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4.4 Loan origination fees and costs
Publication date: 31 May 2022
us Loans & investments guide
ASC 310-20 provides guidance on the recognition and measurement of nonrefundable fees and origination costs associated with all types of lending arrangements (e.g., consumer, mortgage, commercial, leases) other than those specifically scoped out in ASC 310-20-15-3 (e.g., fees and cost related to loans carried at fair value). Fees recognized as a result of arrangements that are outside the scope of ASC 310-20 should be accounted for under other applicable GAAP, for example, ASC 606, Revenue.
The table in ASC 310-20-15-4 outlines the types of instruments subject to the guidance in ASC 310-20.
The following table outlines the applicability of this Subtopic to various types of assets.
Types of Assets |
Basis of Accounting |
Applicability of This Subtopic |
Loans or debt securities held in an investment portfolio
|
Historical or amortized cost(b)
|
Yes
|
Loans held for sale
|
Lower of cost or fair value(b)
|
Yes
|
Loans or debt securities held in trading accounts by certain financial institutions
|
Fair value, changes in fair value included in earnings
|
No
|
Loans or debt securities, available for sale(a)
|
Fair value, changes in fair value reported in OCI
|
Yes
|
|
||
4.4.1 Loan origination fees
A reporting entity (the lender) may charge a borrower fees as part of its origination and lending activities. ASC 310-20-20 defines loan origination fees.
Definition from ASC 310-20-20
Loan Origination Fees: Origination fees consist of all of the following:
a. Fees that are being charged to the borrower as prepaid interest or to reduce the loan’s nominal interest rate, such as interest buy-downs (explicit yield adjustments)
b. Fees to reimburse the lender for origination activities
c. Other fees charged to the borrower that relate directly to making the loan (for example, fees that are paid to the lender as compensation for granting a complex loan or agreeing to lend quickly)
d. Fees that are not conditional on a loan being granted by the lender that receives the fee but are, in substance, implicit yield adjustments because a loan is granted at rates or terms that would not have otherwise been considered absent the fee (for example, certain syndication fees addressed in paragraph 310-20-25-19)
e. Fees charged to the borrower in connection with the process of originating, refinancing, or restructuring a loan. This term includes, but is not limited to, points, management, arrangement, placement, application, underwriting, and other fees pursuant to a lending or leasing transaction and also includes syndication and participation fees to the extent they are associated with the portion of the loan retained by the lender.
4.4.2 Loan origination costs
Costs incurred by a reporting entity as part of origination and lending activities should be evaluated under the guidance in ASC 310-20 to assess whether they represent direct loan origination costs or other lending related costs.
ASC 310-20-20 defines direct loan origination costs.
Definition from ASC 310-20-20
Direct Loan Origination Costs: Direct loan origination costs represent costs associated with originating a loan. Direct loan origination costs of a completed loan shall include only the following:
a. Incremental direct costs of loan origination incurred in transactions with independent third parties for that loan
b. Certain costs directly related to specified activities performed by the lender for that loan. Those activities include all of the following:
1. Evaluating the prospective borrower’s financial condition
2. Evaluating and recording guarantees, collateral, and other security arrangements
3. Negotiating loan terms
4. Preparing and processing loan documents
5. Closing the transaction.
The costs directly related to those activities shall include only that portion of the employees’ total compensation and payroll-related fringe benefits directly related to time spent performing those activities for that loan and other costs related to those activities that would not have been incurred but for that loan. See Section 310-20-55 for examples of items.
Commissions paid to originators, underwriting fees, and costs associated with the processing of loan documents and closing of the transaction are all examples of direct loan origination costs. As stated in the definition above, only the portion of employee salaries and benefits directly related to time spent performing activities directly related to the origination of the loan should be included in direct loan origination costs. ASC 310-20-55-11 through ASC 310-20-55-15 provide additional examples of direct loan origination costs.
See LI 4.4.3 for information on the accounting for direct loan origination costs.
All other lending-related costs should be expensed in the period incurred. Examples include the costs of advertising, occupancy and equipment, servicing of existing loans, unsuccessful loan origination efforts, and portions of employee salaries not directly related to the origination of a loan; these are not considered direct loan origination costs. In addition, as discussed in ASC 310-20-25-26 and ASC 310-20-25-27, fees paid for advisory services regarding loan origination activities, portfolio management, and investment consultations are not direct loan origination costs and should be expensed as incurred.
4.4.3 Accounting for loan origination fees and costs
Direct loan origination costs and loan origination fees should be offset and only the net amount is deferred. The accounting for the net fees or costs depends on whether the loan is classified as held for investment or held for sale.
The net deferred fees or costs associated with a loan held for sale are deferred until the related loan is sold (i.e., they are not amortized).
