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How Banks Write Off Foreclosed Properties

How Banks Write Off Foreclosed Properties

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Published by johngault
Accounting mandates for the treatment of bank
held property after foreclosure.
Accounting mandates for the treatment of bank
held property after foreclosure.

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Published by: johngault on Oct 08, 2011
Copyright:Attribution Non-commercial

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05/27/2013

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JIMGIBBONS
Govemor
STATEOFNEVADA
FINANCIALINSTITUTIONSDIVISION
DEPARTMENTOFBUSINESSANDINDUSTRY
GEORGEE.BURNS
Commissioner
DIANNECORNWALL
Director
STEVENW.KONDRUP
DeputyCommissioner
March26,2010MatthewD.Saltzman,Esq.Kolesar&Latham,Chtd.WellFargoFinancialCenter3320WestSaharaAvenue,Ste.380LasVegas,Nevada89102
RE:PetitionforAdvisoryOpinionRegardingNRS662.015
DearMr.Saltzman:ThisletterconstitutestheresponsebytheFinancialInstitutionsDivision,StateofNevadaDepartmentofBusinessandIndustry(hereafterthe"Division")regardingyourrequestforanadvisoryopiniononbehalfofyourclientSouthwestUSABank(hereafterthe"Petitioner").TherequestwasmadepursuanttoNevadaAdministrativeCode(NAC)232.040,
etseq.
STATEMENT
OF
ISSUES
ThePetitionerhasmadetworequests.First,itrequestedaresponseontheproperprocedureforaccountingforrealestateheldfollowingforeclosure,baseduponahypotheticalscenario.Arestatementoftheproposedfactsandresponsestothemarefullystatedbelow.Second,thePetitionerrequeststhattheDivisionwaivetherequirementsofNevadaRevisedStatutes(NRS)662.015thatabankwriteofftherealestateitholdspursuanttothecollectionofadebt.
ANALYSISA.Petitioner'sAccountingQuestionsRelatedtoNRS662.015.
ThePetitioner'squestionsconcerntheinterpretationofNRS662.015(3)whichreadsasfollows:
CARSONCITY
P.O.Box3239
CarsonCity,NV89702(775)687-5522Fax(775)687-5523WebAddress:http://fid.state.nv.us
LASVEGAS
OfficeoftheCommissioner2785E.DesertInnRd.,Suite180LasVegas,NV89121
170?\4RR-41?O
F::lX
170?\4RR-4!iR:1
 
MatthewD.Saltzman,Esq.
Adv.OpinionRe:NRS662.015
March
26,2010
Page2of4
3.Thissectiondoesnotprohibitanybankfromholding,developingordisposingofanyrealpropertyitmayacquirethroughthecollectionofdebtsdueit.Anyrealpropertyacquiredthroughthecollectionofdebtsdueitmaynotbeheldforlongerthan10years.Itmustbesoldatprivateorpublicsalewithin30daysthereafter.
Duringthetimethatthebankholdstherealproperty,thebankshallcharge
off
therealproperty
ona
schedule
of
notlessthan
10
percentperyear,or
ata
greaterpercentageperyear
as
theCommissionermayrequire.
ThePetitionerpresentsahypotheticalscenariowhereaborrowerdefaultsonaloantoa.Banksecuredbyrealproperty.Theremainingbalanceontheloanis$1Million.TheBankforecloses.Thepropertyhasafairmarketvalueof$400,000,whichisthebookvaluethebankaccountsforthepropertyunderOtherRealEstateOwned(OREO).Giventhesefacts,Petitionerrequeststheanswertothefollowingquestions:1.Musttherequiredchargeoffoccurwithinacalendaryearorwithintwelve(12)monthsfromthedatethepropertywasplacedinOREO?TheBankmustmaketheChargeoffpursuanttoNRS662.015(3)aftertwelvemonthsfromthedatethepropertywasplacedinOREO.Thestatutemakesclearthatthechargeoffshouldoccur"duringthetimethatthebankholdstherealproperty..."Further,thefactthatstatutereads"10percentperyear,"andnotcalendaryear,indicatesthattheLegislatureintendedthattheaccountingshouldoccurannuallyandnotattheendofeachcalendaryear.2.Doestheinitialchargeoffof$600,000(thedifferencebetweentheloanbalanceandthefairmarketvalue)atthetimeofacquisitionconstitutethefirstannualchargeoffoftheOREOproperty?No.Baseduponthestatutoryrequirementthatthiswriteoffoccur"duringthetimethebank
holds
therealproperty,"thewriteoffmustoccuraftertheforeclosuresalehastakenplace.NRS662.015(3).ThiscorrespondstotheaccountingrequirementthatlossontheloanandthegainoftherealpropertyassetarerecordedseparatelyintheBank'sfinancialstatement.3.Cantheinitialchargeoffof$600,000applytotherequired10%chargeoffforallfutureyearsuntiltheOREOpropertyiseithersoldorthecharged-offamountisexhausted?Forthesamereasonsasstatedabove,theanswerisno.PursuanttoFinancialAccountingStandards(FAS)144,theBankisrequiredtoaccountforthepropertyatacquisitionatthefairmarketvalue,or$400,000,minusthecosttoselltheproperty.Asthebalanceoftheloanisnotthedeterminationinthevalueoftheasset,itshouldnotbeconsideredafactorinthewriteoff.The10percentwriteoffisbaseduponthecurrentappraisedvalueoftherealproperty"duringthetime"thatthebankisholdingit,andnoothertime.Aswillbemorefullyexplainedbelow,the
 
