Investors have been increasing their level of interest in non-performing or other distressed loans currently on the balance sheets of banks and other financial services companies. This investment interest has broadened the opportunities for holders to dispose of these assets through individual or bulk loan sales. These transactions, usually at some discounted level, create accounting questions that require appropriate attention prior to recording the results on your financial statements. Below are several critical considerations bankers should keep in mind when selling loans:
- Record any adjustment to the net carrying value of the loan, or loans, resulting from the comparison of the sales price and the net carrying value as an additional provision for loan losses (if a decrease), or as a recovery, netted against charge-offs (if an increase).
- Record any non-credit related costs associated with the sale (broker fees, documentation fees, servicing accommodations, etc.) as a component of the gain or loss on sale of loans (versus an adjustment to the net carrying value of the asset prior to recognition of the sale).
- Reclassify loans with similar characteristics (loan type, performance classification, etc.) as available-for-sale (unless supportable facts demonstrate otherwise) and adjust the net carrying value to the price at which the sale was completed (if at a loss), or at the current net carrying value (if sold at a gain).
- Historical loss rates used in determining the allowance for loan losses on the remaining portfolio (excluding loans classified as available-for-sale) should reflect the results of the completed sales transaction. Adjustments to those historical factors, if necessary to reflect management’s specific intent with regard to those loans, should be included and clearly documented in the qualitative factors applied in estimating the allowance for loan losses.