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l l★K

Federal Reserve Bank
of Dallas

May 31, 2001

DALLAS, TEXAS
75265-5906

Notice 01-44

TO:

The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Interagency Guidance on Loans Held for Sale
DETAILS

On March 26, 2001, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National
Credit Union Administration issued an interagency guidance on the appropriate reporting treatment for
loans that an institution intends to sell. Consistent with generally accepted accounting principles (GAAP),
the guidance directs institutions:
• To report loans that are held-for-sale (HFS) at the lower of cost or fair value;
• To report reductions in the value of loans transferred to the HFS portfolio through a writedown of the loan to fair value upon transfer. At the same time, there should be a charge to
the institution’s allowance for loan and lease losses (ALLL);
• That any decline in value of a loan subsequent to the date it is determined to be HFS
should be recognized through an increase to the valuation allowance for HFS loans, not
through the ALLL; and
• That loans transferred to the HFS account should continue to be accorded the same past
due and nonaccrual treatment as other loans.
The interagency guidance applies when: (1) an institution decides to sell loans that were not
originated or otherwise acquired with the intent to sell, and (2) 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. Loans
that are originated with the intent to sell should be reported at the lower of cost or fair value. Such loans
should be reported in regulatory reports along with other loans held for sale as set forth in footnote 7 of
the attached interagency guidance. Furthermore, such loans should be reported as past due or nonaccrual,
when appropriate.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

-2-

In the attached letter to the agencies, the Chief Accountant of the U.S. Securities and Exchange Commission (SEC) indicated that the SEC staff believes that the interagency guidance will assist
in promoting consistent accounting and reporting treatment for loan sales and transfers of loans to the
held-for-sale account.
While the interagency guidance applies to banks, savings associations, and federal credit
unions, it should also be followed by bank holding companies that file GAAP based regulatory reports.
Accordingly, for purposes of the FR Y-9C Report, any reduction in the value of loans transferred to HFS
should be reported as a charge-off in the appropriate line items in Part I of Schedule HI-B and as an
“adjustment” to the ALLL in Part II of this schedule. This adjustment should be described in the notes
section to the Income Statement, Schedule HI, as “write-downs arising from transfers of loans to HFS.”
The description will appear as a preprinted caption in the notes section of Schedule HI in upcoming
versions of the FR Y-9C. This method of reporting will ensure that the impact of write-downs arising
from transfers to the held-for-sale account is separately disclosed. These amounts may be collected in a
separate reporting item in future years.
For purposes of reporting on the FFIEC 002, U.S. branches and agencies of foreign banks
should report HFS loans at the lower of cost or fair value. Consistent with the institution’s loan loss
methodology, any decline in the value of a loan at the date it is transferred to HFS should be treated as a
charge-off or a specific reserve. Accordingly, this decline in the value should be reported as a reduction of
the loan’s carrying value in the appropriate line items of Schedule C and as an adjustment to the “Net due
to” or “Net due from” (i.e., unremitted profits and losses) included in Schedule M. HFS loans should
continue to be reported as past due and nonaccrual on the same basis as other loans.
Examiners should review a banking organization’s accounting treatment for loan sales and
transfers to the held-for-sale account to ensure that the organization’s practices are in accordance with this
interagency guidance. To appropriately evaluate an organization’s financial ratios, examiners should
consider adjusting any ratio that is based on aggregate loan charge-offs to include write-downs arising
from transfers to the HFS account.
ATTACHMENTS
A copy of the interagency guidance dated May 10, 2001, and a copy of the SEC’s letter dated
March 26, 2001, are attached.
MORE INFORMATION
For more information, please contact Dorsey Davis, Banking Supervision Department,
(214) 922-6051. For additional copies of this Bank’s notice or for hard copies of the Board’s notices,
contact the Public Affairs Department at (214) 922-5254 or access District Notices on our web site at
http://www.dallasfed.org/banking/notices/index.html.

