WASHINGTON (2/18/09)—Some credit unions have experienced serious reductions in capital as a result of the application of fair-value accounting to certain assets and the Credit Union National Association (CUNA) continues to seek legislative relief. In a recent letter to Sen. Christopher Dodd (D-Conn.), CUNA President/CEO Dan Mica expressed CUNA’s “strongest support” for efforts to address accounting rules on fair value and other-than-temporarily impaired (OTTI) assets. Mica noted that, like other financial institutions, federally insured credit unions with more than $10 million in assets are required to follow U.S. Generally Accepted Accounting Principles (GAAP). Therefore, Mica explained, for mortgage-backed securities (MBS) and mortgage servicing rights, credit unions follow the Financial Accounting Standards Board's (FASB) rules on fair value and mark-to-market accounting in valuing these assets and reflecting them on their financial statements and regulatory call reports. Because of this a number of credit unions—like other financial institutions and companies-- have experienced serious reductions in their capital, according to CUNA. “Fair value accounting impacts the application of accounting standards to assets that must be treated as other-than-temporarily-impaired (OTTI), such as MBS. That is because FASB requires OTTI assets to be written down for the entire difference between their cost and fair value on the day they are recorded,” Mica said. “ Because of the current illiquid market conditions, the difference in these values can be substantial and result in charges to earnings that represent unnecessary and overstated capital reductions,” Mica said in his Feb. 13 letter to the Senate Banking Committee chairman. Mica urged Congress to act to address the burden fair value presents to credit unions. CUNA backs the following actions:
* Direct the Securities and Exchange Commission SEC), under the new chairman, and the FASB to refine "fair value" for periods when an active market for a security does not exist; and * Direct the SEC and FASB to address OTTI again and to recognize the differences between credit losses and liquidity losses due to inactive markets.