6.2 Recognition of Servicing Assets or Liabilities
6.2.1 General
ASC 860-50
25-1 An
entity shall recognize a servicing asset or servicing
liability each time it undertakes an obligation to
service a financial asset by entering into a servicing
contract in any of the following situations:
-
A servicer’s transfer of any of the following, if that transfer meets the requirements for sale accounting:
-
An entire financial asset
-
A group of entire financial assets
-
A participating interest in an entire financial asset, in which circumstance the transferor shall recognize a servicing asset or a servicing liability only related to the participating interest sold.
-
-
Subparagraph superseded by Accounting Standards Update No. 2009-16.
-
An acquisition or assumption of a servicing obligation that does not relate to financial assets of the servicer or its consolidated affiliates included in the financial statements being presented.
Example 1 (see paragraph 860-50-55-20) illustrates
accounting for a sale of receivables with servicing
obtained by the transferor.
25-2 A servicer that transfers
or securitizes financial assets in a transaction that
does not meet the requirements for sale accounting and
is accounted for as a secured borrowing with the
underlying financial assets remaining on the
transferor’s balance sheet shall not recognize a
servicing asset or a servicing liability.
25-3 A servicer that recognizes
a servicing asset or servicing liability shall account
for the contract to service financial assets separately
from those financial assets.
A servicing asset or liability is recognized separately to reflect an entity’s
rights (obligations) to service financial assets only when both of the following
conditions are met:
-
The benefits of servicing do not equal adequate compensation.
-
An entity (1) retains the servicing responsibility in a transfer of financial assets that meets the conditions for sale accounting in ASC 860-10 or (2) enters into a contract to acquire a servicing asset or assume a servicing liability that is not related to the entity’s financial assets.
Connecting the Dots
The accounting for a contract to service financial
assets is the same regardless of whether the servicing right results
from an outright sale or securitization of transferred financial assets
or from a purchase or assumption of the rights to service financial
assets that the entity or its consolidated affiliates do not own. It is
never appropriate to recognize a servicing asset or servicing liability
in (1) a transfer of financial assets that is not accounted for as a
sale and (2) an acquisition of loan receivables with the rights to
service them.
The examples below illustrate when it is appropriate to
recognize a servicing asset or servicing liability.
Example 6-1
Sale of Mortgage
Loans
Entity A transfers mortgage loans to an
unconsolidated securitization entity and retains the
rights to service the transferred mortgage loans. The
transfer of the mortgage loans meets the sale accounting
conditions in ASC 860-10-40-5. The benefits of servicing
the transferred mortgage loans exceed adequate
compensation. Entity A should recognize a servicing
asset as part of the proceeds received on the transfer
of the mortgage loans.
Example 6-2
Purchase of Mortgage
Loans
Entity B purchases mortgage loans in a
whole-loan purchase transaction. As part of the
purchase, B obtains the rights to service the acquired
mortgage loans. Entity B should not separately recognize
a servicing asset or servicing liability because ASC
860-50-25-1(c) prohibits an entity from recognizing a
servicing asset or servicing liability on financial
assets that it owns.
That is, when an entity acquires the
servicing rights on loans that it recognizes on its
balance sheet, a servicing asset or servicing liability
cannot be recorded because the servicing is related to
financial assets owned by the servicer.
6.2.2 Special Considerations
6.2.2.1 Securitization Transaction in Which the Transferor Obtains the Resulting Securities
ASC 860-50
25-4 An entity that transfers
its financial assets to an unconsolidated entity in
a transfer that qualifies as a sale in which the
transferor obtains the resulting securities and
classifies them as debt securities held to maturity
in accordance with Topic 320 may either separately
recognize its servicing assets or servicing
liabilities or report those servicing assets or
servicing liabilities together with the asset being
serviced.
As discussed in Section 3.6.1, an entity may transfer
mortgage loans to an unconsolidated securitization entity and meet the
conditions in ASC 860-10 for sale accounting even though the entity retains
all the securities issued by the unconsolidated securitization entity. This
type of transaction would generally qualify as a sale under ASC 860-10 only
if a third party provides a guarantee on the transferred mortgage loans. The
accounting for the MSRs in such a transaction depends on how the entity
accounts for the debt securities received in the transfer.
