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Deferred Costs of Originating Loans

3/4/2010

By Philip Schuyler, CPA

Proper accounting treatment for loan origination fees and loan origination costs was discussed under Statement of Financial Accounting Standards No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loan and Initial Direct Costs of Leasing.” Current guidance is discussed in Financial Accounting Standards Code 310-20 (as codified). Loan origination fees and origination costs should be deferred and recognized as an adjustment of yield generally by the interest method over the life of the related loan.

Direct loan origination cost are defined to include only incremental cost of loan origination incurred in transactions with independent third parties for a loan and certain costs directly related to specified activities performed by a lender for a particular loan. Direct loan origination costs are the costs that result directly from and are essential to the lending transaction, and would not have been occurred by the lender if the lending transaction had not occurred. General costs related to the lending operations, and not related to a lender originating a specific loan should not be deferred, but rather expensed immediately. Examples of these costs include: advertising, soliciting potential borrowers, servicing existing loans, and administrative costs. The majority of the costs associated with originating loans is the employee’s compensation and benefits for time spent. Those costs that are directly related to activities performed by the lender that can be included are: evaluating a potential borrower’s financial condition and collateral, negotiating loan terms, preparing and processing loan documents and closing the loan.

To estimate loan origination costs, most organizations use a form of standard costing to estimate the costs of loan production during a particular timeframe to establish a base cost per hour. This amount can then be used to establish an origination cost based on the amount of time it takes to originate a loan. Banks may assign difference costs to different types and sizes of loans. For example, a loan that is required to be approved by a Loan Committee or Board of Directors due to the amount of the loan may be assigned higher costs due to the time the groups dedicate to approving these loans. Commercial loans that take the loan officer longer to evaluate should also have a higher cost associated with it. Banks should periodically evaluate their analysis of loan origination costs as payroll costs vary from year to year.