The Financial Accounting Standards Board (FASB) is moving closer to putting out for comment a revised version of the once-highly contentious FAS 140. A target has been set for the end of June with the goal of having FAS 140 in place in the first quarter of 2006.
According to market participants it would have been disastrous if FASB had not decided last September that loan participations will continue to qualify for sales accounting so long as the transfer constitutes a true sale under FAS 140. This would have damaged the participation market, which in turn would have caused problems in the management and dispersion of credit risk.
But according to Seth Grosshandler, a partner at Cleary Gottlieb Steen & Hamilton LLP, "ultimately the LSTA was successful in convincing the FASB that a good participation counts as a true sale. But despite this success, there is a lack of consensus at FASB over the measures and until FAS 140 goes through the entire comment period it's hard to know whether anything is settled, he said. "For instance, the September decision was split 4-3 and then in January out of the blue another 4-3 vote decided to put in place more stringent measures," said Grosshandler.
The board has set out four criteria that need to be used as guidance for a loan participation to constitute a true sale. First, there must be no guarantee of repayment or other recourse to the transferor inconsistent with a true sale. Second, the participant's interest in the financial asset has to have the same remaining duration as the underlying financial assets. Third, the transferor must agree to act in a custodial capacity for the participant and not commingle proceeds for any significant period of time. Fourth, they must administer the financial assets under a standard that does not give the transferor unfettered discretion.
At a meeting last month, the board agreed not to require that a transferor pass through benefits of setoff or other dilutive rights to transferees in order to achieve sale accounting. In addition, at its January meeting, the board decided that a QSPE would be required unless there were no recourse whatsoever to the transferor and the interest were a pro rata interest--net of servicing fees.