On Jan. 17, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure” to help clarify when a troubled loan should be classified as other real estate (“ORE”) if a repossession or foreclosure has occurred.

While this would seem obvious to most institutions, a Michigan provision that allows consumers to redeem the property out of foreclosure made it difficult for Michigan institutions to determine whether a problem loan is still a loan or if it is ORE.

FASB has ended the age-old debate, determining that a loan is an ORE when a creditor is considered to have received physical possession of the property. Possession is defined as occurring upon either:

(1)   The creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or

(2)   The borrower conveying all interest in the residential real estate property to the creditor satisfies that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.

Clarifying the classification conflict is the following sentence that has been added to the accounting rule:

“A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law.”

The amendments in this update are effective for most entities in the 2015 calendar year, however early adoption is permitted.

There are many considerations to take in to account while looking at the options of how to adopt the new rule. If you are in need of assistance to weight your options and determine how you will implement this new accounting rule in your institution, contact one of our Financial Institutions Group specialists in Michigan, Houston or Ft. Lauderdale.