WASHINGTON—Credit unions should assemble teams to address the Financial Accounting Standards Board’s (FASB) new Current Expected Credit Loss model (CECL), one group of experts emphasized.
A common mistake, the panel told attendees at CUNA’s GAC, is giving the job of CECL compliance to just one person.
During the panel session, several experts discussed not only best practices at institutions already addressing CECL, but where many in the industry may now stand in preparing for CECL, the compliance deadline for which is expected to arrive in early 2020.
Before a standing room only audience that had numerous questions related to CECL, the panelists agreed credit unions should not fear the new FASB standard, but instead look at it as an opportunity to improve on how they make loans to members.
Ian Dunn, EVP of products at Visible Equity, said CUs that have been most effective in addressing CECL to date have formed cross-functional teams comprised largely of representatives from lending, finance and IT, all working toward the same goal.
“Or, if not IT, someone who is familiar with the lending data,” Dunn said. “These credit unions also don’t just focus on getting to the final number from CECL—they don’t just jump to the number and avoid paying close attention to the steps that get them to that number. They look closely at the data. They are thoughtful about each model available under CECL. They are thoughtful about the segmentation of their portfolios, and they look down the road a ways.”
Dunn acknowledged that credit unions addressing CECL often discover issues when getting information on charge-offs, saying a lot of that data gets overwritten and wiped out.
“So, getting good recovery information has been challenging,” Dunn said.
Dunn said his company’s studies show credit unions have good access getting to their data, but often find holes in it when they begin to analyze it, noting that loan data not on the core system—such as participations, student loans and credit cards—are causing problems.
The Final Thing
“The final thing teams doing a good job do is use their data they gather for CECL to for better risk analysis and a host of other uses,” explained Dunn. “They have a bigger use for what they are doing than just CECL.”
Dunn acknowledged many credit unions are having difficulty finding the time to address CECL, which may be causing some to delay getting moving, he said.
“I sympathize with those with day jobs, or those who have to run the credit union and deal with CECL,” he said.
Dunn pointed to a preliminary survey of 14,000 financial services executives and their responses to their CECL journey. He said survey data show that 15% of FIs have not started yet to address CECL, 44% have formed some kind of committee gathering information to make CECL roadmaps, 38% have concrete plans in place and are executing on them, and 1% are fully up and running on CECL.”
“So, if you haven’t started, you’re probably a little behind the group. If you are ready, you are well ahead of the pack,” he said.
What Study Also Showed
That same study also shows what these same executives are forecasting for CECL’s impact on loan loss reserves:
- 4% expect a decrease
- 10% see no change coming
- 13% expect a 10% increase
- 42% expect a 10%-25% increase
- 19% expect a 25%-50% increase
- 9% expect a 50%-100% increase
- 3% see greater than a 100% increase coming.
A Word of Caution
Dale Hansard, CEO of the $30-million Caprock FCU in Lamesa, Texas, cautioned CUs that hoping CECL will go away is not the right approach.
“There is bit of denial among some credit unions,” Hansard said. “They are thinking CECL will maybe go away. But FASB has spent a lot of time on this and they are not playing. It’s probably going to happen. CECL will affect everything the credit union has its name on.”
But Sydney Garmong, partner with Crowe LLP, told attendees if FASB elects to create a model for regional banks within CECL, she expects CECL’s effective date will be delayed. However, Garmong told CUToday.info she does not expect FASB to consider the regional bank model.
Hansard said while he understands many CUs may fear CECL, they should drop that concern in favor of looking at CECL as an advantage. He said not only can credit unions use the data they complied to address CECL for other needs in the future, they will also be pricing their loan more accurately under the new rules.
“We will benefit more members this way and the credit union,” Hansard said. “So, it’s not woe is me, CECL is a wow.”