in the definition of servicing. The SAB states, "servicing assets are to be recognized only once the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained." Generally, this means that 25 basis points of coupon must be excluded from the computation of the IRLC value.

While this treatment creates some degree of misalignment between economics and accounting, most firms believe that it is a degree of uncertainty they can manage. The SEC action appears to reflect on-going concern about the how servicing is valued and issued related to revenue recognition for "intangible assets." Interestingly, the concern over intangibles is so great, the SEC required that even "tangible" interest (the 25 basis points) be excluded from the valuation of IRLCs, because it is so entwined with the servicing rights.

Since the SAB did not impose written option treatment on IRLCs, firms can continue to treat IRLC (excluding the servicing component) as derivatives recorded at fair value. The SEC position allows the standard practice of estimating fallout and hedging to expected closing ratios to remain unchanged. Therefore, firms may continue to offer their current set of mortgage products and rate locks to consumers without incurring significant additional costs or face large swings in reported financial results.