Under FAS 91, the accounting for nonrefundable loan fees and costs, now codified as ASC 310-20, works on one principle: nonrefundable origination fees collected from the borrower and direct costs the lender incurs to make the loan are not income or expense at closing. You net them against each other loan by loan, fold the net amount into the loan’s carrying value, and release it into interest income over the loan’s life as a yield adjustment using the interest method.1FASB. Summary of Statement No. 91 The standard applies to banks, insurance companies, mortgage bankers, and any other entity that originates or acquires loans.
What Qualifies as an Origination Fee
Origination fees are the nonrefundable charges the borrower pays at or near closing and will not get back. Points on a mortgage, administrative processing fees, and application fees all belong here. These amounts are income the lender has received but not yet earned, so ASC 310-20 requires deferral rather than immediate recognition.1FASB. Summary of Statement No. 91
What Counts as a Direct Origination Cost
A direct origination cost is one the lender would not have incurred if a specific loan had never been made. The standard lists the qualifying activities: evaluating the borrower’s financial condition, reviewing and recording collateral and guarantees, negotiating terms, preparing and processing loan documents, and closing the transaction.2FASB. Statement of Financial Accounting Standards No. 91
Third-party costs tie cleanly to individual loans: an appraisal fee, legal fees for document preparation, a credit report. Internal costs are harder. The standard allows deferral of the portion of an employee’s total compensation and payroll-related fringe benefits corresponding to time spent on the qualifying activities above. That includes salary, bonuses attributable to that work, payroll taxes, and benefits.2FASB. Statement of Financial Accounting Standards No. 91 Time studies or activity-based costing are the common ways to measure the allocation, and the method needs to hold up under examination.
What Never Gets Deferred
Indirect costs stay on the income statement no matter how tightly they connect to lending. General overhead, advertising, branch rent, loan officer training, and executive salaries are expensed as incurred. So is compensation tied to soliciting borrowers, servicing existing loans, or idle time.
Work on loans that never close is also expensed immediately. If underwriting drags on for weeks and the deal falls through, there is no loan to attach the costs to. Legal fees for litigation related to a commitment are not origination costs either; they defend against loss rather than create a loan.3OCC. Bank Accounting Advisory Series
Netting Fees Against Costs
Once fees and direct costs are identified for a loan, ASC 310-20 requires them to be netted. You do not defer the fee in one account and the costs in another. You combine them into a single net figure for each loan.3OCC. Bank Accounting Advisory Series
Where fees exceed direct costs, the remainder is a net deferred fee, an unearned income component that reduces the loan’s carrying value. Where direct costs exceed fees, the remainder is a net deferred cost, added to the carrying value. Either way, the net amount adjusts book value and cannot hit current-period income.
The netting is contemplated loan by loan. For institutions holding large pools of similar loans, such as consumer installment loans or residential mortgages, averages are acceptable if the institution can show the result would not be materially different from a loan-level calculation.3OCC. Bank Accounting Advisory Series
Amortizing the Deferred Amount
The net deferred amount is recognized over the life of the loan as a yield adjustment. Not as a separate fee-income line, not as cost amortization. The required technique is the interest method, sometimes called the effective yield method. It solves for a single constant rate that, when applied to the loan’s net carrying amount each period, produces the actual economic return after accounting for the deferred fees or costs.1FASB. Summary of Statement No. 91
Each period, interest income equals the effective yield rate times the loan’s carrying amount. The difference between that number and the cash interest actually received under the stated rate is the period’s amortization of the deferred fee or cost. As principal is repaid and the carrying amount changes, the dollar amount of amortization shifts even though the effective yield rate holds constant.
Straight-line amortization, which spreads the same dollar amount evenly across every period, is generally not allowed for standard loans because it does not track the true economic yield. Credit card fees are the notable exception, addressed below.
Variable-Rate Loans
For adjustable-rate loans, the effective yield is computed using the contract rate in effect at origination. When the rate resets, the lender recalculates the effective yield prospectively using the new contract rate and the remaining unamortized balance. Prior periods are not restated.4FASB. ASU 2017-08 – Receivables Nonrefundable Fees and Other Costs Subtopic 310-20
Prepayment Estimates for Large Pools
Prepayments generally do not enter the yield calculation. You assume the contractual schedule. The exception applies when a lender holds a large number of similar loans and prepayments are probable with timing and amounts that can be reasonably estimated; in that case the lender may build those estimates into the yield calculation for the pool.4FASB. ASU 2017-08 – Receivables Nonrefundable Fees and Other Costs Subtopic 310-20 Residential mortgage portfolios often qualify. Individual commercial loans rarely do.