_ ____________________________________________________________________________
Office of the Comptroller of the Currency
______________________________________________________________________________
Board of Governors of the Federal Reserve System
______________________________________________________________________________
Federal Deposit Insurance Corporation
______________________________________________________________________________
Office of Thrift Supervision
______________________________________________________________________________
National Credit Union Administration
______________________________________________________________________________

Interagency Guidance on Certain Loans Held for Sale
March 26, 2001

PURPOSE, BACKGROUND, AND SCOPE
The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Federal Reserve Board, the Office of Thrift Supervision, and the National Credit Union
Administration are issuing this Interagency Guidance to provide instruction 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.
This guidance applies when:
•
•

1

an institution decides to sell loans that were not originated or otherwise acquired with the
intent to sell, 1 and
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. 2

Mortgage loans held for sale that are subject to Financial Accounting Standard (FAS) 65, Accounting for Certain
Mortgage Banking Activities, should be accounted for at the lower of cost or fair value in accordance with that
standard. Other loans that are originated with the intent to sell are required to be reported at the lower of cost or fair
value. All loans originated with the intent to sell should be reported in regulatory reports along with other loans held
for sale as set forth in Footnote 7. Furthermore, such loans should be reported as past due or nonaccrual, when
appropriate.
2
This guidance includes a presumption that declines in the fair value of loans are attributable to declines in credit
quality. Adjustments to the recorded investment of loans can be excluded from this guidance only when fair value
declines result from changes in interest or foreign exchange rates and clearly are not attributable, in any respect, to
an increase in credit or transfer risk. The reasons for such exceptions should be adequately supported with
objective, verifiable evidence and properly documented.

Thus, this guidance is directed toward loans that have declined in credit quality. This would
include, but not be limited to, loans that are past due or in nonaccrual status, have been
downgraded or adversely classified (by the institution, examiners, or an external rating agency),
have fair value declines reflecting an increase in credit spreads or spreads over the reference rate,
or have reduced liquidity related to credit factors.
Selling loans, in whole or in part, 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. Specifically, accounting
inconsistencies relate to how and where initial and subsequent fair value adjustments are
recorded, and the reporting of past due and nonaccrual loans that have been designated as held
for sale. This issuance clarifies existing guidance, 3 and promotes accounting transparency
consistent with generally accepted accounting principles (GAAP). 4 5

TRANSFER TO HELD FOR SALE ACCOUNT
When a decision is made to sell a loan or portion thereof that was not originated or initially
acquired with the intent to sell, the loan should be clearly identified and transferred to the
held-for-sale (HFS) account. At the time the decision is made, a formal marketing strategy or
plan of sale is typically developed. A plan of sale may include, for example, identification of the
loans to be sold, the expected method of sale (e.g., securitization or sale in the secondary
market), the time period expected for completion of the sale, and an active program to find a
buyer.
The transfer to the HFS account should be recorded at the lower of cost or fair value 6 on the date
the decision to sell is made. The best evidence of fair value is a quoted market price. If no
quoted market price is available, the following should be considered when estimating a loan’s
fair value:

3

Instructions for the Federal Financial Institutions Examination Council's (FFIEC) Consolidated Reports of
Condition and Income (bank Call Report); instructions for the Office of Thrift Supervision's (OTS) Thrift Financial
Report (TFR); instructions for the National Credit Union Administration's Call Report (NCUA Call Report);
FAS 65; FAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans or
Initial Direct Costs of Leases; FAS 107, Disclosures about Fair Value of Financial Instruments; FAS 114,
Accounting by Creditors for Impairment of a Loan; FAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities; AICPA Practice Bulletin 4, Accounting for Foreign Debt/Equity Swaps;
Securities and Exchange Commission Staff Accounting Bulletin No. 82 (SAB 82), July 5, 1989, Topic 5.V,
Question 2; and the AICPA Audit and Accounting Guide for Banks and Savings Institutions.
4
Consistent with GAAP and longstanding supervisory policies, actual credit losses for a loan, which may be for all
or part of a particular loan, should be promptly deducted from the ALLL and the recorded investment in the loan
should be charged off in the period when deemed uncollectible.
5
Documentation requirements covered by the Paperwork Reduction Act have been submitted to, and approved by,
the U.S. Office of Management and Budget in connection with the bank Call Report, TFR, and NCUA Call Report
information collections.
6
Consistent with FAS 114, costs to sell the loan (loan disposition costs) should be reflected in the determination of
the loan's fair value.

Date: March 26, 2001

Page 2 of 9

•
•
•
•
•

Recent cash sales of similar loans;
Market prices of similar loans including any information received from brokers or dealers;
Valuations received from independent loan pricing experts;
The loan's expected cash flows discounted at an appropriate interest rate; and
The borrower's public debt rating.

