a charge to the institution's allowance for loan and lease losses (ALLL);
  • That any decline in value of a loan subsequent to the date it is determined to be HFS should be recognized through an increase to the valuation allowance for HFS loans, not through the ALLL; and
  • That loans transferred to the HFS account should continue to be accorded the same past due and nonaccrual treatment as other loans.

                     The interagency guidance applies when:  (1) an institution decides to sell loans that were not originated or otherwise acquired with the intent to sell, and (2) the fair value of those loans has declined for any reason other than a change in the general market level of interest or foreign exchange rates.1

                     In the attached letter to the Agencies, the Chief Accountant of the U.S. Securities and Exchange Commission (SEC) indicated that the SEC staff believes that the interagency guidance will assist in promoting consistent accounting and reporting treatment for loan sales and transfers of loans to the held-for-sale account.

                     While the interagency guidance applies to banks, savings associations, and federal credit unions, it should also be followed by bank holding companies that file GAAP based regulatory reports.  Accordingly, for purposes of the FR Y-9C Report, any reduction in the value of loans transferred to HFS should be reported as a charge-off in the appropriate line items in Part I of Schedule HI-B and as an "adjustment" to the ALLL in Part II of this schedule.  This adjustment should be described in the notes section to the Income Statement, Schedule HI, as "write-downs arising from transfers of loans to HFS." This description will appear as a preprinted caption in the notes section of Schedule HI in upcoming versions of the FR Y-9C.  This method of reporting will ensure that the impact of writedowns arising from transfers to the held-for-sale account is separately disclosed.  These amounts may be collected in a separate reporting item in future years.

                     For purposes of reporting on the FFIEC 002, U.S. branches and agencies of foreign banks should report HFS loans at the lower of cost or fair value.  Consistent with the institution's loan loss methodology, any decline in the value of a loan at the date it is transferred to HFS should be treated as a charge-off or a specific reserve.  Accordingly, this decline in the value should be reported as a reduction of the loan's carrying value in the appropriate line items of Schedule C and as an adjustment to the "Net due to" or "Net due from" (i.e., unremitted profits and losses) included in Schedule M.  HFS loans should continue to be reported as past due and nonaccrual on the same basis as other loans.

                     Examiners should review a banking organization's accounting treatment for loan sales and transfers to the held-for-sale account to ensure that the organization's practices are in accordance with this interagency guidance.  In order to appropriately evaluate an organization's financial ratios, examiners should consider adjusting any ratio that is based on aggregate loan charge-offs to include write-downs arising from transfers to the HFS account.

                     Reserve Banks are asked to distribute this SR letter and attached interagency guidance to regulated institutions in their districts and to their supervisory staff.  Any questions may be addressed to Gregory Eller, Project Manager, at (202) 452-5277 or Art Lindo, Supervisory Financial Analyst, at (202) 452-2695.


Richard Spillenkothen
Director


Attachments


Notes:

1.   Loans that are originated with the intent to sell should be reported at the lower of cost or fair value.  Such loans should be reported in regulatory reports along with other loans held for sale as set forth in footnote 7 of the attached interagency guidance.  Furthermore, such loans should be reported as past due or nonaccrual, when appropriate.  Return to text


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