WASHINGTON—Several lawmakers flagged the potential economic consequences of the current expected credit loss (CECL) standard and criticized the lack of understanding about its impact during a House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets hearing featuring Financial Accounting Standards Board (FASB) Chairman Russell Golden.
Ahead of the hearing, NAFCU Associate Director of Legislative Affairs Janelle Relfe sent a letter to subcommittee members warning that the "impact on credit union capital levels from the CECL standard could likely result in credit unions making fewer loans to members primarily in the mortgage and commercial loan space."
Throughout the hearing, lawmakers on both sides of the aisle raised concerns about the lack of economic studies that have been conducted to see how CECL could impact financial institutions' willingness to lend, especially during downturns. Golden contended that CECL increases transparency for investors and other stakeholders, and would actually increase lending during recessions, NAFCU reported.
In addition, subcommittee Ranking Member Bill Huizenga (R-MI) flagged a provision of the fiscal year 2020 Financial Services and General Government funding bill that requires the Treasury Department to study CECL's negative impacts. Golden argued against putting a moratorium on the standard's implementation, saying that the data collected by those institutions now complying with the standard will help inform studies.
Unique Challenges
Rep. Vicente Gonzalez (D-TX) brought up unique challenges credit unions face "because of capital retention due to their structure and the way new members are acquired." He asked Golden how credit unions would generate additional capital to meet retention requirements.
"My understanding is that a credit union would have to retain their income," Golden responded. "One of the things about allowing additional time is it gives credit unions additional time to retain their income… I agree with you that the FASB does not set the capital requirements for credit unions."
As credit unions prepare to comply with CECL, NAFCU has several resources available online. The standard also remains on the NCUA's supervisory priorities for 2020, and the agency has indicated it plans to phase-in CECL's negative impact on credit union net worth ratios.
CUNA Sends Letter
Separately, in a letter to the House subcommittee, CUNA said FASB’s CECL standard will have a significant impact not only on covered financial institutions but also consumers and the broader economy, CUNA wrote to a House subcommittee.
“CUNA continues to maintain its longstanding position that application of CECL to credit unions is inappropriate since CECL is intended to address delayed recognition of credit losses resulting in insufficient funding of the allowance accounts of certain covered entities,” the letter reads. “Underfunding of allowance accounts has not generally been an issue for credit unions. Further, the typical user of a credit union’s financial statements is not a public investor—such as with large, public banks—but instead is the credit union’s prudential regulator, the National Credit Union Administration.”
While CUNA said it understands and supports FASB’s independence, it urged Congress to utilize the authority it does have in order to improve CECL, or “at a minimum, ensure there is sufficient, relevant information regarding CECL’s impact from which future decisions can be made.”
During the hearing, Rep. Blaine Luetekemeyer (R-Mo.) cited a CUNA study showing it will cost credit unions $14-15 billion to implement CECL.
Support for Legislation
CUNA said it supports the CECL Consumer Impact and Study Bill of 2019, introduced by Reps. Vicente Gonzalez (D-Texas) and Ted Budd (R-N.C.).
The legislation would delay implementation of CECL by one year and require the Securities and Exchange Commission, in consultation with FASB to conduct a study on:
- The potential effect CECL implementation may have on the accessibility of credit, particularly consumers and small businesses
- Any potential systematic risks CECL may pose during a recession
- The potentially disproportionate burden on smaller, less complex financial institutions
- The potential competitive effect it might have on the U.S. as a result of differing international accounting standards