ASC 860-50 requires an entity to recognize a servicing asset
or servicing liability for MSRs that are acquired or obtained in a mortgage
securitization involving an unconsolidated securitization entity in which
the transferor retains all of the resulting securities and classifies them
as either available for sale or trading. However, ASC 860-50-25-4 indicates
that if the securities retained are classified as held to maturity, the
entity may choose to separately recognize a servicing asset or servicing
liability or recognize the MSR together with the asset being serviced (i.e.,
the held-to-maturity securities). ASC 860-50-30-1 requires entities to
initially measure servicing assets and servicing liabilities at fair value;
therefore, MSRs that are recognized in a transfer of financial assets to an
unconsolidated securitization entity in which the transferor retains all the
underlying securities issued by the securitization entity should be
initially measured at fair value.
6.2.2.2 Distinguishing Servicing Assets From IO Strips
ASC 860-50
Distinguishing
Servicing From an Interest-Only Strip
25-6 A servicer shall account
separately for rights to future interest income from
the serviced assets that exceed contractually
specified servicing fees. Those rights are not
servicing assets; they are financial assets,
effectively interest-only strips to be accounted for
in accordance with paragraph 860-20-35-2.
25-7 Whether
a right to future interest income from serviced
assets should be accounted for as an interest-only
strip, a servicing asset, or a combination thereof,
depends on whether a servicer would continue to
receive that amount (that is, the value of the right
to future interest income) if a substitute servicer
began servicing the assets. Therefore, any portion
of the right to future interest income from the
serviced assets that would continue to be received
even if the servicing were shifted to another
servicer would be reported separately as a financial
asset in accordance with paragraph 860-20-35-2. For
guidance on why an interest-only strip precludes a
portion of a financial asset from meeting the
definition of a participating interest, see
paragraph 860-10-55-17K.
25-8 The
value of the right to receive future cash flows from
ancillary sources such as late fees shall be
included in the measurement of the servicing asset,
not the interest-only strip, if retention of the
right to receive the cash flows from those fees
depends on servicing being performed satisfactorily,
as is generally the case.
ASC 860-50-25-6 through 25-8 discuss the importance of distinguishing
servicing assets from IO strips. The table below summarizes the significant
accounting differences between servicing assets and IO strips (in this
table, it is assumed that the assets were retained in a sale or
securitization and not purchased separately).
Table
6-1
Servicing Asset
|
IO Strip
| |
---|---|---|
Definition
|
The amount by which — on the basis of marketplace
conditions — the contractually specified servicing
fee exceeds adequate compensation for servicing. See
Section
6.1.
|
Rights to any remaining portion of the interest
spread beyond the contractually specified servicing
rate.
|
Initial recorded amount
|
Fair value. See Section
6.3.
|
Fair value.
|
Immediate adjustment required after initial
recording
|
No adjustment.
|
No adjustment.
|
Income recognition
|
An entity may either (1) amortize
servicing assets or servicing liabilities in
proportion to, and over the period of, estimated net
servicing income or (2) measure servicing assets or
servicing liabilities at fair value as of each
reporting date and report changes in fair value in
earnings. See Section 6.4.
|
Trading and available for
sale — Level yield; prospective adjustments
are made for changes in estimated income under ASC
325-40. In addition, IO strips often contain an
embedded derivative that must be bifurcated under
ASC 815-15. In lieu of bifurcation, entities often
elect the FVO. IO strips cannot generally be
accounted for as held-to-maturity securities (see
ASC 860-20-35-2 and ASC 310-10-35-45).
|
Balance sheet carrying value
|
Amortized cost or fair value, depending on the method
selected. See Section
6.4.
|
Fair value.
|
Recognition of impairment
|
If the amortization method is selected, a valuation
allowance is established for an individual stratum
of servicing assets when its carrying amount exceeds
its fair value. Changes to a valuation allowance are
recognized in earnings; however, an entity cannot
recognize a fair value amount that is above the
stratum’s carrying amount (see ASC 860-50-35-9(c)).
See Section
6.4.2.2.4 for discussion of direct
write-downs of servicing assets.
|
Trading — Fair value with periodic changes
recorded through earnings.
Available for sale — Written down to fair
value in accordance with ASC 325-40, ASC 320, and
ASC 958-325, if impaired.
|
Connecting the Dots
The determination of whether a right to receive a
strip of cash flows (often referred to in practice as “excess cash
flows” or “excess servicing”) is a component of a servicing asset or
represents an IO strip depends on whether the holder of such a right
can transfer that right independently of the servicing contract or
whether the holder can retain the right if it is no longer providing
servicing satisfactorily. If such a transfer is allowed, or the
holder retains the right if it is no longer obligated to perform
servicing, the right to the excess cash flows does not depend on
servicing and reflects an IO strip. If such a transfer is not
allowed, or the holder loses the right if it is no longer providing
servicing satisfactorily, the right to excess cash flows reflects
servicing benefits in excess of adequate compensation since the
holder cannot receive such cash flows without servicing the related
financial assets.
