Since servicing assets and liabilities are not considered financial assets and liabilities (see FV 6.4), their derecognition model differs from the model applied to financial assets and liabilities. In accordance with the guidance in ASC 860-50-40, a transfer of servicing rights related to loans previously sold and to transfers of servicing rights relating to loans that are retained by the transferor qualifies as a sale at the date on which title passes, if the following two conditions are met:
  • Substantially all risks and rewards of ownership have irrevocably passed to the transferee
  • Any protection provisions retained by the transferor are minor and can be reasonably estimated
If a sale is recognized and minor protection provisions exist, a liability should be accrued for the estimated obligation associated with those provisions.
The transferor retains only minor protection provisions if (a) the obligation associated with those provisions is estimated to be no more than 10% of the sales price and (b) risk of prepayment is retained by the transferor for no more than 120 days. ASC 860-50-40 also notes that a temporary subservicing agreement in which the transferor subservices the loans for a short period of time (generally found in sales of servicing rights) would not necessarily preclude recognition of a sale at the closing date.
Additionally, ASC 860-50-40 establishes certain other criteria that should be considered when determining whether the transfer of servicing rights qualifies as a sale:
  • Whether the transferor has received written approval from the investor, if required
  • Whether the transferee is a currently approved seller/servicer and is not at risk of losing approved status
  • For a sale in which the transferor finances a portion of the sale price, whether an adequate non-refundable down payment has been received (necessary to demonstrate the buyer’s commitment to pay the remaining sales price) and whether the note receivable from the transferee provides full recourse to the buyer. Nonrecourse notes or notes with limited recourse do not satisfy this criterion.
  • Whether temporary servicing performed by the transferor for a short time are compensated in accordance with a subservicing agreement that provides adequate compensation
In general, three to six months may elapse between the time a company enters into a contract to sell servicing rights and the time the loan portfolio to be serviced is actually delivered. These delays may result from the purchaser’s inability to accept immediate delivery, the seller’s inability to immediately transfer the servicing records and loan files, difficulties in obtaining necessary investor approval, requirements to give advance notification to mortgagors, or other planning considerations. Question TS 6-6 discusses the unit of account for the derecognition assessment.
Question TS 6-6
What unit of account should be considered when applying the derecognition guidance in ASC 860-50-40?
PwC response
ASC 860-50-20 defines servicing assets and servicing liabilities as contracts to service financial assets. Therefore, we believe the derecognition guidance outlined in ASC 860-50-40 should be applied at the servicing contract level. A servicing asset is created when the benefits of servicing, under a contract to service financial assets, is expected to more than adequately compensate the servicer for performing the servicing. Similarly, a servicing liability is created when the estimated future revenues from contractually specified servicing fees, late charges, and other ancillary revenues, under a contract to service financial assets, are not expected to adequately compensate the servicer. Since servicing assets and liabilities are created at the contract level, they should be analyzed for derecognition at the servicing contract level.

6.4.1 Sale of mortgage servicing rights with a subservicing agreement

ASC 860-50-40 provides guidance on accounting for the transfer of mortgage servicing rights to an unrelated entity at a gain and the parties also enter into an agreement that requires the transferor to continue to perform the loan servicing for a fixed-dollar amount per loan (a subservicing agreement). The guidance provides that if the significant risks and rewards of ownership related to the mortgage servicing rights are transferred to the transferee, the servicing rights have been sold and should be derecognized, but the gain on the transaction should be deferred. Refer to ASC 860-50-40-8 and ASC 860-50-40-9 for factors that should be considered in determining if all the risks and rewards have been transferred. If the servicing of mortgage loans is expected to result in a loss, that loss should be recognized currently.

6.4.2 Sales of mortgage servicing rights for an income stream

ASC 860-50-40 states that gain recognition on the sale of the right to service mortgage loans owned by other parties is appropriate at the sale date. If the sales price is based on a participation in future payments, calculation of the gain on sale can be difficult given the uncertainty associated with the future payments and the impact on the sale price. In these fact patterns, the amount of the gain recognized should be based on all available information, including the amount of gain that would be recognized if the servicing rights were sold outright for a fixed cash price.
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