Accounting for OREO and Repossessed Collateral Doug Orth, CPA, CFE, Managing Partner Orth, Chakler, Murnane and Co., CPAs.

ACUIA 22nd Annual Conference

June 20, 2012

Accounting for OREO and

Repossessed Collateral

Doug Orth, CPA, CFE, Managing Partner

Orth, Chakler, Murnane and Co., CPAs

Presentation Objectives

Gain an understanding of the accounting and regulatory expectations for OREO and repossessed collateral.

Identify common problems related to the accounting for OREO and repossessed collateral.

Take away some “best practices” to share with CFOs and other stakeholders.

Presentation Objectives

The number 1 Objective of this Presentation is:- Audience Participation -- Audience Participation -

Accounting Guidance

FAS 15, “Accounting by Debtors and Creditors for Troubled Debt Restructuring”

FAS 144, “Accounting for the Impairment of Disposal of Long-Lived Assets”

Accounting Standards Codification 310-10 and 310-40

Definitions

Other Real Estate Owned = OREO Repossessed collateral (non-real estate) = REPO OREO includes real estate acquired through:◦ Foreclosure◦ Deed in lieu of foreclosure◦ In-substance foreclosure (physical possession of property without

legal proceedings – property is abandoned by the borrower)

Short Sale = Agreement with borrower to sell property for less than loan balance

Accounting At Acquisition OREO should be recorded at fair value, less costs to sell = new

cost basis

Fair value should be based on updated appraisal

Costs to sell include broker commissions, legal and title transfer fees, closing costs, etc.

Consider private mortgage insurance (PMI) if considered recoverable

Difference between new cost basis and loan balance = charge-off to the Allowance for Loan Losses account

New cost basis is reclassified from loans to members to OREO

Accounting During Holding Period

Typical holding costs – should be charged to expense: Maintenance – routine repairs; lawn maintenance; painting Real estate taxes – current and arrears Insurance Other costs – utilities; management/condo fees; advertising Negative escrow balances – taxes and insurance

Accounting During Holding Period

Typical holding costs charged to OREO: Major repairs/renovations that add value to the property◦ Note: Determine if the appraisal amount is “as is” without the major

repairs/renovations or assumes that the property will be updated

Monitor/update the reasonableness of new cost basis: If property is not sold within reasonable time frame,

consider obtaining a new appraisal Subsequent reductions in the fair value of OREO should be

charged to loss on assets via OREO allowance account

Accounting During Holding Period

OREO is generally Held-for-Sale; however, OREO can be rented or Held-for-Use (check with your state regulator) If OREO is rented, it should be recorded at fair value (without regards

to selling costs) The difference between the fair value and loan balance should be

charged-off to the Allowance for Loan Losses account The estimated value of the building should be depreciated over a

reasonable period as a charge to operating expenses Rental revenues and expenses should be recorded to the income

statement consistent with the nature of the revenue or expense

Accounting During Disposition Period

A gain or loss on the sale of OREO should be recorded for the difference between the selling price of OREO, net of selling costs, compared to the carrying amount of OREO◦ Note: Material gains or losses recorded from the sale of OREO

should be considered when developing the net charge-off ratios for mortgage loans

If OREO is sold shortly after taking possession of the property, the gain or loss from the sale of OREO, can be recorded to the Allowance for Loan Losses account◦ Note: Once the Credit Union takes control of the property, it is no

longer considered a delinquent loan

Tax Reporting

IRS Form 1099-A, Acquisition or Abandonment of Secured Property, should be filed the year that real property is acquired by the Credit Union through foreclosure or abandonment

IRS Form 1099-C should be filed the year a “short sale” occurs, leaving the Credit Union with an unrecoverable loan balance

Repos

◦ For long-lived assets to be disposed of by sale, they should be classified as assets held-for-sale at the asset’s fair value less costs to sell

◦Six criteria must be met prior to reclassification◦Reporting loan delinquency

Repos

Measuring impairment on vehicles: loan-by-loan approach average loss ratio on pool of repos average loss per unit

Writing down the impairment amount: at the individual loan level at the general ledger level

only

Call Reports

Line 27 - Foreclosed and Repossessed Assets

Requires the Credit Union to disclose the number and dollar balances related to Real Estate, Automobiles and Other Collateral

Common Problems

OREOs and REPOs are maintained at outstanding loan balance

Holding costs are capitalized OREO fair values are not reassessed Negative escrow balances on OREO Private mortgage insurance issues

Thank You!

Thank you for your attention and participation in today’s session!

Speaker Information

Presented by: Doug Orth, CPA, CFEOrth, Chakler, Murnane and Co.,

CPAs

Telephone: 305-232-8272305-794-5457 cell

E-mail: [email protected]