6.2.2.3 Subservicing Contracts
ASC 860-50
Subservicing Contracts
55-10 A transferor may
transfer mortgage loans in their entirety to a third
party in a transfer that is accounted for as a sale
and undertake an obligation to service the loans.
After the transfer, the transferor enters into a
subservicing arrangement with a third party.
55-11 If the transferor’s
benefits of servicing exceed its obligation under
the subservicing contract, that differential shall
not be accounted for as an interest-only strip.
Rather, the transferor should account for the two
transactions separately. First, the transferor
should account for the transfer of mortgage loans in
accordance with Subtopic 860-20. The obligation to
service the loans should be initially recognized and
measured at fair value according to paragraph
860-50-30-1 as proceeds obtained from the sale of
the mortgage loans. Second, the transferor should
account for the subcontract with the
subservicer.
ASC 860-50-55-10 and 55-11 address when an entity transfers
mortgage loans, retains the right to service the mortgage loans, and enters
into a contract with a third party to service the mortgage loans (i.e., a
subservicing contract). That guidance stipulates that if the transfer of the
mortgage loans is accounted for as a sale, the transferor has two separate
transactions to account for: (1) the transfer of the mortgage loans and
recognition of the servicing asset or servicing liability as part of the
proceeds on transfer and (2) the subcontract with the subservicer. Because
the transferor has the primary obligation to service the transferred
mortgage loans, it would recognize a servicing asset or servicing liability,
and not an IO strip, related to that servicing right. The subservicing
contract would be accounted for separately (i.e., as an executory contract,
generally).
6.2.2.4 Revolving-Period Securitizations
ASC 860-50
Revolving-Period
Securitizations
25-9 Recognition of servicing
assets or servicing liabilities for revolving-period
receivables shall be limited to the servicing for
the receivables that exist and have been sold. As
new receivables are sold, rights to service them may
become assets or liabilities that are recognized.
Therefore, additional transfers under
revolving-period securitizations (for example, home
equity loans or credit card receivables) may result
in the recognition of additional servicing assets or
servicing liabilities.
ASC 860-50-25-9 clarifies that servicing assets and
servicing liabilities may only be recognized for recognized receivables.
Entities may not separately recognize a servicing asset or servicing
liability for receivables to be originated in the future. This guidance is
consistent with ASC 860-20-55-31, which indicates that the fair value
measurement of a beneficial interest in a securitization entity may not
include the estimated cash flows associated with receivables that do not yet
exist but that will be originated and transferred during the revolving
period (e.g., in securitizations with revolving features or prefunding
provisions).
6.2.2.5 Regaining Control of Financial Assets Sold
ASC 860-50
Regaining
Control of Financial Assets Sold
25-10
Paragraph 860-20-25-10(b) explains that, after a
paragraph 860-10-40-41 change, the transferor shall
not change, the accounting for the servicing asset
related to the previously sold financial assets and
provides related guidance.
Entities may be required to rerecognize financial assets
that were previously considered sold for many different reasons. Upon such
rerecognition, entities do not subsume any previously recognized servicing
asset or servicing liability into the carrying amount of the rerecognized
financial assets. For more information, see Section 4.3.
6.2.2.6 Acquisition of Rights to Service an Entity’s Owned Financial Assets
Entities may obtain the servicing rights on financial assets
that are owned by the entity or its consolidated affiliates. For example, an
entity may purchase financial assets with the servicing retained by the
seller and then later acquire those servicing rights. In accounting for an
acquisition or assumption of servicing rights, an entity should consider the
guidance in ASC 860-50-25-1(c), which addresses the recognition of a
servicing asset or servicing liability in situations in which an entity
acquires or assumes an obligation to service financial assets that it owns.
We believe that if, in a manner consistent with this guidance, an entity
acquires the servicing rights to financial assets that it owns, it should
account for the servicing rights and related financial assets on a combined
basis. That is, the offsetting entry for the consideration paid or received
for the servicing rights should be recognized as an adjustment to the
related receivables. In such circumstances, an entity may be required to
make an allocation to each receivable within a larger group by using a
systematic and reasonable allocation method.
We understand that recognizing acquired servicing rights as
a basis adjustment to the carrying amounts of the related receivables could
be considered inconsistent with the guidance in ASC 860-50-25-10 (see
Section
6.2.2.5). However, ASC 860-50-25-1(c) prohibits the
recognition of a separate servicing asset or servicing liability in this
situation.