CECL: CUs’ Four-Letter Word

Four-letter words generally are considered profanities that shouldn’t be uttered in polite company.

For credit unions, CECL perfectly fits the bill.

The Current Expected Credit Loss standard is a technical accounting method that officials from NCUA Chairman Rodney Hood to the president of the Indiana Credit Union League have said could have a huge impact on credit unions.

And it’s been issued by a board – the Financial Accounting Standards Board – that most people have never heard of. FASB is an independent, not-for-profit organization that establishes accounting and reporting standards for public companies, private companies and not-for-profit organizations that follow Generally Accepted Accounting Principles.

Even the simplest explanation of CECL will leave most people scratching their heads.

Under the CECL standard, institutions will have to recognize the expected lifetime losses at the time a loan or financial instrument is recorded. The effective date of CECL has been pushed back until January 2023 for credit unions.

The CECL standard could have a chilling effect on lending, including loans to low-income borrowers, Hood wrote in a letter to Russel Golden, then-chairman of FASB earlier this year.

“I believe the compliance costs associated with implementing CECL overwhelmingly exceed the benefits,” Hood wrote in his letter.

He said he was worried about the impact of CECL even before the coronavirus crisis, but that the economic impact of the pandemic makes the exemption even more urgent. He said credit unions have had to begin preparing for the implementation of CECL – a task that has become even more difficult as a result of social distancing and stay-at-home orders.

He urged that at a minimum, the standards board allow credit unions to use an alternative that retains the current framework they use.

As late as September, Hood said he had met with new FASB Chairman Richard Jones to push the accounting board to exempt credit unions from the standard. While Hood said Jones acknowledged that CECL likely would hit credit unions hard, he did not promise to revisit the issue.

And of course, exempting credit unions would lead to a huge fight among financial institutions that also would demand an exemption.

Members of Congress also have weighed in on CECL. Rep. Blaine Luetkemeyer (R-Mo.), the ranking Republican on the House Consumer Protection and Financial Institutions Subcommittee, introduced legislation in July that would abolish CECL.

“This standard is bad for institutions, bad for investors and bad for everyday Americans,” he said. “It is time we eliminate this harmful accounting standard once and for all.”

The bill was referred to the House Financial Services Committee, which has not considered it yet.

The legislation followed a letter that Luetkemeyer and subcommittee chairman Rep. Gregory Meeks (D-N.Y.) sent to FASB asking the board to work with financial regulators to study the impact of the new accounting standard.

For instance, they said, if small and midsize financial institutions curb lending and restrict credit, lower-income people would see the cost of borrowing increase or evaporate.

Meanwhile, the NCUA board has issued a proposed rule that members hope will help cushion the blow.

The rule, according to the NCUA, was narrowly tailored to mitigate the impact of CECL on the Prompt Corrective Action classification of a federally-insured credit union’s net worth. The rule mirrored a rule adopted by other banking regulators.

“Specifically, the proposed rule would provide that, for purposes of the PCA regulations, the Board will phase in the day-one effects on a FICU’s net worth ratio over a three-year period,” the NCUA board said. The phase-in would only apply to federally-insured credit unions that adopt the CECL methodology on or after Dec. 15, 2022.

Comments on the proposed rule were due last month. In comments filed with the agency, credit union officials took an “it’s better than nothing” approach.

“As we have stated in previous comment letters to FASB, we believe that this new standard is a solution in search of a problem that does not exist within credit unions,” Indiana Credit Union League President John McKenzie wrote.

He said historically, credit unions have weathered economic crises very well. And he expressed concern that when CECL goes into effect, credit unions will overfund allowance accounts.

“The end result will be lower reported earnings, and reduced capital for credit unions as they implement these onerous standards,” he added.

Nonetheless, McKenzie commended the NCUA for trying to help credit unions with the transition to the new accounting standard.

He also endorsed the NCUA’s plan to exempt credit unions with less than $10 million in assets.

“For some credit unions, implementing CECL will have an immediate and negative impact on net worth and its ability to serve members and communities during a time of unparalleled economic turmoil,” Joni Senkpeil, SVP of member solutions at the Illinois Credit Union League, told the NCUA.

Many credit unions are experiencing rapid increases in deposits, resulting in a decrease in their net worth, according to Tim Tacheny, general counsel for the Minnesota Credit Union Network. He said the general consensus is that a complete economic recovery from the coronavirus crisis will take several years. That means credit unions still will be dealing with net worth issues when CECL is scheduled to go into effect, he added.

The NCUA should consider the multitude of issues that could have an impact on credit union capital during the next three years and adopt flexible standards for the examination of credit union capital, Andrew Morris, NAFCU’s senior counsel for research and policy, told the agency.

And then, there’s the consideration of the compliance cost of adapting to the new rule, according to Luke Martone, CUNA’s senior director of advocacy and counsel. Martone said credit unions will have to use scarce resources to analyze their loan portfolios and project life of loan losses.

He added that CECL is likely to have an impact on a lender’s ability to assist low- and moderate-income people.

“A completely unintended, though real, consequence of CECL is that it will force lenders to be more discerning of potential borrowers with less than perfect credit,” he added.