ALEXANDRIA, Va.–The NCUA board has voted 3-0 in favor of phasing in the new current expected credit loss (CECL) rule.
CECL is scheduled to go into effect for credit unions on Jan. 1, 2023.
Two members of the NCUA board said CECL has the potential for a “chilling effect” on credit union lending unless certain care is taken, while NCUA staff said it’s important every credit union start thinking about building capital.
The objective of the new NCUA rule is to mitigate the so-called “day one adjustment” that would otherwise effect a credit union’s net worth ratio overnight by instead phasing in the new accounting standard related to projected loan losses over that longer term.
Not doing so could push some credit unions into prompt corrective action (PCA) territory on day one under CECL, noted NCUA.
“Consistent with regulations issued by the other federal banking agencies, the proposed rule would temporarily mitigate the adverse PCA consequences of the day-one capital adjustments, while requiring that FICUs account for CECL for other purposes, such as call reports,” NCUA said.
By 2025 a credit union’s net worth ratio would fully reflect the day one effect of CECL.
CUs of $10 Million & Below
The new rule provides that FICUs with less than $10 million in assets are no longer required to determine their charges for loan losses in accordance with GAAP. NCUA has instead said FICUs may use any reasonable reserve methodology (incurred loss), provided that it adequately covers known and probable loan losses.
In contrast to other federal banking regulators, which allow individual institutions to determine the phase-in amounts, NCUA said it will make that determination for credit unions.
NCUA Chairman Rodney Hood said the coronavirus pandemic has only made more critical the delay in CECL, saying not doing so could have a “chilling effect” on credit union lending. Hood said he continues to call on FASB to exclude credit unions from the FASB standard.
Harper Comments
NCUA Board Member stressed the new rule is “narrowly tailored” to address PCA at federal credit unions, and it will not adjust the numeric net worth ratio under PCA.
“The sole purpose of the proposed phase-in is to give FICUs time to adjust to the new GAAP standard in a uniform manner without disturbing their ability to serve their members,” said Harper. “Earlier recognition of credit losses, in my view, is a good thing.”
McWatters’ Cites Potential for ‘Chilling Effect’
NCUA Board Member J. Mark McWatters noted he and other NCUA staff had joined with representatives of the banking agencies to meet with the then chairman of FASB to express their concerns and to request an exemption for credit unions or, at the very least, less burdensome rules.
“My goal for the meeting was not merely to rehash what everyone already knew, but to make actual progress on the development of a realistic approach to reducing the burden on credit unions from the implementation of CECL while maintaining the integrity of audited financial statements and the regulatory capital determinations relied upon by the NCUA for safety and soundness purposes,” McWatters said.
McWatters said during the meeting he outlined two fundamental challenges presented by the proposed CECL rule:
· The projected compliance cost for credit unions and other community financial institutions in administering CECL was excessively and disproportionately burdensome given the size, complexity, and risk presented by these financial institutions
· The day-one charge to regulatory capital triggered by the implementation of CECL would inappropriately decrease capital without a justifying commensurate increase in the loan loss risk applicable to credit unions and the NCUSIF. “Far from a mere technical accounting change, this reduction in capital would most likely lead to a restriction in the ability of credit unions to make loans and extend credit to their members,” McWatters said.
‘Helpful Steps,’ But…
Since raising his concerns, McWatters said FASB has taken “helpful steps” to allay some of the financial burdens associated with implementing CECL.
“Concerning the second issue, I initially proposed that the NCUA permit credit unions to amortize their day-one CECL charge over a 10-year period, and not the three-year term we are proposing today,” said McWatters. “Although the longer amortization period parallels prior standards employed by the FASB, the banking agencies adopted the much shorter three-year amortization period and due to statutory constraints we may not exceed that timeframe. While no doubt of benefit, I would have preferred a longer amortization period of the day-one charge for credit unions and other community financial institutions.”
McWatters, who is a CPA, said the rule remains an “exceedingly complex mechanism by which to increase loan loss reserves. Given the dramatically adverse economic fallout from the Great Recession, CECL offers an unsurprising approach for the FASB to mandate for the too-big-to- fail and other significant and mid-tier financial institutions. The trickle down of this tedious and costly rule to credit unions and other community financial institutions, however, is far more problematic.
The Irony
“Surely, from my perspective as a CPA for over 40 years, there’s a simpler and more elegant approach by which to reflect the audited financial statements of these institutions in accordance with GAAP and without impairing regulatory capital or safety and soundness,” McWatters continued.
While voting in favor, McWatters said he encouraged the NCUA to work with the banking agencies and FASB to craft a credit loss rule that is specifically tailored and targeted to the loan loss risk actually presented by credit unions and other community financial institutions.
“Otherwise, CECL may have a chilling effect on the ability of these institutions to extend loans and other credit to their members and customers,” McWatters said. “Ironically, this burden will fall disproportionately on those who were the absolutely least responsible for the Great Recession–the underserved, the unserved, and those economically challenged and of modest means.”
NAFCU Response
NAFCU called the move a strong first step toward providing credit unions with needed relief from the FASB’s CECL standard.
“While credit unions would benefit from a three-year phase-in for compliance with CECL and a select number would receive an exemption, NAFCU firmly believes that all credit unions should be exempt from this onerous and costly accounting standard," said NAFCU President and CEO Dan Berger. "As our economy looks to rebound from the coronavirus crisis in the years ahead, this standard could place significant strains on credit unions’ capital levels, which would harm recovering communities' access to loan options.”
NASCUS Response
“We are pleased that NCUA is joining the other Federal Banking Agencies in taking action to mitigate the adverse effects that the adoption of the current expected credit loss (CECL) accounting methodology will have on the capital ratios of credit unions," said NASCUS President/CEO Lucy Ito. "We will closely examine the proposed rule to check for any conflicts with state laws and regulations and to recommend any improvements to ensure reasonable implementation of CECL for federally insured state-chartered credit unions.”