An institution's fair value estimates should be clearly supported and documented.
For purposes of the bank Call Report, the TFR, and the NCUA Call Report, institutions must
report loans held for sale at the lower of cost or fair value. 7

FAIR VALUE ADJUSTMENTS
Reporting at Transfer Date
At the time of a loan's transfer to the HFS account, any reduction in the loan's value should be
reflected as a write-down of the recorded investment resulting in a new cost basis, with a
corresponding reduction in the allowance for loan and lease losses (ALLL). To the extent that
the loan's reduction in value has not already been provided for in the ALLL, an additional loan
loss provision should be made to maintain the ALLL at an adequate level.
For bank Call Report purposes, the write-down for the loan's reduction in value should be
reported as a charge-off in Part I of the schedule on Charge-offs and Recoveries on Loans and
Leases and Changes in Allowance for Loan and Lease Losses, and the corresponding reduction
in the ALLL should be reported as an "adjustment" to the ALLL in Part II of this schedule. 8 This
adjustment should be described in the Explanations schedule of the bank Call Report as "Writedowns arising from transfers of loans to HFS."9 For TFR purposes, the write-down for the loan's
reduction in value should be reported as a "charge-off" in the Consolidated Valuation
Allowances and Related Data schedule. 10 For NCUA Call Report purposes, the write-down for

7

Bank Call Report - Loans held for sale and in the loan portfolio (i.e., loans that a bank has the intent and ability to
hold for the foreseeable future or until maturity or payoff) are reported by loan category in Schedule RC-C, Loans
and Lease Financing Receivables. Effective March 31, 2001, loans held for sale will be reported as a separate asset
category on the balance sheet (Schedule RC). TFR - The TFR instructions require that loans held for sale be
reported along with the loan portfolio (i.e., loans held for investment) by loan category on the balance sheet on
Schedule SC - Consolidated Statement of Condition. In addition, TFR instructions require that loans held for sale be
reported along with certain other assets held for sale on Schedule SI - Consolidated Supplemental Information.
NCUA Call Report - Loans held for sale are reported along with the loan portfolio by category on the Statement of
Financial Condition and on applicable supplementary schedules Schedule A – Real Estate Loans/Lines of Credit
(Outstanding Balances) and Schedule B – Member Business Loans. NCUA plans to institute a separate loans held
for sale asset category on the Statement of Financial Condition effective March 31, 2002.
8
Schedule RI-B, Part I - Charge-offs and Recoveries on Loans and Leases, and Part II - Changes in Allowance for
Loan and Lease Losses .
9
Schedule RI-E, Explanations, item 6, "Adjustments to the allowance for loan and lease losses." A preprinted
caption for the description of this "adjustment" will be provided in Schedule RI-E, item 6.a, effective for the
June 30, 2001, report date.
10
Schedule VA - Reconciliation, and Charge-offs, Recoveries, and Specific Valuation Allowance Activity.

Date: March 26, 2001

Page 3 of 9

the loan's reduction in value should be reported as a "charge-off" in the Loan Information
schedule and in applicable supplementary loan schedules. 11
For financial reporting purposes, reductions in the ALLL for loans transferred to the
HFS account, if material, should be separately disclosed and appropriately described in the
presentation of the activity in the ALLL during the period.
Subsequent Declines in Value
After a loan or group of loans is transferred to the HFS account, these assets must be revalued at
each subsequent reporting date until sold and reported at the lower of cost or fair value. Any
declines in value (including those attributable to changes in credit quality) and recoveries of such
declines in value occurring after the transfer to the HFS account should be accounted for as
increases and decreases in a valuation allowance for HFS loans, not as adjustments to the ALLL.
Changes in this valuation allowance should be reported in current earnings. 12 The valuation
allowance for HFS loans cannot be reduced below zero (i.e., cannot have a debit balance). Such
valuation allowances should not be reported as part of the ALLL and are not eligible for
inclusion in Tier 2 capital for risk-based capital purposes.
Furthermore, for financial reporting purposes, when these income or expense amounts relating to
increases or decreases in the valuation allowance are material, they should be separately
disclosed and appropriately described either on the face of the income statement or in the notes
to the financial statements.

PAST DUE AND NONACCRUAL ISSUES
Loans transferred to the HFS account should continue to be accorded the same past due and
nonaccrual treatment as other loans, and should be reported as past due or nonaccrual when
appropriate. 13 For regulatory reporting purposes, when an institution holds portions of a
nonaccrual loan in both the loan portfolio and the HFS account, the institution should report both
portions of the loan as nonaccrual until the loan meets the requirements for restoration to accrual
status. All portions of the nonaccrual loan are required to be reported in the same manner
because the entire amount is dependent on the same source of repayment.

