Reporting and Capital Treatment of Servicing
Assets Under New Accounting Standard
Federal Financial Institutions Examination Council
(FFIEC) issued the attached press release on December
18, 1996, in order to:
remind banking organizations about a new accounting
rule, Financial Accounting Standards Board (FASB)
Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments
of Liabilities" (FAS 125), that takes effect
on January 1, 1997, and
describe its recommendations to the banking
agencies regarding interim guidance for the
regulatory capital treatment of "servicing assets"
and any related "interest-only strips receivable"
recorded as assets in accordance with FAS 125.
For purposes of the Reports of Condition and Income
(Call Reports), banks must adopt the provisions
of FAS 125 for transfers and servicing of financial
assets occurring after December 31, 1996, except
for any provisions deferred for implementation
by the FASB. FAS 125 also applies to servicing
contracts in existence before January 1, 1997.
This new accounting standard gives accounting
recognition to mortgage servicing contracts similar
to that prescribed in current accounting rules
and extends this recognition to servicing contracts
for all types of financial assets. However, FAS
125 eliminates the current distinction between
"normal" and "excess" servicing fees and will
generally reclassify these cash flows into two
new types of assets: "servicing assets" and certain
related interest-only financial assets known as
"interest-only strips receivable."
Consistent with the agencies' current capital
standards, under the FFIEC's recommended interim
regulatory capital guidance the aggregate amount
of mortgage servicing assets (MSAs) and purchased
credit card relationships (PCCRs) that banking
organizations may recognize for regulatory capital
purposes (i.e., not deduct from assets and capital)
would be limited to no more than 50 percent of
Tier 1 capital. Banking organizations also would
remain subject to the restriction limiting the
amount of MSAs and PCCRs that they may recognize
for Tier 1 capital purposes to the lesser of 90
percent of fair value or 100 percent of book value
(net of any valuation allowance). As with purchased
servicing rights related to financial assets other
than mortgages under the agencies' current capital
standards, the recommended interim guidance would
treat all non-mortgage servicing assets as intangible
assets and deduct them in full when computing
Tier 1 capital. The FFIEC's recommended interim
capital guidance addresses the agencies' concerns
about excessive concentrations in servicing assets
and would remain in place until a final rule amending
the agencies' capital standards takes effect.
Please refer to the attached FFIEC issuance for
further information on the regulatory reporting
and recommended capital treatment of servicing
assets and any related interest-only strips receivable.
In addition, banks should note that FAS 125 establishes
a new accounting approach for distinguishing transfers
of financial assets that are reported as sales
from transfers that are reported as borrowings.
Because this new approach will apply to transfers
of financial assets beginning in 1997, including
such basic transactions as loan participations,
banks are encouraged to consult with their outside
accountants concerning the effect of FAS 125 on
their asset transfer activities and the actions
needed to implement FAS 125.
For more information, please contact Stephen G.
Pfeifer, Examination Specialist in the Division
of Supervision's Accounting Section, at (202)