NORWALK, Conn. – If certain conditions are met, credit unions will be allowed to continue to treat their loan participations as sales. “This is extremely good news for credit unions and CUNA appreciates the support from NCUA, leagues and credit unions that we received during deliberations on this issue,” said Scott Waite, CUNA Accounting Task Force Chairman. At issue is FASB’s project to revise Statement No. 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), which sets requirements that a transfer in a loan participation must meet to be considered a sale under Generally Accepted Accounting Principles (GAAP). FASB had been considering amending FAS 140 to disallow sales treatment for loan participations marked by rights of setoff. In the case of a bank in bankruptcy or receivership, the customer has the right to offset or cancel any deposits with any outstanding loans; and the bank has the right to offset or cancel any outstanding loans that customer has with that customer’s deposits. Under FASB’s tentative position, the existence of the right of setoff means the loan participation is not isolated from the transferor as required under FAS 140. Therefore, a loan participation would have to be reflected on the originating credit union’s financial statements as a secured borrowing unless a qualified special purpose entity (bankruptcy-remote), such as a CUSO, is used. FASB is now proposing that financial institutions must obtain “true sale” opinions from a lawyer and address several other requirements to prove isolation before being permitted to utilize sales accounting treatment for loan participations. The attorney providing the “true sale” opinion would be expected to check to see that certain criteria are met, including the originating financial institution must act in a custodial capacity with respect to handling the loan and its proceeds and must “not commingle for any significant period of time proceeds received on the underlying financial assets;” and the originating financial institution must also pass loan proceeds directly to the participating financial institution, except for servicing fees. The originator must “administer the financial assets under a standard that does not give it unfettered discretion as to all matters,” FASB noted. Waite said several other key points came out of the recent FASB meeting. “It is my opinion that a custodial capacity will be part of the language in future contracts,” Waite said. Waite said CUNA also had concerns with FASB’s proposal. There was some concern that the proposal would affect those credit unions involved in loan participations approaching the member business loan cap and impact the capital ratio computation for those credit unions that would have to treat loan participation transactions as secured borrowing. The restructured proposal would stave off any of those concerns, Waite said. CUNA has said there were already sufficient safeguards in place to address the accounting group’s concerns about isolating the loan participation asset from the reach of the originating credit union and its creditors in liquidation, according to Mary Dunn, CUNA associate general counsel and senior vice president. She added that CUNA wanted to ensure that FASB understood that credit unions operate differently from other financial institutions. FASB is expected to issue a revised draft of the proposed loan participation rules by the first quarter of 2005. Following the public comment period, the FASB Board would meet again to finalize the proposed rule. “We appreciate FASB’s willingness to listen to our concerns and to acknowledge that credit unions should not be subjected to new accounting standards regarding loan participations,” Waite said. -msamaad@cutimes.com