It has come to our attention that some financing entities have entered into various residential mortgage loan purchase programs, which also are referred to as participating lending programs, early purchase programs, or temporary mortgage purchase programs, collectively referred to as mortgage purchase programs. Under a typical mortgage purchase program, a bank may provide funding to a mortgage loan originator, which closes a residential mortgage loan in the originator's name. Upon closing the loan, the originator generally executes a takeout commitment with a secondary market investor to purchase the mortgage loan from the originator at a subsequent date. Simultaneously or shortly after funding, the bank purchases the mortgage loan or an interest in it from the originator. The understanding between the originator and the bank is that the bank will own the loan for a brief period of time until the sale to the secondary market investor occurs. While the arrangement between the originator and the bank is structured as though the originator sells the loan to the bank, it functions very similarly to a mortgage warehouse line of credit. The funded amount is repaid to the bank by the proceeds from the subsequent sale of the mortgage loan by the originator in the secondary market. In return for the funding it receives from the bank under the mortgage purchase program, the originator pays a yield to the bank based on the par value of the bank's ownership interest in the mortgage loan, and related fees. In many cases, the yield to the bank is greater than the yield on the underlying mortgages.
Some originators and banks have inappropriately accounted for the transfer of the loan from the originator to the bank under these programs as a purchase/sale rather than secured financings as required by the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, if the criteria for sales treatment are not met. As a result of this inappropriate accounting treatment, the Comptroller of the Currency, Administrator of National Banks, issued a Supervisory Memorandum on this topic.
In making the determination of whether mortgage purchase program transactions quality for sales treatment, consideration should generally first be given to whether the transferred ownership interest in the underlying loan is less than 100%. If this is the case, ASC 860-10-40-6A should be evaluated to determine whether the portion of the loan transferred from the originator to the bank meets the definition of a participating interest. If the transferred portion does not meet the definition of a participating interest (which it generally would not due to the disproportionate sharing of cash flows and other reasons), the transfer should be recorded as a secured financing.
If the transferred portion of the financial asset meets the definition of a participating interest, or if the transaction represents a transfer of an entire financial asset, the next step is to determine whether each of the three conditions of ASC 860-10-40-5 have been met to demonstrate that the transferor (the originator in this case) has surrendered control over the transferred loan and therefore met the requirements for sales treatment.