The Financial Accounting Standards Board’s (FASB) current expected credit loss (CECL) model was a much-discussed item at the CUNA CFO Council Conference in Anaheim, Calif., this week.
Although most credit unions will not need to implement the new standards until 2021, it's time to explore what it will mean for your credit union, said Aaron Lenhart, Sageworks’ senior risk management consultant.
“This is a big project,” Lenhart told attendees. “CECL will affect a lot of areas of your business. You can’t just flip a switch in 2021.”
CECL introduces a major change in how financial institutions calculate potential loan losses. Lenders will need to project losses for the life of a loan from the start of the loan.
The new standard is a byproduct that arose during the Great Recession. There was a recognition that losses were not recognized soon enough by financial institutions, Lenhart said.
CECL comes with many concerns for credit unions, including:
How should credit unions prepare? Lenhart offered two pieces of advice:
1. Form an implementation committee. This committee, with senior-level representation, should consider what will be needed to accomplish implementation in terms of staff, data, and processes.
2. Review your risk-rating process. “It forms the foundation,” Lenhart said. Using the reliable five C's of credit, develop ratings that are granular, transparent, and objective, he said.
The bottom line: Get to work on CECL, Lenhart said.
“This is a big project that needs to be managed,” Lenhart said. “We have some time, but that’s not an excuse to sit back and do nothing.”
Late last month, FASB announced implementation deadlines would be pushed back a year in response to protests from banks and credit unions. The new standard is expected to be finalized later this summer.