Revision of FASB's Loan Participation Proposal Could Benefit CUs

WASHINGTON -A recent markup of a Financial Accounting Standards Board proposal on how loan participations are treated should be beneficial to credit unions. FASB’s proposal details how loan participations should be handled to qualify for accounting treatment as a sale. All along, the CUNA Accounting Task Force expressed concerns with two of FASB’s provisions – `rights of setoff’ and `true-sale-at-law,’ said Scott Waite, task force chairman and senior vice president/CFO of Patelco Credit Union. Waite said he’s pleased to see that FASB’s latest draft no longer contains those provisions. Meanwhile, FASB is still seeking comment on proposed conditions for reporting a transfer of a portion, or portions, of a financial asset as a sale. Comments are due by Oct. 10. First, that the transferred amount and any portion retained by the transferring party must be participating interests, which are defined as a portion of a financial asset that conveys proportionate ownership rights with priority under the law that is equal to the priority of each other participating interest and involves no recourse to or subordination by any participating interest holder. It also does not entitle any participating interest holder to receive cash before any other participating interest holder. The transferred portion or portions must also meet the conditions for surrender of control including the transferred financial assets having been “isolated” or put beyond the reach of the transferor and its creditors, even in bankruptcy. A “true-sale-at-law” opinion by an attorney, often required to support “isolation”, is not required if the transferring institution has a reasonable basis to conclude that the legal opinion would be given if requested. The transferee would also have the right under the loan participation agreement to pledge or exchange the transferred financial assets it received. On the other hand, the transferor does not maintain control through an agreement that entitles and obligates it to repurchase or redeem the assets before their maturity or the ability to unilaterally cause the holder to return specific assets. The analysis must consider any arrangement or agreement made in connection with the transfer even if it was not entered into at the time of the transfer. If the transfer doesn’t meet those conditions, sales accounting can be achieved only by transferring an entire financial asset or group of financial assets to a “qualifying special purpose entity” (SPE), and the entire transferred financial asset must meet the conditions for surrender of control. The Michigan CU League also strongly encouraged FASB to reconsider their 2003 proposed changes. “In the initial exposure draft, there were discussions that the proposed `rights of setoff’ and the requirements to meet `true-sale-at-law’ tests would prevent loan participations among credit unions,” said Michael DeFors, regulatory and legal affairs director for MCUL. DeFors said fortunately for CUs the new exposure draft does not contain the `rights of setoff’ and the requirements to meet `true-sale-at-law’ tests. “This benefits credit unions because loan sale accounting treatment allows a financial institution to deduct the transferred portion of the loan from its balance sheet,” DeFors said. “If the loan is a member business, selling a portion of the loan might keep the institution from encroaching on its MBL cap. If a loan participation does not qualify for sales accounting treatment, it would instead have to be recorded as a secured borrowing, which would make it subject to the MBL cap.” [email protected]