SECTION 4. USE OF THE

PRINCIPAL-REDUCTION METHOD

August 18, 1997 48 1997–33 I.R.B.

standard categories of loans are:

Category (1). Loans that are secured by 1- to 4-family residential real property and are not home equity lines of credit or construction loans.

Category (2). Construction loans with original terms not greater than three years.

Category (3). Loans that are secured by real property, are not contained in category (1) or (2), and are not home equity lines of credit.

Category (4). Loans that are consumer loans with original terms not greater than seven years, are not secured by real property, and are not revolving credit loans.

.03 Additional categories of loans. The principal-reduction method also may be used for discount on loans that are described in section 3 of this revenue procedure but are not in one of the standard categories described in section 4.02 of this revenue procedure. This use is permissible, however, only if the taxpayer defines one or more additional categories of loans that are sufficiently homogeneous so that use of the principal- reduction method for those additional categories clearly reflects the taxpayer’s income. In particular, each additional category must consist solely of loans of comparable duration. For this purpose, duration means the weighted average time to expected payments of principal (including expected prepayments of principal). The weighted average is computed using the present value at issue of the expected payments and prepayments.