New Developments in Loan Participations

2/4/2010

By Rocky J. Levkulich, CPA and Joseph M. Press, CPA, CFE

During 2009, the Financial Accounting Standards Board issued Statement 166 “Accounting for Transfers of Financial Assets” (FAS 166), which governs the accounting for loan participations beginning January 1, 2010 for calendar year banks. Under the Statement, loan participations agreements with last in, first out (LIFO) provisions will remain on the books of the originating bank and thereby increasing risk-weighted assets. The statement grandfathered loan participation agreements entered into prior to January 1, 2010, however, transfers or draws on LIFO loan participations after January 1, 2010 may not be grandfathered.

One of the hurdles that must be cleared in order to receive sale treatment in a loan participation is that the originating lendor (transferor) must give up control of the transferred financial asset.

Many standard participation agreements have an “Assignments” clause which requires that the participant (transferee) “may not sell, pledge, assign or sub-participate or otherwise transfer its interest in the participated loan without prior written consent of the transferor, which will not be unreasonably withheld.” The question arises whether such a clause would preclude sale treatment because of the constraints placed on the transferee.

The details of FAS 166 appear to allow such clauses. Specifically, paragraph 30 states in part, “Further examples of conditions that presumptively would not constrain a transferee for the purposes of this statement include (a) a requirement to obtain the transferor’s permission to sell or pledge that is not unreasonably withheld,. . . .”

We are monitoring this situation with bank regulators and trade associations and will provide an update on whether banks may want to consider amending their participation agreements.