by Calculated Risk on 10/19/2005 11:18:00 AM

The FEI.org provides a summary of the proposed FASB staff position:

On Oct. 13, 2005, the Financial Accounting Standards Board (FASB) released Proposed FASB Staff Position (FSP) No. SOP 94-6-a, "Nontraditional Loan Products." The proposed FSP is in response to inquiries from constituents and discussions with the SEC staff and regulators of financial institutions.

Nontraditional loan products are defined in the proposed FSP as those that "expose the originator, holder, investor, guarantor, or servicer to higher risk than traditional products…[and] include, but are not limited to" the following:

a. Loans with the contractual ability to negatively amortize
b. Loans with a high loan-to-value ratio
c. Home equity lines of credit, second mortgages, or other products that result in a high loan-to- value ratio when combined with other mortgages on the same collateral
d. Option ARMs or similar products that may expose the borrower to future increases in repayments in excess of changes that result solely from increases in the market interest rate (for example, once negative amortization results in the loan reaching a maximum principal accrual limit)
e. Loans with below market or teaser interest rates
f. Interest-only loans.

The proposed FSP states that nontraditional loan products such as those described above represent concentrations of credit risk as that term is defined in FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments," and accordingly certain disclosures under FAS 107 would be required. Additionally, certain disclosures under AICPA Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties" (SOP 94-6) would be required.

In addition to referencing the above-named standards requiring disclosure, the proposed FSP also notes numerous other existing FASB, Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA) and bank regulatory rules requiring certain disclosures that must be considered with respect to these nontraditional loan products. Regarding the effective date of the FSP (when finalized), the proposed FSP notes, "This FSP references only existing effective literature; therefore, no effective date or transition guidance is required." As such, in considering commenting on the proposed FSP, companies may want to consider the potential implications of a lack of a delayed effective date or transition guidance.

Here is the proposed FSP from FASB.