NCUA Releases Tool to Tackle Complex Credit Loss Estimates

The NCUA on Wednesday released a tool designed to help small credit unions comply with the complexity of new accounting standards to estimate future credit losses that become mandatory for most credit unions on Jan. 1.

The Financial Accounting Standards Board changed its standard for current expected credit losses (CECL) in 2016 in response to shortcomings exposed in the 2007 financial crisis. Its adoption has been postponed a few times, most recently in March 2020 because of the financial chaos and uncertainty with the COVID-19 pandemic.

FASB is a private, not-for-profit group whose mission is to set and improve the Generally Accepted Accounting Principles (GAAP) used by businesses. Regulators, including the NCUA, defer to its standards for regulatory benchmarks.

NCUA Chair Todd M. Harper said the NCUA’s new Simplified CECL Tool is intended for use by credit unions with less than $100 million in assets, although it could be used by larger credit unions based on the discretion of their management and auditors.

“The Simplified CECL Tool gives small credit unions a valuable resource to help them implement CECL without having to hire an econometrician or to use complicated models,” Harper said. “With an uncertain economic picture, this tool provides relief for smaller credit unions, so they can focus on serving their members and communities.”

He continued, “The NCUA will continue to provide CECL-related information on our website, and our staff is available to assist credit unions with using the tool and with other CECL-related questions.”

The Simplified CECL Tool uses the Weighted Average Remaining Maturity (WARM) methodology to determine the average remaining term of any loan pool, which in turn is part of the process to estimate the allowance for credit loss. FASB supports the WARM methodology, in which the percentage of each loan’s value to the total value of the pool is weighted by each loan’s remaining years to maturity.

An NCUA news release said the tool requires a credit union to enter its charter number, total assets and loan portfolio balances. The loan portfolio categories in the tool mirror the categories in the NCUA’s Call Report.

For each loan portfolio category, the tool calculates the credit union’s net charge-off rate from its Call Report data and provides the industry-based WARM factor. The tool also allows the credit union to make qualitative adjustments for current conditions and reasonable and supportable forecasts, as required by CECL.

The Simplified CECL Tool, along with FAQs, a user guide and information on the model used, is available on the NCUA’s CECL Resource Center website.

“The NCUA recognizes credit unions need time to evaluate which CECL methodology is appropriate for their size and complexity,” the NCUA news release said.

As credit unions evaluate their options, NCUA said the Simplified CECL Tool will be updated for use with this year’s quarters ending Sept. 30 and Dec. 31 to allow credit unions to test and calibrate the tool. After that, the tool will be updated each quarter.

NAFCU President/CEO Dan Berger said the tool is welcome assistance to small credit unions to “better understand and properly adhere to the CECL accounting standard. Continued guidance from the NCUA will also be critical to assist credit unions in using CECL.”