Deferred Loan Costs and Fees: A Quick Refresher

By Baker Newman Noyes September 1, 2019

While the accounting for deferred loan costs and fees has been around since 1986, we have seen some questions arise in the past couple of years that make now a good time to revisit this topic.

Why Defer Loan Costs and Fees?

The basic idea for deferring loan fees is to prevent lenders from writing loans with below-market coupon rates and high loan origination fees and front-loading the fee income. Some troubled thrift institutions were doing this in the S&L Crisis in the 1980s. The FASB stepped in and prohibited that practice and at the same time, required lenders to defer some of the origination costs as well.

The Accounting Standards

The accounting requirements are now codified in FASB literature in Topic 310-20, Receivables—Nonrefundable Fees and Other Costs. Essentially, the FASB requires that loan origination fees and costs should be deferred and (generally) amortized as a component of interest income over the life of the loan. This article will review what constitutes loan origination fees and costs, how to amortize those amounts and some special circumstances that can arise.

Loan Origination Fees

Deferred loan origination fees are typically thought of as “points” on a loan—fees that reduce the loan’s interest rate-but they can also be amounts to reimburse a lender for origination costs or are fees otherwise related to a specific loan.

Loan Origination Costs

Loan origination costs can be harder to determine. In general, they are the costs associated with originating a specific loan. They include incremental direct costs paid to third parties and internal costs, such as employee compensation, directly related to activities for a specific loan. Examples of these activities are evaluating the borrower’s creditworthiness, negotiating the loan, processing loan documents and closing the loan. Commissions, outside attorney costs, and a proportion of salary that relates to actual loans closed, rather than administrative and business development activities, are examples of costs that should be deferred. All other costs should be expensed as incurred. We have seen most of our clients use a standard amount of deferred internal loan origination costs, based on the type of loan. That is allowed, and those standard costs should be reviewed periodically to adjust for changes in processes and costs.

Deferred loan origination fees and costs should be netted and presented as a component of loans. If the loans are classified as held for sale, the net fees and costs should not be amortized; instead, they should be written off as part of the gain or loss on the sale of the loan. In some cases, the timing of loan originations is such that deferred amounts are not material.

If the loans are held for investment, the net amount should be amortized using the effective interest method as a component of interest income on loans. We have seen many cases where the deferred amounts are amortized on a straight-line method; that method can be used if the difference is not material.

Amortization Considerations

The period used for amortization can be the contractual life of the loan, or an estimated life for a group of similar loans that contemplates anticipated prepayments. Generally, we see financial institutions use their loan system to capture and amortize these net fees and costs over the contractual life. In those cases, it is important to write off those amounts when a loan pays off or is written off. Also, it is important to stop amortizing those amounts while a loan is on nonaccrual status.

When purchasing a loan, either a whole loan, or a participation, the initial investment in the loan should include amounts paid to the seller or other third parties as part of the acquisition. While not technically loan origination costs, they can essentially be treated as such since the treatment of a discount or premium is similar. Since the purchase is not an origination, any internal costs should be expensed as incurred.

When a loan is refinanced with the same lender on market terms, the changes in terms are more than minor, and a troubled debt restructuring (TDR) is not involved, then the refinanced loan is considered a new loan. Any deferred fees and costs on the old loan are written off and new deferred fees and costs are deferred and amortized over the term of the new loan, assuming the loan is held for investment.

The accounting standards also address other specific fees such as commitment, credit card and syndication fees. In general, those fees are netted with related direct costs as well, and amortized over the relevant period, such as the commitment period.

As with any accounting summary, this article does not address all the circumstances that can arise. If you have questions, please contact your BNN advisor at 800.244.7444.