When Amortization Stops or Accelerates
Early Payoff
When a borrower pays off a loan before maturity, the entire remaining unamortized net fee or cost is recognized immediately. There is nothing left to spread.1FASB. Summary of Statement No. 91
Charge-Offs
On charge-off, any unamortized net deferred fees or costs reduce the loan’s carrying value and therefore the amount of the charge-off recorded. They do not appear separately as income or expense; they roll into the loss calculation as part of the cost basis.3OCC. Bank Accounting Advisory Series
Non-Accrual Status
Placing a loan on non-accrual stops interest accrual, and that includes stopping amortization of deferred net loan fees or costs. Regulatory guidance treats fee amortization and discount accretion as components of interest accrual, so all three cease together.5Federal Register. Loan Workouts and Nonaccrual Policy and Regulatory Reporting of Troubled Debt Restructured Loans A loan that is both well-secured and in the process of collection may continue accruing under some regulatory frameworks.
Transfer to Held for Sale
Loans held for sale follow a different path. Origination fees and direct costs are still netted and deferred, but the deferred amount is not amortized. It sits inside the loan’s cost basis until the loan is sold, then flows through the gain or loss on sale. If a loan first held for investment is later transferred to held for sale, amortization stops at the transfer date, the unamortized balance carries over as part of cost basis, and the loan is measured at the lower of cost or fair value.3OCC. Bank Accounting Advisory Series
Modifications and Refinancings
When a loan’s terms change, what happens to existing deferred fees depends on whether the modification is treated as a new loan or a continuation. ASC 310-20 uses a two-part test. To be treated as a new loan, both conditions must be met: the new terms must be at least as favorable to the lender as terms offered to a comparable borrower, and the modifications must be more than minor.
The “more than minor” threshold has a quantitative benchmark. If the present value of cash flows under the new terms differs by at least 10 percent from the present value of remaining cash flows under the original terms, the modification is more than minor.6FASB. ASU 2022-02 – Financial Instruments Credit Losses Topic 326 Below 10 percent, the lender applies judgment based on the specific facts.
If the modification qualifies as a new loan, the lender recognizes any remaining unamortized deferred fees or costs from the original loan and starts fresh with new fees and costs on the replacement. If the modification is a continuation, the unamortized net fees or costs carry forward as part of the net investment, and the effective yield is recalculated prospectively.6FASB. ASU 2022-02 – Financial Instruments Credit Losses Topic 326
Commitment Fees
Fees collected for a commitment to lend follow one of three paths depending on what happens next.
- If the commitment is exercised, the fee becomes part of the resulting loan. It gets netted with direct origination costs and amortized over the loan’s life using the interest method.
- If the commitment expires undrawn, the fee is recognized as income on the expiration date, because no loan was created to attach it to.1FASB. Summary of Statement No. 91
- For revolving credit arrangements, where the fee compensates for general availability of credit rather than a specific funding, the fee is amortized straight-line over the commitment period and reported as service fee income rather than interest income.
Credit Card Fees
Annual credit card fees get a modified treatment. The net of the card fee minus direct origination costs is amortized straight-line over the privilege period, which is the period during which the fee entitles the cardholder to use the card. When a significant annual fee is charged, the privilege period is the year that fee covers. When there is no significant fee, the privilege period defaults to one year. Straight-line amortization is required here rather than the interest method.
Purchased Loans and Callable Securities
ASC 310-20 also governs the accounting when a lender buys a loan at a price above or below face value. A premium or discount is economically similar to a deferred origination fee or cost; it adjusts the actual yield on the investment. Premiums and discounts on purchased loans are amortized over the loan’s life using the interest method.1FASB. Summary of Statement No. 91
Purchased callable debt securities held at a premium have one refinement. Under ASU 2017-08, the premium must be amortized to the earliest call date rather than to maturity. If the security is not called on that date, the lender resets the effective yield based on the remaining payment terms. This change eliminated the surprise losses that occurred under the old rules when a callable security was redeemed early and the lender had to write off unamortized premium all at once. Discounts on callable securities continue to be amortized to maturity.4FASB. ASU 2017-08 – Receivables Nonrefundable Fees and Other Costs Subtopic 310-20
Where the Numbers Appear on the Financial Statements
Deferred net origination fees and costs are not shown as a separate asset or liability. They are included in the loan’s carrying amount. A net deferred fee reduces the carrying value; a net deferred cost increases it. The unamortized balance is not classified as a deferred charge.3OCC. Bank Accounting Advisory Series
On the income statement, the periodic amortization flows through interest income as a yield adjustment, not as a separate fee-income or cost-amortization line. Commitment fees on revolving arrangements are the exception; those are reported as service fee income because they compensate for availability rather than for a funded loan.
The unamortized deferred balance also feeds other measurements tied to the loan’s carrying value, including the allowance for credit losses under CECL and the lower-of-cost-or-fair-value test for loans held for sale. Errors in tracking the deferred amount ripple across several line items, which is one reason regulators focus on ASC 310-20 during examinations.