You are not alone if your bank instantly credits loan origination fees and expenditures to your income statement. Many community banks follow this standard procedure. But this method does not follow generally accepted accounting principles (GAAP).

Loan origination fees and direct costs are to be deferred and amortized throughout the life of the loan to which they relate, in accordance with Accounting Standards Codification (ASC) 310-20-25-2.

What are the charges associated with loan origination?

The following expenses and fees are only a sample.

• Payment in advance
• Fees for origination activities that the lender must pay
• Additional costs incurred by the borrower that are directly connected to the loan origination
• Costs immediately associated with assessing the borrower’s financial standing
• assembling and processing loan paperwork
• pay for staff members directly tied to the loan

Can I treat the expenditures associated with my loan origination as irrelevant?

While direct loan costs are to be adjusted against fees collected and only the net amount is to be delayed, ASC 310-20 does not explicitly specify a minimum amount of fees and costs to be deferred. These net sums are typically regarded as “immaterial” by community bankers. Each institution should assess its costs to see if they could be deemed inconsequential because everyone is unique. Management should carry out the following actions to assess the costs:

• List the lowest loan amount for which immediate recognition will be used.
• Give a brief description of the documentation requirements needed to calculate the direct loan costs for loan origination expenses that are higher than the required minimum, including if a standard costing system will be applied.
• Decide when the costing methodology and recommendations will be reviewed and adjusted.
• Describe the procedure for recognizing loans that are about to close at year’s end.
• Be sure to mention the accounting procedures involved in renewing, refinancing, restructuring, and changing loans with deferred fees.

If a bank’s policies and procedures support that conclusion, it may see these fees as irrelevant. It is advisable to calculate the net deferred loan fee and cost. According to best practices, this exercise could be completed by estimating the cost of a sample of loans of the same type, utilizing that data to determine the average cost, and then subtracting that amount from the loan-specific loan origination fees.

You Should Be Aware Of These 6 Personal Loan Fees

Find out about the various expenses associated with personal loans, such as application fees, origination fees, prepayment penalties, late payment fees, returned check fees, and payment protection insurance. Learn how to avoid them and how much they often cost.

Every loan carries interest, which is the additional sum you must pay for the right to borrow money. Due to the vast range of interest rates on loans, different loans, even for the same amount of money, have varying costs.

Less well-known is the fact that many loans have fees. In addition to any interest you pay, these fees are also assessed. Several fees, including the following, could be added to a personal loan:

• common fees for personal loans
• Type of charge
• $25 to $50 for applications
• Origination fees range from 1% to 6% of the loan’s total amount.
• Prepayment penalties range from 2% to 5% of the loan amount.
• Late payment penalties range from $25 to $50, or 3% to 5% of the monthly amount.
• $20 to $50 for returned checks
• 1% of the loan amount is allocated to payment protection insurance.

Depending on the loan, these fees come in different sizes. Furthermore, not all loans have the same fees. Most of these costs do not apply to all loans. A mix of comparing interest rates and fees is required to find the best loan.

Find out all there is to know about personal loan fees and how to reduce or eliminate them.

1. Fee for Applications

The application fee is one fee that lenders of personal loans frequently assess. Before you ever hear back from the lender about your loan request, you must pay an application fee. Typically, there is a nominal fixed cost of $25 to $50.

Dealing with this kind of fee might be irritating because you might pay it and still be denied a loan. It seems sensible for lenders to want to charge an application fee, though.

It costs money to process a loan application. The lender must cover labor costs to review the application, charges associated with obtaining a copy of your credit report, and other overhead expenses.

Find lenders who don’t impose this cost.

Make sure you’ll be eligible before applying if there is an application cost. You don’t want to spend hundreds of dollars on loan applications only to have them rejected. Leading American lenders with no application fee;

• Citizen’s Bank
• USAA
• Santander
• American Express
• TD Bank
• Marcus
• Discover
• Prosper
• Payoff

2. Fee of Origin

Another typical price for personal loans is the origination fee. When your loan is accepted, and the funds are transferred to your account, they are charged.

These costs are often assessed as a percentage of the amount you borrow. For instance, the price would be $800 if you were to apply for a $20,000 loan with a 4% origination fee. The cost would be $400 for a $10,000 loan.

Although you will still get the entire loan amount, the balance on your first bill will instead read “borrowed amount plus charge.” This cost is doubly harsh because interest will also be added to the amount.

Origination fees typically range from 1 to 6 percent of the entire loan amount. To lower their risk and increase revenues, lenders impose origination fees. Additionally, they aid lenders in promoting lower interest rates.

Lenders can promote the low rate to attract more business if they can make the same amount by lowering the interest rate but increasing the origination charge.

3. Early Payment Fee

Prepayment costs are less frequent than other fees, but they should still be avoided.

When you repay your loan earlier than expected, prepayment costs are applied. Therefore, you might be assessed this cost if you took out a 3-year loan and paid it off in just two years. Given that the lender is getting all of its money back—and early, too—it could seem absurd to charge this fee. It does make sense if you consider it from the lender’s point of view.

