On September 29, 2000, the FASB released FASB Statement 140 which replaces FASB 125 in its entirety, but carries forward many of its provisions without reconsideration. The major changes to FASB 125 affecting securitizations are summarized below. FASB 140 is generally effective for transactions occurring after March 31, 2001; however, the additional disclosures of securitization activities are required in audited financial statements beginning end of December year 2000. Those required disclosures are quite extensive and are described further in this bulletin.
NEW REQUIREMENTS TO BE A QUALIFYING SPECIAL-PURPOSE ENTITY
Remember that Qualifying Special-Purpose Entities (QSPEs) do not get consolidated by the transferor even if the so-called equity class is wholly-owned by the transferor.
A QSPE is a trust or other legal vehicle that meets all of the following conditions:
It is demonstrably distinct from the transferor, meaning it cannot be unilaterally dissolved by the transferor (throughout this document, transferor includes its affiliates and its agents) and either (a) at least 10 percent of the fair value of its beneficial interests (all debt and equity securities issued by the SPE) is held by parties other than the transferor or (b) the transfer is a guaranteed mortgage securitization (either Fannie, Freddie or a monoline). An ability to unilaterally dissolve an SPE can take many forms, including holding sufficient beneficial interests to demand that the trustee dissolve the SPE, the right to call all the assets transferred to the SPE, and a right to call the beneficial interests held by other parties.
Its permitted activities (1) are significantly limited, (2) were entirely specified in the legal documents that established the SPE or created the beneficial interests in the transferred assets that it holds, and (3) may be significantly changed only with the approval of the holders of at least a majority of the beneficial interests held by entities other than the transferor.
It may hold only:
(1) Financial assets transferred to it that are passive in nature
(2) Passive derivative financial instruments that pertain to beneficial interests issued or sold to parties other than the transferor
(3) Financial assets (for example, guarantees or rights to collateral) that would reimburse it if others were to fail to adequately service financial assets transferred to it or to timely pay obligations due to it and that it entered into when it was established, when assets were transferred to it, or when beneficial...