Happy Days: CECL Guidance Issued

April 4, 2019 at 9:32 am 1 comment

With regulators continuing to be gun-shy about offering advice on preparing for the new Current Expected Credit Losses methodology (CECL) even as its implementation date draws closer, I suspect that the news that financial regulators, including the NCUA, issued an updated Q & A on the accounting standard yesterday will be gobbled up by compliance geeks everywhere, not to mention nervous CEO’s, quicker than city pigeons devour a piece of bread on the sidewalk.

Just in case you haven’t had your second cup of coffee – I’ve treated myself to a McDonald’s ice coffee this morning and it’s surprisingly good – here is a quick reminder of what I’m talking about. In June of 2016, the Financial Accounting Standards Board announced that it was implementing new accounting standards related to when financial institutions have to recognize a loan as impaired. Under existing accounting standards, loan losses have to be recognized when they become “probable” but under the CECL standards credit unions and banks will have to account for expected losses. This new approach is more forward-looking since it effectively requires financial institutions to base projected losses on past lending history and to reflect these changes in their ALL calculations.

The most practical result will be that many institutions will have to put aside more money to guard against losses than they have had to in the past. Despite the importance of this accounting change, regulators have been hesitant to assist credit unions because we are ultimately dealing with an accounting issue. Conversely, this is one accounting area that is clearly going to have an operational and safety and soundness impact.

Which brings me to why I was as pleased as a kid with a snow day when I got this link to an updated Q & A issued by federal regulators. I have consistently stressed to credit unions that if the standard is implemented properly, smaller credit unions should not find the new standard overly burdensome so I was pleased to see that in a new answer to Question 45, the regulators stressed that CECL is scalable to all institutions and that they anticipate a wide variety of methods used to implement its requirements which may be as simple as an institution’s updated spreadsheets.

I was a little less pleased but by no means surprised by the answer to the question: Will the agencies provide an approved formula or mandate a single approach for CECL implementation? Alas, the examiners explained that the agencies would not provide an aproved formula or mandate a specific approach but would instead be “closely monitoring” implementation practices. On a practical level this means that you and your accountant will be on your own in figuring out CECL but that examiners will ultimately have the right to second guess your methodology. This is precisely the kind of gray area which could lead to inconsistent examiner expectations but maybe this is inevitable given the fact that we are implementing an accounting standard as opposed to prescriptive regulations.

Movement On Data Privacy Legislation

Bloomberg News is reporting this morning that top republicans are “optimistic” about writing a federal privacy bill after a bipartisan group of Senators held their first meeting at the Capitol yesterday. As I’ve explained before, I’m cautiously optimistic that this might be the year, or at least the legislative cycle, when Congress passes a comprehensive privacy bill. Even the data mining giants that have the most to lose from regulation in this area have potentially more to gain if they can help influence the drafting of a single national standard that preempts far more aggressive state laws. Stay tuned.

Entry filed under: General, Regulatory. Tags: , .

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1 Comment Add your own

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    Reply

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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