During 2005, the Financial Accounting Standards Board (FASB) released an Exposure Draft (ED) entitled, Accounting for Transfers of Financial Assets, which, if adopted, would amend FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets & Extinguishment of Liabilities, (FAS 140) to clarify, among other things, the circumstances in which a transferred financial asset can be deemed a sale for accounting purposes. FAS 140 sets forth several conditions which a transferred asset must meet to qualify as a sale (rather than a secured financing arrangement), including a condition that an asset must be "legally isolated" from the transferor and its creditors, even in bankruptcy or receivership. The ED includes guidance that is intended to clarify when this legal isolation condition is met but which, in fact, has raised questions regarding the circumstances in which lenders must obtain legal opinions to support sales treatment for their transferred loans.
MBA believes that the accounting treatment of loan transfers should reflect the economic substance of the transfers. MBA further believes that loans that are accounted for as "sold" should be the legal property of the buyer, and should not be subject to being reclaimed by the seller. On the other hand, MBA believes lenders should not be required to obtain legal opinions when substantial evidence already exists that they could not reclaim transferred loans. A requirement that legal opinions must be obtained in this instance would be inappropriately conservative and would drive up lender business costs for no benefit to readers of their financial statements.
During 2007, FASB agreed to reconsider previous tentative decisions relating to the legal isolation condition as part of its continuing deliberations on amending FAS 140. The Board has tentatively decided to amend the isolation criteria in paragraph 9(a) of Statement 140 for consolidated financial statements that include a transferor by requiring that the legal analysis treat all of the involvements in the transferred financial assets by any entity that is included in the consolidated financial statements being presented as if those involvements were made by the transferor. Therefore, in order for a parent entity of a transferor to meet the isolation requirement, an isolation analysis must conclude that the transferred financial assets would be beyond the reach of all of the entities (and their creditors) included in the financial statements being presented, using the assumption that all of the involvements of the entities were made by the transferor.
The Board anticipates releasing an Exposure Draft of a new amendment of FAS 140 in the second quarter of 2008. MBA is awaiting that Draft and preparing to comment on it.
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