Pub. 6 2015 Issue 1

www.wvbankers.org 12 West Virginia Banker T he Financial Accounting Standards Board (FASB) released Accounting Standards Update No. 2014-04 in January 2014 as a consensus of the FASB Emerging Issues Task Force. This guidance applies to lenders and other creditors who obtain physical possession of residential real estate property, either through foreclosure or a deed in-lieu of foreclosure (i.e., “turning in the keys”), in satisfaction of a consumer mortgage loan. The primary applicants of this guidance will be financial institutions, mortgage companies and other creditors that finance residential real estate. Under U.S. generally accepted accounting principles (GAAP), a creditor should reclassify a mortgage loan when it has taken physical possession of the residential real estate, regardless of formal foreclosure proceedings. Certain jurisdictions have longer foreclosure timelines and require a creditor to jump through ad- ditional legal hoops, leading to diversity in the practice of when the foreclosure actually occurs and the financial asset should be de-recognized. This update clarifies when physical possession is determined to have taken place. What you need to know Specifically, a creditor (typically, a bank or finance company) is considered to have taken possession of residential real estate property collateralizing a consumer mortgage loan, upon either: 1. obtaining the legal title to the residential real estate property through foreclosure, or 2. the residential borrower “turns in the keys,” conveying all interest to the creditor in order to satisfy the loan, in lieu of foreclosure or through a similar legal agreement. Essentially, the de-recognition of the financial asset occurs when the deed is legally transferred to the creditor, not when control of the property may have been obtained (i.e., the borrower aban- doned the property but legal foreclosure has not yet occurred). There are also additional disclosures required by the update. In interim and annual financial statements, the update requires disclosure of both: 3. the carrying amount of foreclosed residential real estate property held by the creditor, and 4. the recorded investment in consumer mortgage loans col- lateralized by residential real estate property that are in the Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure By Wesley Allen, DHG’s Financial Services Group