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NORWALK, Conn. – The Financial Accounting Standards Board may be reconsidering its proposed ban on the sales aspect for loan participations indicated by rights of setoff. At its July 27 meeting, the majority of FASB Board members were in agreement to allow credit unions to continue treating loan participations as sales with the stipulation that the arrangement is set up in a way that allows for ownership of a segment of the loan to be transferred from the owner to the buyer. At the most, loan participation contracts would have to be modified to make clear who owns what, a potentially expensive undertaking but well worth not having the option at all, industry experts note. The FASB had considered amending FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and the rights of setoff – the common-law right of debtors and creditors to setoff (net) amounts due to one another if one of the parties defaults, becomes insolvent, or enters into bankruptcy or receivership. One of FASB’s main concern was that in a loan participation situation in which the borrower has shares or deposits at the originating institution, if that institution is liquidated, the participating institution would not be able to recover its prorata portion of the members’ shares/deposits within the originating institution that are setoff. As a result, the FASB had considered banning the sales aspect for loan participations indicated by rights of setoff. If an institution is in bankruptcy or receivership, setoff allows the customer to offset or cancel any debts owed to them with any outstanding loans. That institution can offset or cancel any debts owed with any deposits belonging to the customer. This would mean credit unions would have to use the less beneficial accounting choice of keeping their assets as secured borrowing. Typically, the accounting portion of a loan participation allows the transfer of part of the loan off the selling credit union’s books to the credit union’s purchasing the book. “Even though setoffs do exist, they have never been used by credit unions in liquidation,” said Scott Waite, a member of FASB’s Small Business Advisory Committee and senior vice president/CFO of Patelco Credit Union. Waite is also chairman of the CUNA Accounting Task Force, which sent FASB a May 11 comment letter written by Mary Dunn CUNA associate general counsel and senior vice president and Catherine Orr, CUNA senior regulatory counsel. CUNA was mainly concerned that requiring institutions to run participations through a qualified special purpose entity (QSPE) in order for the participations to receive true sale treatment would be “a needless and costly expense.” Also, rather than adopting universally applicable provisions, FASB “should recognize provisions incorporated into loan participation agreements that would alleviate FASB’s concerns about legal isolation.” Another area of concern for CUNA was if FASB had moved forward with the amendment, more assets would have to be recorded on the originating credit union’s financial statement, possibly triggering a need to increase net worth in order to meet prompt corrective action standards and, in the case of member business loans pushing the originating credit union closer to the statutory MBL cap. At a June 17, roundtable with FASB, NCUA Attorney Paul Peterson said the common law right of setoff does not apply to credit union shares under the Federal Credit Union Act. Steven Bisker, a Virginia attorney specializing in credit union issues, also attended the roundtable and agreed with CUNA that there are sufficient safeguards already are in place that address FASB’s concerns about isolating the loan participation asset from the reach of the originating credit union and its creditors in liquidation. As it stands now, Waite said the majority of the FASB Board is “leaning towards keeping things favorable to credit unions and banks” but more options, including a custodial agreement that “would isolate” the piece being participated, will be considered at its next meeting in mid-August. “This is good news for credit unions,” Waite said. “There may have to be some rewriting of contracts but the momentum is looking favorable for credit unions.” [email protected]

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