CUNA Stands Firm Against FASB Loan Participation Proposal

WASHINGTON – CUNA has been watching the progress of a loan participation proposal from the Financial Accounting Standards Board supporting its stance that there are safeguards currently in place to address the arrangement. In a May 10, 2004 letter to FASB CUNA wrote ” (loan) participations are important financial and management tools that are increasingly used by credit unions, and by other financial institutions, to control interest rate risk, credit risk, balance sheet growth, and maintain net worth” and “ enable credit unions to utilize assets to make more credit available to their membership than they would be able to do without the use of loan participations.” “As we understand the issue, FASB is concerned 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,” wrote both CUNA Associate General Counsel and Senior Vice President Mary Dunn and CUNA Senior Regulatory Counsel Catherine Orr. At issue is FASB’s amendments to FAS 140, which would expressly state that because the right of setoff between the originating institution and the member/depositor/ borrower exists (setting up the potential that the participating institution would not have any claim against the member/depositors’ funds in the originating institution) the loan transaction does not meet the isolation requirements of FAS 140. Because of this concern, instead of transferring the portion of the loan participated off of its books as a sale, the transaction would be reflected on the originating credit union’s financial statements and records as a secured borrowing. Dunn and Orr summarized CUNA’s position with the following points: CUNA strongly opposes any guidance from FASB that would render loan participations unusable, and we urge FASB not to move forward with contemplated changes to FAS 140. Requiring institutions to run participations through a qualified special purpose entity (QSPE) in order for the participations to receive true sale treatment is a needless and costly expense, which we oppose. Rather than adopting universally applicable provisions, FASB should recognize provisions incorporated into loan participation agreements that would alleviate FASB’s concerns about legal isolation. Both CUNA and NCUA have participated in recent roundtables with FASB. [email protected]