For loans for which the FVO has been elected, ASC 825-10-25-3 requires immediate recognition of related upfront costs and fees in the applicable expense or revenue account.
For loans held for investment, the net amount should be deferred and amortized over the life of the related loan using the interest method described in ASC 835, Interest. The objective of the interest method is to arrive at periodic interest income, net of fees and costs that reflects a constant effective yield on the net investment in the loan receivable. However, deferred net fees or costs should not be amortized during periods in which interest income on the loan is not being accrued because of concerns about the collection of principal and interest from the borrower (i.e., when the loan is put on nonaccrual status). See ASC 310-20-35-17.
4.4.3.1 Loan origination fees or costs with demand debt
ASC 310-20-35-22 provides guidance on the amortization of net fees or costs for loans that are payable at the lender’s demand.
For a loan that is payable at the lender’s demand, any net fees or costs may be recognized as an adjustment of yield on a straight-line basis over a period that is consistent with any of the following:
a. The understanding between the borrower and lender
b. If no understanding exists, the lender’s estimate of the period of time over which the loan will remain outstanding; any unamortized amount shall be recognized when the loan is paid in full.
Such estimates should be monitored regularly and revised as appropriate. If, contrary to expectation, a loan remains outstanding beyond the anticipated payment date, no adjustment is required.
4.4.3.2 Origination fees/costs with revolving lines of credit
ASC 310-20-35-23 through ASC 310-20-35-25 provide guidance on the amortization of net fees or costs associated with revolving lines of credit and similar arrangements.
For revolving lines of credit (or similar loan arrangements), the net fees or costs shall be recognized in income on a straight-line basis over the period the revolving line of credit is active, assuming that borrowings are outstanding for the maximum term provided in the loan contract. If the borrower pays all borrowings and cannot reborrow under the contract, any unamortized net fees or costs shall be recognized in income upon payment. The interest method shall be applied to recognize net unamortized fees or costs when the loan agreement provides a schedule for payment and no additional borrowings are provided for under the agreement.
For example, if the loan agreement provides the borrower with the option to convert a one-year revolving line of credit to a five-year term loan, during the term of the revolving line of credit the lender would recognize the net fees or costs as income on a straight-line basis using the combined life of the revolving line of credit and term loan. If the borrower elects to convert the line of credit to a term loan, the lender would recognize the unamortized net fees or costs as an adjustment of yield using the interest method. If the revolving line of credit expires and borrowings are extinguished, the unamortized net fees or costs would be recognized in income upon payment.
If the borrower continues to have a contractual right to borrow under the revolving line of credit, net fees and costs associated with revolving lines of credit shall be amortized over the term of the revolver even if the revolver is unused for a period of time.
4.4.3.3 Credit card fees and costs
As discussed in ASC 310-20-25-15 and ASC 310-20-35-5, periodic credit card fees charged to the cardholder should be deferred and recognized on a straight-line basis over the period the fee entitles the cardholder to use the card.
Origination costs incurred by a credit card issuer should be deferred only if they meet the definition of direct loan origination costs. Direct loan origination costs should be netted against any credit card fees and recognized on a straight-line basis over the privilege period as described in ASC 310-20-25-17.
Excerpt from ASC 310-20-25-17
In situations where a significant fee is charged, the privilege period is the period that the fee entitles the cardholder to use the credit card. If there is no significant fee, the privilege period shall be one year. Significance for this purpose shall be evaluated based on the amount of the fee relative to the related costs.
All other costs that do not meet the definition of direct loan origination costs should be expensed as incurred. ASC 310-20-55-5 provides additional guidance on credit card solicitation costs.
In a typical credit card solicitation effort, an issuer engages an independent third party to solicit and obtain new customers. For a fee, the solicitor prepares and mails the promotional offer to a group of preselected consumers (for example, 1 million consumers). The expected response rate for new cardholders is generally 1 to 2 percent. Although only a small percentage of the total solicitation effort is expected to be successful, the portion of the solicitation performed by an independent third party that is allocable to successful efforts should not be deferred as direct loan origination costs under the definition of that term. Incremental direct costs to originate a loan are costs that the lender would not have incurred if that lending transaction had not occurred. In this example, the lender would have incurred all of the solicitation costs regardless of the number of credit cards issued. Accordingly, all costs in this example should be charged to expense.
If a reporting entity pays a third party to acquire individual credit card accounts, the amount paid should be netted against any related credit card fees and amortized on a straight-line basis over the privilege period.
4.4.3.4 Loan origination fees and costs with loans held for sale
Loan origination fees and costs associated with loans held-for-sale should be deferred and included as part of the loan balance until the loan is sold.
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