Posts tagged ‘CECL’

NCUA Committed To Gradual Phase In Of CECL

Greetings from Washington DC where I hope to see many of you at our Association Briefing today in preparation for tomorrow’s Hike The Hill.

Although the legislative stuff is a lot of fun to talk about, with Congress gridlocked the most important developments continue to be on the regulatory and legal front. At last Thursday’s Board meeting, NCUA approved a joint agency guidance explaining baseline examiner expectations for banks, credit unions and thrifts as they prepare to comply with the Current Expected Credit Loss Methodology we lovingly refer to as “Cecil” CECL. The best news I have to report in a while is that NCUA included a footnote in the preamble to the guidance in which it reiterated that it has the authority to phase in CECL Compliance over a three year period. In addition, speaking to a group of small credit unions on Sunday, Chairman Hood noted that phasing in CECL is one of his top priorities.

Why is this so important? Remember that the basic idea of CECL is that financial institutions should record expected credit losses earlier in the lending cycle. There are a number of credit unions for whom a decisive shift to this methodology would have extremely negative consequences. For example, how many credit unions would be harmed if they had to report medallion values under a CECL model? A phasing in of CECL compliance in addition to the already delayed effective date applied to credit unions is one more way that regulators can help smooth the transition.

That being said, the transition is coming and there is a lot of work to be done. Take a look at this guidance and you will see that CECL Compliance impacts much more than accounting. It impacts everything from your board governance to your off balance sheet investments. Now really is the time to get started.

Credit Unions Offer Good Mortgage Value

Here is one more point to raise when you talk to your Congressman tomorrow. Home buyers save thousands of dollars by getting their loans from credit unions. This is the conclusion of a report released by NCUA’s economist at Thursday’s Board meeting. It’s always been interesting to me that when consumers think about credit unions they are much more likely to mention a great rate they received on a car loan than a great mortgage they received. Perhaps this report can help broaden the focus of consumers and policy makers particularly as they consider how to ensure secondary mortgage access if Fannie and Freddie ever go away. On that note, have a nice day.

 

 

 

February 25, 2020 at 8:49 am Leave a comment

Key Federal and State Proposals Rolled Out

Well, the holiday season is officially over. Judging by the amount of information I want to give you in today’s blog, it’s clear that our policymakers are hitting the ground running. Remember, this is an election year.

Let’s start with some federal guidance.

The NCUA released its annual list of supervisory priorities. Close your eyes and guess what NCUA has listed on their agenda for this year. You got it. The BSA compliance! Listen, I understand that few statutes are as important to properly implement, but if there is a credit union out there that doesn’t understand the importance of BSA and have a grasp of how to comply with it, that credit union has issues that a regulatory guidance can’t help with. What I am surprised by is that Libor is so far down on the list. If I were making the list, my top priorities would be cybersecurity, business continuity, which should be viewed as opposite sides of the same coin, potential liquidity risks- because the ongoing need of the Fed to prop up overnight lending facilities continues to scare the bejeebies out of me, and our good friend CECL, because I don’t think credit unions should in any way be encouraged to ignore implementation issues before it’s too late.

As painful as this is for me to admit, as between my priorities and NCUA’s, it makes sense to follow NCUA’s list.

Supervisory Guidance Issued

A regulation which has flown under the radar has been one finalized by NCUA in September intended to assist credit union supervisory committee audits by providing a more concise framework and explanation for minimum audit requirements. Yesterday, the NCUA issued a guidance complimenting this regulation, which succinctly explains what these minimum obligations are. Anyone involved with the supervisory committee should take a look. I of course have some opinions about this as well, but I still have much to talk about today, and I’m in too good of a mood to get hate mail.

Governor Unveils Ambitious List of Financial Services Initiatives

I’m going to go out on a limb here and say that the Governor’s 10th list of legislative priorities for this year’s New York session includes the most comprehensive list of priorities that could impact credit union operations since he was first elected. In addition to the issues he addressed in his State of the State, which included a pointed criticism of banks for not providing services in many of the areas that need them most, his book includes several priorities which we will be scrutinizing once they take legislative form. Among the proposals that caught our eye is one dealing with reporting suspected elder abuse; further strengthening of state law banning unfair and deceptive practices; a state-level crackdown on robo-calls; and enhancing the oversight powers of the Department of Financial Services.

In addition to the issues directly dealing with financial service issues, Cuomo once again called for the legalization of the sale of marijuana for recreational use and even wants to create an institute for the study of hemp and marijuana within the SUNY system. I was chatting with a longtime colleague and lobbyist after the presentation, and he pointed out that one of the reasons you may actually see agreement on this measure is the State’s fiscal deficit. The reality is that the state can plug in estimates of projected tax revenue to help fill the gap.

