WASHINGTON – Both CUNA and NAFCU are pleased with the latest draft from the Financial Accounting Standards Board on its proposal regarding the treatment of loan participations, but both trade groups have suggested further tweaks. At issue is FASB's Accounting for Transfers of Financial Assets, which is an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The proposed statement would prescribe how loan participations should be conducted to qualify for accounting treatment as a sale. The transferred portion or portions and any portion retained by the transferor must meet the definition of participating interests. A participating interest, among other things, must involve no recourse or subordination provisions. CUNA has suggested revising the definition of participation interest to enable loans with limited recourse to achieve sales accounting treatment, a change that would help institutions avoid the costly and time-consuming process of setting up and running a special purpose entity (SPE). In an Oct. 10 letter written by CUNA Senior Regulatory Counsel Catherine Orr, the trade group also recommended FASB make prospective the requirement that loan participation transactions with recourse shown on an institution's books as a sale must be retroactively recharacterized as a secured borrowing upon issuance of the final rule. CUNA also said a one year transition/effective date should be established in order to allow institutions time for implementation of the rule, including establishment of an SPE. NAFCU is also suggesting a broader definition of participating interest saying the current one "is too narrow in that it requires that there be absolutely no recourse or subordination to the transferor," wrote Fred Becker, NAFCU president/CEO in an Oct. 10 comment letter. "Credit union loans frequently are of a higher credit quality than other loans in the market," Becker said, adding the market, however, does not price CU loans differently from other loans and as a result, they are "often reluctant to sell loans without recourse since they don't get paid for the lower credit risk inherent in the loans." NAFCU also supports the ability of FCUs to make loan participations due to limitations in liquidity and risk management options and believes that markets "are better served by achieving isolation through a contractual agreement rather than the creation of an artificial entity." The new FASB rule represents "business as usual" for credit unions that engage in loan participations, CUNA said. It also eliminates a concern that "rights of setoff" and obtaining "true-sale-at-law" opinions would prevent the more favorable sales accounting treatment, as the 2003 plan would have done, the group said. "We commend FASB for taking into consideration the comments of CUNA and other stakeholders on this project in issuing this Exposure Draft," Orr wrote. [email protected]

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