Credit unions have been anticipating big changes from the Financial Accounting Standards Board's new Current Expected Credit Loss rules, and they have plenty of work to do to prepare. Here are four things experts in the trenches recommended credit unions do now.
1. Start gathering data.
“The idea behind CECL is being able to predict or forecast what the life cycle of that loan will look like from the very inception,” said Shawn Kisana, SVP/CFO of the West Jordan, Utah-based Member Business Lending, a CUSO that provides loan support services.
Making those predictions starts with amassing historical data, such as risk rating by individual loan, loan durations, individual loan balances, individual loan charge-offs and recoveries, and individual loan segmentation. With that data, credit unions can create models that calculate future expected losses.
Data collection can take time, so credit unions need to start immediately, Julie Renderos, EVP/CFO for the Tampa, Fla.-based, $7.3 billion Suncoast Credit Union, said.
“I think it's going to vary by credit union depending on how easy your data is to access electronically,” she said. “Start now, because if you go through a core conversion, you might lose some of that data.”
2. Form a team.
Credit unions should form CECL committees, said Aaron Lenhart, a senior risk management consultant at Sageworks, which provides financial analysis software and runs ALLL.com.
“Bring these folks together and understand how this is going to potentially impact you so that you can hopefully lay the foundation for some of these processes that are going to make life a little bit easier, [or] at least the transition a little bit easier,” he said.
3. Reevaluate your IT budget.
Compiling lots of historical data will likely require a data warehouse and analytics tools – without them, you're signing up for a very manual process, Renderos cautioned. And it costs money.
Whether to build data collection and analysis tools in-house or go with a third-party provider is also a question more credit unions will face. Small credit unions, Kisana noted, may be able to create their own analytics and models in-house, but some might not have the time or money to do that.
4. Don't panic.
Credit unions that haven't done much about CECL shouldn't freak out – yet – according to Lenhart. Credit unions should spend 2016 creating a committee and a game plan, he advised. In 2017 and 2018, they should create their models and start testing scenarios. By 2019, he noted, credit unions should have a final, validated model.
“Just because we say don't panic, that doesn't mean don't prepare,” he said.
Learn more about how credit unions can prepare for CECL changes in the May 18, 2016 print issue of Credit Union Times.
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