Believe it or not, there’s even more, but I think you have better things to do with your time than engage in a one-sided conversation with yours truly. That being said, as many of you already know, you can always e-mail me or give me a call if you want to follow up with anything I’ve mentioned.

Have a great day.

January 9, 2020 at 9:36 am Leave a comment

Six Things You Need to Know to Start Your Credit Union Day

Yours truly was looking at his list of potential blog topics the other day and realized there’s a lot of information that I need to get out to my faithful readers. So, with the usual qualifier that each one of these is worthy of more extensive review, here is a look at six developments that impact your credit union.

Regulators Issue a Proposed Joint Guidance on CECL

NCUA has joined with the other financial regulators in proposing a joint policy statement on the proper accounting for credit losses under the Current Expected Credit Loss (CECL) as well as proposed industry guidance on Credit Risk Review Systems. In other words, this is a long awaited policy statement which establishes the framework that examiners will use when assessing how your credit union is accounting for expected credit losses. The proposed policy statement includes a list of policies that examiners expect to see when CECL takes effect, which, for credit unions, has been pushed back to 2023. The examiners also issued a closely related proposed guidance on what constitutes an appropriate Credit Risk Review System.

State Approves Another Wild Card Request

New York’s Department of Financial Services has approved another Wild Card request allowing state chartered credit unions to exercise powers that previously could be exercised only by their federally chartered counterparts. Specifically, state chartered credit unions can now make unsecured loans to employees without seeking board approval. State chartered credit unions interested in utilizing this power are expected to have policies and procedures in place “acceptable” to the Department of Financial Services.

Budget Briefing Set for November 20th

NCUA has announced that it will be holding a public “briefing” on its proposed $316.2 million budget for 2020-2021. I put “briefing” in quotes because of NCUA’s refusal to acknowledge that it holds a hearing on its proposed budgets. It wasn’t too long ago that the NCUA’s refusal to hold budget hearings under then Chairwoman Debbie Matz was one of the biggest controversies in credit union land. If you want to provide testimony at the briefing, or submit a comment letter on the budget, this resource provides the information you will need.

The Litigation Continues

Even though settlements have already benefited the industry, NCUA’s litigation against the investment banks that participated in selling or underwriting the mortgage-backed securities which led to the demise of the industry’s largest corporate credit unions is continuing. In this recent decision, the court dismissed some of NCUA’s claims against Deutsche Bank National Trust, but allowed the litigation to go forward.

News Flash: Cyberattacks Against Credit Unions Are a Big Deal

The headline in NCUA’s press release following its most recent board meeting read: “Financial Services Industry a Prime Target for Cyberattacks.” The press release went on to explain that NCUA is developing a “multi-year plan to combat cyber threats.” Wow. With press releases like this, it’s only a matter of time before the Department of Defense tells Hawaiians to be on the lookout against a possible attack on Pearl Harbor.

I understand why a new leadership team wants to underscore the importance of cybersecurity preparedness. It is the number one issue facing the financial industry. That being said, headlines like this make it sound as if NCUA is only now reacting to cyberattacks that have already taken place. It also may come as a bit of a surprise to both large and small credit unions, many of which have been subject to cyber evaluations as part of their examinations. My suggestion to the NCUA communications team would be to tone down the rhetoric. It only makes NCUA sound like it’s late to the party.

A Mortgage Match Made in Cybersecurity Heaven?

Finally, a colleague of mine gave me a heads up on the announcement of a merger between Ellie Mae and Capsilon. If you deal with mortgages, there’s a good chance you deal with Ellie Mae. Its Encompass platform is the leading software system used by mortgage lenders. Capsilon provides artificial intelligence services. I thought this announcement was blog-worthy because of Ellie Mae’s stated goal of providing “the most comprehensive end-to-end SaaS solution for companies in the mortgage industry.” I would say that if you don’t have a plan in place to make originating mortgage loans for your members about as easy as downloading Candy Crush in the next five years, or working with a vendor who does, you won’t have much of a future in the mortgage lending industry.

Then again, I am the same guy who would’ve predicted that the Astros would beat the Dodgers in the World Series. Instead, the Nationals are still alive. Enjoy the game and your day.

October 30, 2019 at 9:32 am Leave a comment

FASB Green Lights CECL Delay

Good morning folks.

As expected, the Federal Accounting Standards Board approved its proposals to delay the effective date of CECL for smaller businesses, including credit unions until January 1, 2023. The delay is welcome news, particularly for the smaller credit unions which are concerned that the standards will negatively impact their bottom line.