MatthewD.Saltzman,Esq. Adv.OpinionRe:NRS662.015 March26,2010Page3of4
intentofthestatutewastodiscourageabankfromholdingrealpropertyexcessivelyandavoidrealestatespeculation.Byfrontloadingtheentirewriteoffatthetimeofforeclosure,theintentofthestatutewouldbelost.However,ifthecurrentappraisedfairmarketvalueoftherealpropertyshoulddeclinebyanamountgreaterthan10percentduringanytwelvemonthperioditisheldbytheBank,thennoadditionalwriteoffisrequired.ThecurrentappraisedvalueisestablishedatthetimetherealpropertyisplacedinOREO,inthiscase$400,000,andeachyearthereafterbyappraisalthroughouttheperiodinwhichtheBankholdstheproperty.Ifpropertyvaluescontinuetofall,bankscanincludethe10percentintheactualdeclineintheproperty'svalue.Usingthe hypotheticalasanexample,ifthefollowingyearafterforeclosuretheproperty'scurrentappraisedvalueinOREOwas$360,000,thennoadditionalwriteoffisrequiredbecausethepropertyalreadydepreciatedby$40,000(10percentof$400,000).If,however,theappraisedvaluefelltoonly$380,000,thenthebankwouldberequiredtowriteoffanadditional$20,000tomeetthe10percentminimum$40,000total.
B.TheBank'sRequestforWaiver
of
NRS662.015Requirements.
Next,thePetitionerrequeststhatitbeexemptfromtheprovisionsofNRS662.015(3)pursuanttoNRS662.015(1)(f)whichpermitsastatecharteredbanktoactasanationalbankwouldoperate.Exerciseanyauthorityandperformallactsthatanationalbankmayexerciseorperform,withtheconsentandwrittenapprovaloftheCommissioner.TheCommissionermay,byregulation,waiveormodifyarequirementofNevadalawifthecorrespondingrequirementfornationalbanksiseliminatedormodified.Thislawwasenactedasa"wildcard"statute,withtheintentthatstatebankswouldnotbeheldtoacompetitivedisadvantagetotheirnationalcounterpartsbecausestatelawwasnotabletokeepupwithnationaltrends.Duringthehearingonthisbill,onebankpresidenttestifiedthathehad"foundthatitwasverydifficultforbankstooperatewithout-datedregulations."
HearingonS.B.343beforetheSenateandAssemblyStandingCommitteesonCommerce,
1971Legis.56thSess.3(March16,1971).HerethePetitionerrequeststhatthe"writeoff'requirementbewaivedbecausethisisanactwhichnationalbanksarenotrequiredtodo.Insupportofthisassertion,itcitesfederalregulationsandpolicystandardsforaccountingproceduresforrealpropertyacquiredthroughforeclosure.However,theseaccountingstandardsareutilizedthroughouttheindustry.The PetitionerandeveryotherbankisaccountingforitsOREOundertheverystandardsthatit describesinitspetition.TherequirementcontainedinNRS662.015(3)ismerelyamodificationthat10percentofOREObesubtractedfromassetonanannualbasis.

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