District Circular Letters

April 20, 2001

BANKING SUPERVISION AND REGULATION:
ACCOUNTING AND REPORTING
FOR LOANS HELD FOR SALE

To State Member Banks, Bank
Holding Companies, U.S. Branches
and Agencies of Foreign Banks,
and Others Concerned,
in the Twelfth Federal Reserve District

Agencies Clarify Guidance on Accounting and Reporting Procedures for Loans Held for Sale

The federal financial institution regulatory agencies have issued guidance to institutions and examiners about the appropriate accounting and reporting treatment for certain loans that are sold directly from the loan portfolio or transferred to a held-for-sale account.

The Interagency Guidance applies in the following circumstances:

• an institution decides to sell loans that were not originated or otherwise acquired with the intent to sell
• the fair value of those loans has declined for any reason other than a change in the general market level of interest or foreign exchange rates

Selling loans has become an increasingly important portfolio risk management tool for institutions seeking to manage concentrations, change risk profiles, improve returns, and generate liquidity. Examiners, however, have noted differences among institutions in the accounting for and reporting of these transactions.

The Interagency Guidance clarifies existing instructions and promotes accounting transparency consistent with generally accepted accounting principles (GAAP). The guidance reminds institutions to appropriately report reductions in the value of loans transferred to held-for-sale through a write-down of the recorded investment to fair value upon transfer. At the same time, there should be a charge to the institution’s allowance for loan and lease losses. Institutions are also reminded that loans transferred to a held-for-sale account should continue to be accorded the same past-due and nonaccrual treatment as other loans.

The Securities and Exchange Commission has determined in the attached letter* that the guidance will assist in promoting consistent accounting and reporting treatment for the loan sales and transfers of loans to held- for-sale accounts that are within the scope of the agencies' guidance.

Additional Information

For additional information about the accounting and reporting of loans held for sale, please contact our Banking Supervision and Regulation Department, at (415) 974-2802.

FEDERAL RESERVE BANK OF SAN FRANCISCO

* Note: Attachment is not available online.