In making the decision, the FASB announced a change in its approach to implementing major changes to its accounting standards such as CECL. Although there are exceptions to this new approach, institutions which are required to file financial reports with the SEC will have more time to adapt to new accounting rules than the larger companies subject to SEC oversight. According to the FASB, it received 35 comment letters from credit unions and credit union associations.

Under traditional GAP accounting standards, companies have to recognize losses on loans when they become probable. In contrast, under CECL, credit unions and other institutions will have to account for expected credit losses based on the past performance of similar loans. For what it’s worth, yours truly remains very much in the minority within the credit union industry in believing that IF CECL is properly implemented and understood by examiners, the accounting change is logical and can be easily implemented by smaller credit unions. The FASB has repeatedly stressed that it does not expect smaller institutions to adopt the same analytical models as bigger ones.

How Low Can Interest Rates Go?

There is more and more talk about the possibility that the Fed could introduce negative interest rates in a future economic downturn. This recent analysis by the Federal Reserve Bank of San Francisco analyzing the experiences of central banks around the world that have adopted negative interest rates has generated a fair amount of attention. In addition, the Wall Street Journal is reporting this morning that an increasing number of option traders are betting that interest rates could go negative within the next two years. Yours truly is in no position to make predictions on the future interest rates, but the very fact that serious people treat negative interest rates as a distinct possibility underscores how limited the Fed’s options will be to combat the next economic downturn using traditional stimulus pools. This is a long winded way of saying that interest rates are already near historic lows.

Have a nice weekend, see you on Monday.

October 18, 2019 at 8:42 am Leave a comment

“Ugh.”

That is how a trusted colleague of mine responded to this article in the CU Times reporting that veteran Congresswoman Carolyn Maloney, who sits on the House Financial Services Committee called for a moratorium on taxi medallion foreclosures during a committee hearing dedicated to debt collection practices. In addition, none other than Rep. Alexandria Ocasio-Cortez referred to some of the taxi medallion loans as “criminal.”

These comments are the latest sign that the taxi medallion issue is not going to go away anytime soon. As policymakers discuss how best to aid drivers in financial straits, let’s hope that some basic facts are understood. Most importantly, the medallion crisis cannot be separated from the rise of Uber and Lyft. We would not be having this discussion today if these two companies did not upend the entire structure of the taxi industry and destroy the value of medallions.

In addition, many medallion loans are now being serviced directly by NCUA. NCUA has to do more to publicly explain to policymakers on both the state and federal level what steps it is taking to modify these loans. Many credit unions are working with members, but that message is not getting out to the public as effectively as it should be with NCUA in control of so many of the lending decisions.

Finally, I hope legislators think long and hard before advocating for a foreclosure moratorium. The reality is that the price of medallions has tumbled and may very well continue to do so. A moratorium would do nothing except put further downward pressure on medallion prices, and extend the time it will take to get the medallion crisis behind both drivers and lenders alike. Instead of talking about moratoriums, policymakers should look at the example of the HAMP Program and see if there are mechanisms to assist both lenders and borrowers in making financially responsible modifications. Stay tuned.

A Phase-in for CECL

In addition to a delay in its effective date, another piece of good news on the CECL front is that Chairman Hood has indicated that NCUA will be joining with banking regulators in permitting credit unions to phase in recognition of loan losses triggered by the new standards over a three-year period.

CECL requires financial institutions to recognize lifetime expected credit losses, and not just credit losses incurred as of a reporting date. In addition, it implements a lower threshold for financial institutions to recognize a potential credit loss. As a result, many institutions could experience a reduction in their retained earnings as they increase buffers to guard against potential losses.

Many banks and credit unions have expressed concern that they could face dramatic losses on paper if they are not allowed to phase in the recognition of losses caused by this new standard. Earlier this year, the OCC and FDIC finalized regulations giving banking organizations that experienced a reduction in retained earnings as a result of adopting CECL the option of phasing in its effects over a three-year period. At a presentation before NAFCU earlier this month, Chairman Hood indicated that NCUA will be proposing similar regulations for credit unions.

 

September 27, 2019 at 9:51 am Leave a comment

Three Things You Should Know Before You Celebrate The Fourth

Welcome to the second half of the year. Here are some things I wanted you to know as you begin your holiday – shortened week.

Optional URLA Postponed

The Uniform Residential Loan Application (URLA) is one of the most important documents in mortgage lending. It’s the standard loan application document mandated for use by Fannie – Form 1003 and Freddie – Form 65 for the last twenty years to collect information for mortgage applicants. Equally important, the form is used to create the Uniform Loan Application data set which is also administered jointly by the GSE’s. so it was big news when the FHFA announced that it would be updating form 1003 to make it easier to use for both lenders and borrowers. However this is a reminder that the FHFA has announced that July 1st will not be the first day that lenders have the option of using the new form. A new date has yet to be announced.