The lender stakes its reputation on the revenue generated by your loan. The lender loses money if you pay off the loan early, so it seeks to make up some of that potential loss. Prepayment penalties typically range from 2 to 5 percent of the loan balance.

Make sure your lender handles any additional payments you make corrections if you intend to pay off the loan early. Some lenders automatically cover interest instead of principal when extra payments are made. Even if you send more money with each payment in this situation, you won’t be able to pay off the loan early.

For instance, you might have a loan with a $250 monthly payment. You contribute $300 to the debt each month. The additional $50 will be debited from your account right away if the lender applies the entire sum toward the loan’s principal.

If you continue to make $250+ monthly payments, it will result in a lower minimum payment the next month and a quick payout period. The additional $50 will be kept by the lender if interest is applied to the installments. The $50 will be used to pay the interest as it accrues. Because interest is calculated based on your loan’s balance, the difference is significant.

In the first scenario, interest accrues based on a balance of $9,950 if you had $10,250 remaining on your loan when you made the $300 payment. It will accrue in the second scenario using a $10,000 balance. You’ll eventually pay more if your extra payments aren’t allocated to the principal.

Contact your lender and give clear instructions on how extra payments should be handled to ensure that your payments are applied correctly.

4. Fee for Late Payment

On any loan, personal or otherwise, there are late payment penalties. Every time you miss a payment, they are assessed a fee.

These fees often consist of a flat sum or a percentage of your regular monthly payment. If they are flat costs, they can range from $25 to $50; if they are percentage-based, they can range from 3 to 5 percent.

Lenders impose these fees for two reasons. One is that they wish to provide incentives for timely payment. People are more inclined to pay on time if there is a price for late payments. Risk reduction is the other justification. A late payer is more likely to go into default on a debt. Lenders can recover part of their costs earlier and lower their risk by imposing late payment fees.

5. Check-Returned Fee

Fees for returned checks, often known as insufficient funds fines, typically accompany late payment fees. These penalties are assessed when you attempt to pay off your loan but lack the funds to do so.

For instance, you have $400 in your account but need to submit a check for $459 to fulfill your monthly payment. Your lender cannot deposit the check. Due to the lender’s inability to be compensated, you will be assessed a late payment fee. In addition, the lender will levy a returned check fee to cover the costs of handling a bad check.

These fees typically range from $20 to $50 and are flat-rate payments.

6. Payment Protection Insurance

Payment protection insurance (PPI) is a unique type of insurance that covers your loans. You can get PPI for any kind of loan, including personal loans.

In the case that you are unable to work, the insurance will pay your monthly obligations. PPI provides coverage for incidents including sickness, accidents, fatalities, and even simple job loss.

PPI is offered but not required by all lenders. It is not necessary to obtain a policy if you are sure that you can repay the loan despite changes in your employment situation. Doing this might be a good idea if it helps you feel more at ease about the loan.

PPI costs vary widely and are based on your age, monthly payment, and creditworthiness. It usually costs less than 1 percent of your total loan amount.

How to Avoid These Fees

So, now that you know about all the fees you might face when applying for a personal loan, you need to know how to avoid them. Most importantly, look for lenders that don’t charge these costs. In truth, there are a lot of lenders who represent themselves as no-fee lenders. They specialize in making it easy to apply for a loan and don’t charge you origination costs or prepayment penalties.

However, even no-fee lenders levy late payments and returned check fees. The most straightforward approach to avoid this is to avoid making late payments in the first place.

Note: Lenders who promote their minimal fees may charge higher interest rates. Similarly, lenders who advertise low rates may have high costs.

Because there is no origination fee and you intend to pay off the loan early, you might discover that a loan with a higher rate is more affordable. Asking the lender for a complete schedule of costs before applying for any type of loan is the recommended course of action.

This will outline each form of cost that the lender levies, along with the precise fee amount. After comparing the overall costs of personal loans after this information, you may precisely determine which loan is the least expensive.

Taking Control of Loan Fees

Financial organizations, ranging from small neighborhood banks and credit unions to the home-lending behemoth Fannie Mae, have been forced to restate their financial statements partly due to incorrect accounting for loan origination fees.

Financial companies are paying closer attention to recognizing fees from loan origination due to increasing regulatory scrutiny and tighter procedures following Sarbanes-Oxley.

FASB Statement No. 91, which mandates that these fees be netted with origination costs and the resulting net fee be deferred and amortized over the life of the loan, often using the effective-interest method, applies to the recognition of fees from loan origination.

In the case of adjustable-rate and hybrid loans, the simple and mechanical application of the effective-yield technique may not be compliant with Statement No. 91. The accounting of fee recognition should be reviewed by companies that created a sizable number of such loans during the recent real estate boom.

