Long-Awaited Updated Guidance on Loan Participations

The Financial Accounting Standards Board has issued long-awaited guidance on various aspects of transfers of financial assets.  The new rules relate primarily to:

 

1. Sales of loans with retention of servicing rights
2. Securitizations of loans
3. Sale of participation interests in loans

 

A particularly significant aspect of the new rules relates to whether participation interests qualify to be recorded as sales rather than secured borrowings.  In order to qualify for sale treatment, sales of participations must be made according to the following rules:

 

1. All cash flows received from the loan are divided proportionately among the participating interest holders in an amount equal to their share of ownership (except for market-rate fees for services rendered, such as for servicing the loan)
    
2. The rights of each participating interest holder (including the transferor in its role as a participating interest holder) have the same priority, and no participating interest holder's interest is subordinated to the interest of another participating interest holder
1. Participating interest holders have no recourse to the transferor (or its consolidated affiliates included in the financial statements being presented or its agents) or to each other, other than standard representations and warranties, ongoing contractual obligations to service the entire financial asset and administer the transfer contract, and contractual obligations to share in any set-off benefits received by any participating interest holder
    
2. No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset

 

The new rules can be found in paragraph 4g of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets- an amendment of FASB Statement No. 140.

 

We recommend you review the new rules regarding participation interests to ensure your institution's participation agreements will allow you to record the sale of participations as sales in your financial statements.  Any such transfers that don't qualify as sales would need to be recorded as borrowings secured by the participation in the loan, which can have a significant negative impact on capital ratios depending on the volume of your participation activity.

If you have specific questions, please contact your BDMP advisor:

Tracy Harding       207-991-5114    tharding@bdmp.com

Janice Latulippe   207-541-2378    jlatulippe@bdmp.com

Patti Faria            207-541-2305    pfaria@bdmp.com