After years of anticipating current expected credit loss (CECL), January 2023 is within sight. And the compliance deadline won’t be moving.
For many credit unions, the biggest challenge is simply adopting an unfamiliar process for calculating reserves. Fortunately, regulators have made strides toward minimizing possible disruptions. In fact, they’ve addressed many concerns head on.
Regulators believe a credit union’s CECL solution should equal the sophistication of its loan portfolio. So, they expect different institutions to use different solutions to calculate reserves. For credit unions with fewer losses, overly engineered solutions add no value—one reason solutions based on call report data are popular.
Process complexity can vary greatly among methodologies. When evaluating solutions, don’t mistake precision for accuracy. No current or past losses to work with? Future loss forecasts more often come from qualitative adjustments than from quantitative adjustments.
Methodologies such as loss rate, remaining life, migration, or vintages are less complicated, but generally less precise. Likewise, other methodologies (i.e., probability of default, discounted cash flows) are more precise, but more difficult to develop. Is it worth the extra work? Many credit unions say no, preferring to continue using their Q factors to support or defend CECL as they did for their Allowance for Loan and Lease Losses (ALLL) reserve.
Among the varying options for CECL compliance is a solution developed with credit unions and their challenges in mind. CECLSolver™ is easy to use and getting started is simple.
The tool utilizes a weighted average remaining maturity (WARM) focus to automatically display historical losses over WARM periods. This eliminates the need to compile past information, enabling quick, easy analysis of different loss scenarios. CECLSolver also displays loss histories of selected peer groups (state/custom) for identical periods. We’ll help you with WARM calculations whether they’re performed by your team (if data is available) or by ours.
We expect that credit unions will continue to address qualitative factors. Regulatory statements in regards to assessing the collectability of cash flows have caused many institutions to stress—and there’s no need to. We believe credit unions should continue to utilize qualitative adjustments currently conducted as part of their incurred loss calculation. They’ve been doing this successfully for years. Furthermore, you and your regulators are familiar with and believe in the process.
As for the CECL “forecasting” element, credit unions should focus on what might cause future portfolio losses and diminish your ability to collect on loans. Document and quantify your answers, again not mistaking precision for accuracy. Emphasize being directionally accurate, considering your portfolio plus possible scenarios. If your mortgage portfolio is significant, consider housing prices, unemployment levels, etc. Understand how they’re trending and the potential negative effect of reversals. We can help you update current qualitative adjustments to reflect forward-looking perspectives.
CECLSolver provides credit unions with a portfolio-level solution based on call report information—plus the ability to perform more complex loan-level analysis as required. Our approach is to start, monitor, and, if necessary, adjust.
CECL compliance is as complicated as you want to make it — but delaying the inevitable isn’t the wisest strategy. Schedule a demo today to see your historical numbers and how CECLSolver can help.
SHAWN O'BRIEN is president of QwickRate, providing practical and affordable solutions for credit unions for more than 30 years.