NORWALK, Conn. – The Financial Accounting Standards Board may bereconsidering its proposed ban on the sales aspect for loanparticipations indicated by rights of setoff. At its July 27meeting, the majority of FASB Board members were in agreement toallow credit unions to continue treating loan participations assales with the stipulation that the arrangement is set up in a waythat allows for ownership of a segment of the loan to betransferred from the owner to the buyer. At the most, loanparticipation contracts would have to be modified to make clear whoowns what, a potentially expensive undertaking but well worth nothaving the option at all, industry experts note. The FASB hadconsidered amending FASB Statement No. 140, Accounting forTransfers and Servicing of Financial Assets and Extinguishments ofLiabilities, and the rights of setoff – the common-law right ofdebtors and creditors to setoff (net) amounts due to one another ifone of the parties defaults, becomes insolvent, or enters intobankruptcy or receivership. One of FASB's main concern was that ina loan participation situation in which the borrower has shares ordeposits at the originating institution, if that institution isliquidated, the participating institution would not be able torecover its prorata portion of the members' shares/deposits withinthe originating institution that are setoff. As a result, the FASBhad considered banning the sales aspect for loan participationsindicated by rights of setoff. If an institution is in bankruptcyor receivership, setoff allows the customer to offset or cancel anydebts owed to them with any outstanding loans. That institution canoffset or cancel any debts owed with any deposits belonging to thecustomer. This would mean credit unions would have to use the lessbeneficial accounting choice of keeping their assets as securedborrowing. Typically, the accounting portion of a loanparticipation allows the transfer of part of the loan off theselling credit union's books to the credit union's purchasing thebook. “Even though setoffs do exist, they have never been used bycredit unions in liquidation,” said Scott Waite, a member of FASB'sSmall Business Advisory Committee and senior vice president/CFO ofPatelco Credit Union. Waite is also chairman of the CUNA AccountingTask Force, which sent FASB a May 11 comment letter written by MaryDunn CUNA associate general counsel and senior vice president andCatherine Orr, CUNA senior regulatory counsel. CUNA was mainlyconcerned that requiring institutions to run participations througha qualified special purpose entity (QSPE) in order for theparticipations to receive true sale treatment would be “a needlessand costly expense.” Also, rather than adopting universallyapplicable provisions, FASB “should recognize provisionsincorporated into loan participation agreements that wouldalleviate FASB's concerns about legal isolation.” Another area ofconcern for CUNA was if FASB had moved forward with the amendment,more assets would have to be recorded on the originating creditunion's financial statement, possibly triggering a need to increasenet worth in order to meet prompt corrective action standards and,in the case of member business loans pushing the originating creditunion closer to the statutory MBL cap. At a June 17, roundtablewith FASB, NCUA Attorney Paul Peterson said the common law right ofsetoff does not apply to credit union shares under the FederalCredit Union Act. Steven Bisker, a Virginia attorney specializingin credit union issues, also attended the roundtable and agreedwith CUNA that there are sufficient safeguards already are in placethat address FASB's concerns about isolating the loan participationasset from the reach of the originating credit union and itscreditors in liquidation. As it stands now, Waite said the majorityof the FASB Board is “leaning towards keeping things favorable tocredit unions and banks” but more options, including a custodialagreement that “would isolate” the piece being participated, willbe considered at its next meeting in mid-August. “This is good newsfor credit unions,” Waite said. “There may have to be somerewriting of contracts but the momentum is looking favorable forcredit unions.” [email protected]