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4.9 Mortgage banking activities
Publication date: 31 May 2022
us Loans & investments guide
A mortgage banking entity uses its own funds (or funds borrowed from a warehouse lender) to originate (or purchase) mortgages that it then sells to an investor. A mortgage bank may be a standalone institution or a division of a larger financial institution.
ASC 948 provides guidance on mortgage banking related topics.
4.9.1 Loan pipeline
A mortgage banking entity’s loan pipeline consists of loan applications that have been received, but that have not yet closed. Pipeline loans are either “floating” or “locked.”
- A floating pipeline loan is one for which an interest rate has not been set by the borrower.
- A locked pipeline loan is one for which the potential borrower has set the interest rate for the loan by entering into an interest rate lock commitment (IRLC) in advance of closing the loan with the mortgage banker. The commitment period for a single-family mortgage loan is typically 30 to 60 days. The IRLC binds the mortgage banker to lend funds to the potential borrower at a set interest rate during the commitment period regardless of changes in market interest rates.
The mortgage banker bears the interest rate risk on locked pipeline loans; the borrower bears the interest rate risk on floating pipeline loans.
An IRLC that relates to a mortgage loan expected to be classified as held for sale should be accounted for as a derivative under ASC 815.
4.9.2 Sale of mortgage loans to an affiliated entity
ASC 948-310-30 provides measurement guidance for mortgage loan transactions with affiliates.
The carrying amount of mortgage loans to be sold to an affiliated entity shall be adjusted to the lower of amortized cost basis or fair value of the loans as of the date management decides that a sale to an affiliated entity will occur. The date shall be determined based on, at a minimum, formal approval by an authorized representative of the purchaser, issuance of a commitment to purchase the loans, and acceptance of the commitment by the selling entity. The amount of any adjustment shall be charged to income.
If a particular class of mortgage loans or all loans are originated exclusively for an affiliated entity, the originator is acting as an agent of the affiliated entity, and the loan transfers shall be accounted for at the originator’s acquisition cost. Such an agency relationship, however, would not exist in the case of right of first refusal contracts or similar types of agreements or commitments if the originator retains all the risks associated with ownership of the loan.
A transfer of financial assets from one subsidiary to another with a common parent should be accounted for as a sale in the transferor subsidiary’s separate financial statements if both of the following requirements are met:
- All of the sale conditions in ASC 860 are met
- The transferee’s assets and liabilities are not consolidated into the transferor’s separate-company financial statements
When loans that are originated exclusively for an affiliated entity (when the originator is acting as an agent of the affiliated entity), ASC 948 requires that loan transfers be accounted for at the originator’s acquisition cost.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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