CUNA backs CECL exemption for CUs under $10M in assets

October 19, 2020

CUNA supports NCUA’s proposed current expected credit loss (CECL) transition methodology, it wrote to the agency Monday. CUNA also strongly supports the proposal’s effective exemption of credit unions with less than $10 million in assets from CECL.  

CECL is a new accounting standard that recognizes lifetime expected credit losses. CUNA has maintained that it is inappropriate for credit unions and will present capital and compliance challenges.

Upon adoption of CECL an institution will record a cumulative-effect adjustment to retained earnings. CUNA believes credit unions will likely experience a (potentially sharp) increase in expected credit losses on the effective date as a result of the day-one adjustment, which could lower prompt corrective action (PCA) classification.

Credit unions are required to comply with CECL for fiscal years beginning after Dec. 15, 2022. NCUA’s proposal would provide that, for the purposes of net worth classification, the agency will phase in over a three-year period the day-one capital effects of CECL.

“A phase-in will alleviate the impact of the day-one adjustment but will not change the overall impact the new accounting methodology will have on credit unions. With that said, we believe a three-year phase-in is appropriate,” CUNA’s letter reads. “Not only does it conform with the flexibility provided by the federal banking agencies, it also provides a sufficient amount of time for credit unions to spread out the effect of the day-one adjustment.”

NCUA’s proposal also exercises its statutory authority under the Federal Credit Union Act to no longer require that credit unions with under $10 million in assets make changes for loan losses. Instead those credit union would be allowed to make such charges under any reasonable reserve methodology (including the current “incurred loss” approach), as long as it adequately covers loan losses.

 “NCUA using its statutory authority to exclude the smallest FICUs from the costly—initial and ongoing—expenses required to comply with CECL is critical,” the letter reads. “While these challenges are not unique to only the smallest FICUs, we recognize the GAAP-exemption threshold of $10 million is explicitly stated in the FCU Act, prohibiting the NCUA from exempting from GAAP credit unions at or above $10 million in assets.”

CUNA’s letter requests NCUA determine whether a credit union that meets $10 million in assets after the CECL effective date is permitted to phase-in CECL for regulatory capital purposes.