Can You Comply With CECL Using an Excel Spreadsheet?

Speaking of compliance dates, even though the day for credit union and compliance is still years away, now is the time to start preparing for this new accounting standard. In that vein, and because I’m such a helpful guy, I wanted to give you a head’s up about these proposed amendments to these CECL standards. I won’t even pretend to know how important these changes are other than to tell you that they don’t change the fact that your credit union is still going to be subject to CECL. I also wanted to pass along this quote from the Chairman of the FSAB in an interview with the American Banker, “The questions that the board has received from various sizes of financial institutions has really been about making sure that they understand what the board intended. What we have found throughout the process is, we believe — and we’ve said this in the document, banking regulators have said it publicly — that this standard is scalable and can be applied by large financial fusions as well smaller financial solutions. We believe smaller financial institutions can apply and do this on an Excel spreadsheet. And banking regulators have agreed with that.”

HMDA Comment Period Extended

If you, like your faithful blogger, were wondering how you were going to do a good job on the CFPB’s Advanced Notice of Proposed Rulemaking seeking feedback on whether or not it should scale back the amount of data which the CFPB now requires HMDA institutions to collect you can breathe a sigh of relief and go on our July 4th holiday without feeling guilty about the comment letter. At the request of trade associations – good work fellas – the CFPB has extended the comment period until October 15th.

On that note, enjoy your day. I’m going to spend my lunch hour buying a New Jersey Nets jersey so I’m ready to jump on that bandwagon now that they made so many free agent pickups. Let’s face it, would you rather spend money going to Manhattan to watch the Knicks lose or taking the train to Brooklyn and watching entertaining basketball?

July 1, 2019 at 9:26 am Leave a comment

CECL, Like Winter, Is Coming

Image result for night king

In The Game of Thrones, which thankfully kicks of Season 8 on Sunday night, an army of the dead is coming to attack civilization as we know it. People have been warned for years that “winter is coming” but most leaders have buried their head in the sand and either ignored the threat or refused to believe it is real.

So what does this demonstrate other than yours truly is an unabashed Game of Thrones geek? After sitting through a webinar yesterday on the impending Current Expected Credit Loss standard, which becomes mandatory for credit unions in 2022, it’s clear to me the biggest mistake that many credit unions could make is hoping it never arrives and not preparing for CECL. In fact, CECL, like winter, is coming, and its time to grapple with its complexities both perceived and real.

The good news is that the information flood gates are beginning to open. Yesterday’s webinar was a joint presentation of financial regulators including the NCUA. Allison Cook, the Chief Accountant at the NCUA, used her time to provide credit unions some good news: There is still time to prepare for CECL, but only if credit unions get started now.

So how should a credit union get started? With the huge caveat that I’m not an accountant and never will be, CECL requires financial institutions to estimate expected loan losses as opposed to probable loan losses. There are several different approaches to anticipating losses and the regulators made clear again yesterday that they are not going to prescribe a specific method. What they are going to expect is that you and your accountants can justify your assumptions.

Let’s say your credit union originates ten, fifteen-year mortgage loans this month to members that have excellent credit. Your credit union complies with Dodd-Frank so your originators believe that everyone they have underwritten has the ability to repay the mortgages. In other words, there are no probable losses on any of these mortgages for current accounting purposes.

In contrast, you know from your credit union’s loan loss history that, statistically speaking, one of these mortgages will go delinquent within the first two years. You also know that the SEG group that employs ten of these borrowers is expected to announce layoffs in the next couple of months. You can expect that some of these mortgages will end up costing you money in the form of diminished payments. CECL expects you to anticipate those losses and to set aside money much earlier in the lending cycle.

There are numerous ways of arriving at the precise amount of money that should be put aside. The presenters stressed that they won’t be mandating a specific method. That being said, the method that has gotten the most attention lately is called the WARM method and a good chunk of yesterday’s webinar was dedicated to explaining how it would work. Here is a guidance to provide you more detail on that approach.

Regardless of what method you and your accountants ultimately decide on, it’s time to get started. One step you can take is gather up the historical data on the credit losses for your lending products. In addition, many of you already have perfectly acceptable credit loss models but they are in your head. And of course its time to call your accountant and start talking about potential ways of implementing the new standard. I would even get your board involved in the discussion so that they understand what is being done and why.

CECL like winter, is coming. Enjoy the show.

April 12, 2019 at 9:39 am 1 comment

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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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