11

Loan Information, Schedule A – Real Estate Loans/Lines of Credit (Outstanding Balances), and Schedule B –
Member Business Loans.
12
Bank Call Report - See the instructions for Schedule RI - Income Statement, Item 5.i, effective March 31, 2001.
TFR - See the instructions for Schedule SO - Consolidated Statement of Operations - under Noninterest Income,
Line SO465, LOCOM Adjustments made to Assets Held for Sale. NCUA Call Report - Income and Expense.
13
Bank Call Report - See the Glossary entry for "nonaccrual status" and the instructions for Schedule RC-N - Past
Due and Nonaccrual Loans, Leases and Other Assets . TFR - See the instructions for Schedule PD - Consolidated
Past Due and Nonaccrual. NCUA Call Report - See the instructions for Loan Information, Schedule A – Real Estate
Loans/Lines of Credit (Outstanding Balances), and Schedule B – Member Business Loans.

Date: March 26, 2001

Page 4 of 9

CONTACTS
If you have any questions about this issuance, please contact Louise A. Francis at the Office of
the Comptroller of the Currency (202-874-1306), Gregory Eller at the Board of Governors of the
Federal Reserve System (202-452-5277), Doris L. Marsh at the Federal Deposit Insurance
Corporation (202-898-8905), Harrison E. Greene, Jr., at the Office of Thrift Supervision
(202-906-7933), or Karen Kelbly at the National Credit Union Administration (703-518-6389).

Date: March 26, 2001

Page 5 of 9

APPENDIX
Example 1
The following is an example of the accounting for a loan that was transferred to the HFS
category.
PRIOR TO DECISION TO SELL:
A single payment commercial loan was originated with a principal balance of $100, which was
also the loan's recorded investment at origination. The loan was individually evaluated for
impairment under FAS 114. Deterioration in the borrower's repayment capacity was noted, and
the loan was determined to be impaired. An allowance of $20 was established for this loan in
accordance with FAS 114 and included in the ALLL, with a corresponding charge to earnings.
Subsequently, the institution determined that a partial charge-off of $8 was needed. The loan
was written down by this amount, with a corresponding reduction in the ALLL.
The journal entries to record the impairment and partial charge-off are as follows:
Dr. Provision for loan and lease losses
Cr. Allowance for loan and lease losses (ALLL)

$20

Dr. Allowance for loan and lease losses
Cr. Loans

$8

$20

$8

The components of the carrying amount of the loan are as follows:

Recorded investment (historical cost)
Partial charge-off/write-down
Recorded investment (cost basis, as adjusted)
Remaining allowance for loan and lease losses (after charge-off)
Carrying amount, prior to transfer to HFS

$100
(8)
$92
(12)
$80

REPORTING AT TRANSFER DATE:
The institution decided to sell the loan and established a plan of sale. The fair value (based on
recent cash sales of similar loans) was estimated to be $75. At the time of the transfer to the
HFS account, the ALLL was increased by $5 to recognize the further decline in the value of the
loan from $80 to $75. The recorded investment in the loan was written down to the fair value of
the loan, with a corresponding reduction in the remaining allowance of $17 [$12 + $5].
The journal entries to record the additional decline in value of the loan and the transfer to the
HFS account are as follows:

Date: March 26, 2001

Page 6 of 9

Dr. Provision for loan and lease losses
Cr. Allowance for loan and lease losses

$5

Dr. Allowance for loan and lease losses
Cr. Loans

$17

Dr. Loans held for sale
Cr. Loans

$75

$5

$17

$75

The components of the carrying amount are as follows:
Recorded investment (cost basis, as adjusted) prior to transfer to HFS
Write-down recognized at time of transfer
Recorded investment (new cost basis) and carrying amount upon transfer to HFS

$92
(17)
$75

SUBSEQUENT DECLINE IN VALUE:
In a subsequent reporting period, the fair value of the loan further declined from $75 to $68.
The journal entry to record this decline in value is as follows:
Dr. Noninterest income/expense 14
Cr. HFS valuation allowance

$7
$7

The components of the carrying amount are as follows:

Recorded investment (new cost basis) upon transfer to HFS
HFS valuation allowance
Carrying amount

$75
(7)
$68

14

For financial reporting purposes, if this amount is material, it should be separately disclosed and appropriately
described in the income statement.

