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A WORD OF ADVICE

EIGHT COMMON ACCOUNTING MISTAKES IDENTIFIED IN AUDITS OF FINANCIAL INSTITUTIONS BY J.P. LAPOINTE | WOLF & CO

orking with a broad range of banking clients provides an expansive overview of common accounting issues that arise with financial institutions. Below are eight significant areas of concern that required additional guidance to clients this year.

Deferring commissions on loan originations

In the current interest rate environment, many institutions are selling fixed-rate first mortgages in the secondary market. As incentive to the loan originators, many institutions are paying commissions for loan originations. As commissions paid have not been significant in recent years, many institutions have not been including these amounts in loan origination cost deferrals. These commission amounts should be deferred as loan origination costs upon origination of the loan. The deferred costs on loans that are intended for sale will become part of the carrying value of the loan and would subsequently be part of the gain or loss on the sale of that loan. Institutions should revisit their cost study to ensure all required components are included.

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Mortgage banking derivatives

In conjunction with loans that are intended to be sold in the secondary market, management should consider the impact of mortgage banking derivatives related to loan commitments. Mortgage banking derivatives reflect the fair value of the rate lock commitment intended to be sold in the secondary market, including the value of servicing. The derivative on the commitment should therefore approximate the gain that is expected to be recognized as a result of the sale of the loan. In addition, derivatives on loan commitments that move to loans held for sale would no longer be considered derivatives and would become part of the amortized cost basis of the loans. Management should calculate the derivative related to loan commitments, including loans held for sale, and determine materiality in relation to the financial statements to conclude whether or not they should be recorded.

Mortgage servicing rights recognition

As noted above, many institutions are selling loans in the secondary market and retaining the servicing of those loans. In conjunction with these loan sales, institutions are capitalizing mortgage servicing rights. These servicing

Banking Solutions 2014  
Banking Solutions 2014