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4.7 Written loan commitments
Publication date: 31 May 2022
us Loans & investments guide
Some commitments to originate loans are required to be evaluated as derivatives under the guidance in ASC 815. Whether the commitment is accounted for as a derivative depends on the type of loan that will be originated under the loan commitment and how the loan will be classified once it is originated. The following figure summarizes which loan commitments are accounted for as derivatives under the guidance in ASC 815. Refer to DH 3.2.11 for further information.
Figure LI 4-2 illustrates loan commitments that are accounted for as derivatives under ASC 815
Figure LI 4-2
Loan commitments that are accounted for as derivatives under ASC 815
Loan commitments that are accounted for as derivatives under ASC 815
Originated loan will be held for sale |
Originated loan will be held for investment |
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Loan commitments that are accounted for as derivatives are initially recorded at fair value with subsequent changes recognized in net income. See DH 3.2.11 for additional information on whether a loan commitment should be accounted for as a derivative instrument.
SAB Topic 5.DD, Written Loan Commitments Recorded at Fair Value through Earnings, provides interpretative Q&A related to the valuation of loan commitments recorded at fair value through net income.
4.7.1 Written loan commitments: commitment fees
Commitment fees are fees a lender charges for entering into an agreement under which it is obligated to fund or acquire a loan (or to satisfy an obligation of the other party under a specified condition). Commitment fees also include fees for letters of credit.
Commitment fees should be deferred. Any direct loan origination costs incurred by the reporting entity to make the commitment should be offset against the related commitment fee. If the direct loan origination costs exceed the commitment fees, the lender should assess the likelihood of the commitment being exercised; if the likelihood that the commitment will be exercised is remote, any net costs should be expensed immediately.
ASC 310-20-35-3 provides subsequent measurement guidance for commitment fees.
Except as set forth in this paragraph, fees received for a commitment to originate or purchase a loan or group of loans shall be, if the commitment is exercised, recognized over the life of the loan as an adjustment of yield or, if the commitment expires unexercised, recognized in income upon expiration of the commitment:
a. If the entity’s experience with similar arrangements indicates that the likelihood that the commitment will be exercised is remote, the commitment fee shall be recognized over the commitment period on a straight-line basis as service fee income. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise shall be recognized over the life of the loan as an adjustment of yield. The term remote is used here, consistent with its use in Topic 450, to mean that the likelihood is slight that a loan commitment will be exercised before its expiration.
b. If the amount of the commitment fee is determined retrospectively as a percentage of the line of credit available but unused in a previous period, if that percentage is nominal in relation to the stated interest rate on any related borrowing, and if that borrowing will bear a market interest rate at the date the loan is made, the commitment fee shall be recognized as service fee income as of the determination date.
If a loan commitment expires without the loan being made or if a loan is repaid before the estimated repayment date, any related unrecognized fees should be recognized as revenue or expense at that time.
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