UPDATE 1-US FASB plans off-balance sheet proposal soon

(Adds further comments, background)

WASHINGTON, July 22 (Reuters) - Current off-balance-sheet accounting has been abused and rule makers plan to issue a proposal soon, probably in August, to bring them back on the balance sheet, the chairman of the U.S. Financial Accounting Standards Board said on Tuesday.

"My own view is that the current accounting has been stretched and abused," FASB chairman Robert Herz told Reuters on the sidelines of a Center for Audit Quality event.

"It has been treated as a punch bowl and we have got to take away that punch bowl," he added.

For years, accounting standards have allowed U.S. banks to keep certain loans, such as those linked to subprime mortgages, in off-balance sheet vehicles.

But now FASB is revamping the standard known as FAS 140 as it believes that the rule hid the true risks banks faced.

Herz said the proposal will be released over the summer despite concerns that it could force mortgage finance giants Freddie Mac FRE.N and Fannie Mae FNM.N and other major banks to raise capital at a difficult time.

"It will probably be in August," he said.

Under the new accounting rule, analysts estimate financial institutions could be forced to book $5 trillion, including troubled loans.

Herz said the issue of when the rule would have to be implemented and how financial firms would move to a new standard is something that needs to be discussed.

Once FASB releases its proposal it will require public comment as part of the rule making process. It is not known how long the public comment period will last. Typically they last anywhere from 30 to 60 days. After that time, the agency will hold a vote on whether to adopt the rule. (Reporting by Rachelle Younglai; editing by Tim Dobbyn)