Date: March 26, 2001

Page 7 of 9

Example 2
The following is an example of the accounting for a loan when a decision is made to sell the loan
and the loan is sold immediately.
PRIOR TO DECISION TO SELL:
A single payment commercial loan was originated with a principal balance of $100, which was
also the loan's recorded investment at origination. The loan was individually evaluated for
impairment under FAS 114. Deterioration in the borrower's repayment capacity was noted, and
the loan was determined to be impaired. An allowance of $7 was established for this loan in
accordance with FAS 114 and included in the ALLL, with a corresponding charge to earnings.
Subsequently, the institution determined that a partial charge-off of $7 was needed. The loan
was written down by this amount, with a corresponding reduction in the ALLL.
The journal entries to record the impairment and partial charge-off are as follows:
Dr. Provision for loan and lease losses
Cr. Allowance for loan and lease losses (ALLL)

$7

Dr. Allowance for loan and lease losses
Cr. Loans

$7

$7

$7

The components of the carrying amount of the loan are as follows:
Recorded investment (historical cost)
Partial charge-off/write-down
Recorded investment (cost basis, as adjusted) and carrying amount

$100
(7)
$93

VALUATION AT THE TIME OF SALE:
The institution decided to sell the loan and immediately found a purchaser to whom the loan was
sold for $90. At the time of the sale, the ALLL was increased by $3 to recognize the further
decline in value of the loan from $93 to $90. The recorded investment in the loan was written
down to the sales price of the loan (its fair value), with a corresponding reduction in the ALLL of
$3.
The journal entries to record the additional decline in value of the loan and the transfer to HFS
are as follows:
Dr. Provision for loan losses
Cr. Allowance for loan and lease losses

$3

Dr. Allowance for loan and lease losses
Cr. Loans

$3

Date: March 26, 2001

$3

$3

Page 8 of 9

Dr. Loans held for sale
Cr. Loans

$90
$90

The components of the carrying amount of the loan immediately prior to recording the sale are as
follows:
Recorded investment (cost basis, as adjusted)
Additional write-down recognized at time of sale
Recorded investment (new cost basis) and carrying amount at time of sale

$93
(3)
$90

The journal entry to record the sale of the loan is as follows:
Dr. Cash
Cr. Loans held for sale

Date: March 26, 2001

$90
$90

Page 9 of 9

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

OFFICE OF
THE CHIEF ACCOUNTANT

March 26, 2001

Mr. Zane Blackburn
Office of the Comptroller of the Currency
250 E Street, SW
Washington, DC 20219-0001
Mr. Gerald Edwards
Board of Governors of the Federal Reserve System
20th and Constitution Avenue, N.W.
Washington, DC 20551
Mr. Robert Storch
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Mr. Timothy Stier
Office of Thrift Supervision
1700 G Street, N.W.
Washington, DC 20552
Dear Gentlemen:
Thank you for the opportunity to review your Interagency Guidance on Certain Loans Held for
Sale, which you issued on March 26, 2001. The staff believes the Interagency Guidance is timely and
will assist in promoting consistent accounting and reporting treatment for the loan sales and transfers of
loans to held for sale that are within its scope, especially with regard to the following key points:
•

Loans held for sale should be recorded at the lower of cost or fair value. The best evidence
of fair value is a quoted market price. However, if no quoted market price is available, an
institution should consider other factors, including, but not limited to, recent cash sales of
similar loans, market prices of similar loans, valuations received from independent loan pricing
experts, and the loan’s expected cash flows discounted at an appropriate interest rate.

March 26, 2001
Page 2

•

Declines in the value of loans before they are in the held for sale account should be recognized
as credit losses and not as other noninterest expense. Exceptions should be limited to
adjustments to carrying value that are attributable to interest or foreign currency exchange
rates and clearly are not attributable, in any respect, to credit risk. That assertion should be
supported with objective, verifiable evidence that is properly documented.

•

If amounts removed from the allowance for loan losses upon transfer of a loan to the held for
sale account are material to the activity in the allowance, those amounts should be separately
disclosed and appropriately described in the presentation of the activity in the allowance for
loan losses during the period.

•

Changes in the valuation allowance for loans in the held for sale account should be reported in
the “other noninterest income” or “other noninterest expense” category in the income
statement. When these income or expense amounts are material, they should be separately
disclosed and appropriately described either on the face of the income statement or in the
notes to the financial statements.

•

Registrants reporting to the SEC are reminded that disclosures about nonaccrual, past due,
restructured, and potential problem loans in their portfolio could be unbalanced and
misleading unless similar information also is presented about their loans held for sale that
exhibit similar risks of noncollection.

We look forward to continuing to work with you in the future to improve the financial reporting of
lending activities to provide more comparable and transparent information to investors and other users
of financial reports.
Sincerely yours,
(Signed) Lynn E. Turner
Lynn E. Turner
Chief Accountant


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102