Companies could run into problems when attempting to comply with Statement No. 91 if they rely on vendor software without thoroughly testing it, group loans without adhering to the requirements, use manual spreadsheet calculations without proper controls, have lax controls, or don’t keep enough loan-level data.

Lenders received significant fees from loan origination during the housing boom of 2001–2005. The FASB Statement No. 91, Accounting for Nonrefundable Costs and Costs Associated With Originating or Acquiring Loans and Initial Direct Costs of Leases, specifies how such fees should be recorded. It stipulates that as soon as the lender gets these fees, they are not to be included in earnings. Instead, origination fees and origination costs are tallied, and the resulting net expense is typically amortized over the life of the loan. The effective-interest approach is generally used to calculate this amortization.

Although Statement No. 91 is simple in theory, applying it correctly can be challenging and error-prone. Common mistakes in amortization computations relate to the use of prepayment estimates or non-standard loan types, such as adjustable-rate mortgages. They include the erroneous use of the straight-line approach instead of the effective-interest method (ARMs). The main focus of this article is the common issues that financial institutions run when implementing Statement no. 91 accounting procedures and systems.

FASB 91 RED FLAGS: SIGNS OF TOUGH TIMES

Understanding these specific Statement No. 91 problem areas should assist CPAs in identifying problems and taking the necessary action:

1. Underestimating the difficulties in implementing Statement No. 91

Management under-allocated resources when it underestimates the statement’s complexity in practice (see, for instance, the example of a hybrid loan in Exhibit 3). Inadequate systems and understaffed accounting departments are the results. An investigation of Fannie Mae by the firm’s Paul, Weiss, Rifkind, Wharton & Garrison LLP, and the Huron Consulting Group revealed that the “accounting systems were grossly inadequate” and that, before its restatement, the “resources devoted to accounting, financial reporting, and audit functions were not sufficient to address the needs of an institution as large and complex as Fannie Mae.”

2. Not thoroughly assessing the program’s capability before relying on it to perform the correct fee accounting computations.

The proper accounting treatment is the responsibility of management, not the vendor. Therefore, management should carefully examine its vendor’s software to ensure that it complies with Statement No. 91 and that the effective-yield approach is being applied correctly. This is crucial for lenders who create many ARMs or hybrid loans. In actuality, it is challenging to determine the precise computations made by vendor software. The risk that amortization computations are performed improperly by the vendor’s system is reduced by running many test cases through Microsoft Excel and comparing the results to those from the vendor program. For an explanation of the Excel functions and formulas that can be used to perform such comparisons and highlight situations where the results of Statement no.

3. Putting Statement No. 91 into practice by using numerous manual calculations.

For instance, spreadsheets without controls, features, or management override tracking capabilities are frequently utilized in amortization computations. Automated and auditable systems should take the place of such manual processes.

The perspective of loan originators who postpone and amortize origination fees is the main topic of this essay. FASB Statement No. 91 does, however, also apply to purchasers of loans or debt securities at a premium or discount. For instance, on the company’s financial statements, a premium (or discount) paid for a bond by a company is amortized over the bond’s life.

For bonds with complex cash flows, such as mortgage-backed securities with underlying ARM or hybrid loans, tranches in collateralized mortgage obligations (CMOs), interest-only (IO) strips, or principal-only (PO) strips, the application of Statement no. 91 can be very challenging. This is because the amortization of the premium or discount must consider both the past and anticipated future cash flows of these securities.

4. Distribution of accounting work across an organization without adequate coordination.

This is a typical practice that creates issues when the institution’s controls are ineffective, and it is unable to uphold its accounting principles. For instance, determining the appropriate accounting classification of fees might be under the purview of the operations department. The operations department may classify fees incorrectly and apply the wrong accounting treatment if there aren’t strict controls and close coordination with the accounting department.

5. Combining loans’ net fees and amortizing the total of those fees, as opposed to doing so for each loan’s net charge individually.

There are two fundamental issues with this grouped method. First, Statement No. 91, Paragraph 19, states that only when the institution possesses a significant number of loans with comparable characteristics can loans be aggregated (loan type, loan size, interest rate, maturity, location of collateral, date of origination, expected prepayment rates, etc.). This is significant because loans that cannot be grouped may not receive the same accounting treatment as loans that are grouped. Second, because grouping procedures are typically quite complicated, it is difficult to examine the grouped approach correctly.

6. Utilizing prepayment projections.

Implementing amortization calculations with prepayment estimations presents several challenges. First, only groups of loans are permitted for these calculations. Second, since adjustments are required every period to account for inaccuracies in earlier prepayment estimations, the amortization calculations are more complex. Prepayments present extra implementation difficulties because a prepayment model must be connected to the accounting system, and there are numerous barriers to successfully implementing this linkage. For instance, the prepayment model’s data interface with the amortization system must be programmed appropriately. The amortization expense for a period must also be calculated carefully so that the beginning-of-period prepayment estimates (together with the beginning-of-period management assumptions for producing such estimates) are employed.

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