ALEXANDRIA, Va.–In a 3-0 vote, the NCUA board has approved Final Rule, Part 702, which provides for the phase-in of day-one capital adjustments under CECL.
Agency staff told the board that ultimately CECL will create “more realistic” balance sheets for credit unions.
The final rule applies only to those federally insured credit unions that adopt CECL for the fiscal years beginning on or after Dec. 15, 2022, the deadline established by the Financial Accounting Standards Board for CECL’s implementation. Credit unions deciding to adopt CECL for the fiscal years before that date would not be eligible for the phase-in, NCUA said.
In addition, the more than 1,100 federally insured credit unions with less than $10 million in assets will no longer be required to determine their charges for loan losses under generally accepted accounting principles, and are permitted to use any reasonable reserve methodology, if it adequately covers known and probable loan losses.
Without the phase-in, under CECL, credit unions would be required to report on day one an adjustment equal to the difference between the amount of credit loss allowance required under the current loss methodology and the amount of the expected loss allowance under CECL.
NCUA’s chief accountant, Allison Clark, noted the result would be many CUs could experience a sharp increase in expected credit losses as the result of the day one adjustment, which could lower their capital classification. The three-year phase-in of that adjustment is designed to mitigate the new rule’s effects.
NCUA said it received 18 comment letters on CECL that led to two technical and clarifying changes in the final rule, including adjustments for state-chartered CUs that operate under non-calendar fiscal years.
Rule is ‘So Important’
NCUA Chairman Todd Harper noted that when the board first considered the proposal in July of 2020 he believed earlier recognition of credit losses was a good thing, and he continues to do so, adding the pandemic only made the need for doing so even clearer as CUs increased reserves in anticipation of what were expected to be much larger losses than were actually realized.
“Nevertheless, implementing the CECL accounting standards should not prevent credit unions from serving their members and communities because they cannot manage their capital levels appropriately,” Harper said. “That is why this rule before us today is so important.”
Harper reminded the rule NCUA adopted is similar to that already in place at the banking agencies, and that it has been “tailored” to temporarily mitigate the initial impact of CECL’s adoption by allowing a covered federally insured credit union to phase in the day-one effects on its net worth ratio over a three-year period under the NCUA’s prompt corrective action standards.
Time to ‘Adjust’
“This phase-in will provide credit unions time to adjust to the change and grow capital organically without disrupting their ability to serve their members,” said Harper. “Additionally, this change will provide credit unions with a measure of regulatory relief while still requiring them to account for the methodology for other purposes, such as in the Call Reports they file with the NCUA.”
Harper called the rule a “good first step” in transitioning to CECL, and said work remains to be done in developing a simplified CECL spreadsheet for smaller credit unions and in creating training materials for and issue more guidance to credit unions as CUs get closer to the implementation deadline.
NCUA staff told Harper the agency has targeted having those materials available by year-end.
Harper said he has heard from some CUs that vendors have approached them offering to sell for $5,000-$25,000 a month a model for adjusting to CECL. In response to a question from Harper, agency staff said a credit union would not be expected to use a vendor-supplied model, and that the method the agency is currently working on will comply with the standard
Hauptman: ‘I Empathize With Credit Unions’
NCUA Vice Chairman Kyle Hauptman, who recognized Board Member Rodney Hood and former Board Member J. Mark McWatters for their efforts in working with FASB to mitigate the “tremendous burden” from the transition to CECL, said he regrets the NCUA board does not have the power to exempt any credit unions or redraft the rule to fit the size and scope of credit unions.
“The origin of CECL did not start with credit unions, as it was born from the financial crisis of 2008-09,” said Hauptman. “I empathize with credit unions that feel they’re paying another cost for problems created by others.”
Indeed, after noting how CUs differ from other institutions, including in their motivation to take certain risks, Hauptman said he is “genuinely interested in seeing anything information about if the benefits of CECL outweigh the costs to credit unions, particularly for smaller credit unions…As of now, I haven’t been able to find any explanation for why, say, credit unions under $100 million couldn’t be exempted.
“CECL comes with major costs in time, effort and regulatory risk. And a general rule for regulators, and in life, is that anything with major costs should have major benefits,” Hauptman continued. “Yet I believe no one at NCUA is saying that, due to CECL, our Share Insurance Fund will now have lower projected losses.”
In response to a question from Hauptman over where the benefits from CECL might be seen and realized, staff said the “long-term, major” benefits are in improved recognition and measurement of potential losses, creating “more realistic” balance sheets at CUs.
Hood: Benefits Do Not Outweigh Costs
In his comments, Hood, who called “CECL a solution in search of a problem,” cited a Treasury report on the COVID-19 pandemic’s effects on the economy and financial institutions in which it was recommended that FASB expand its efforts to consult and coordinate with the prudential regulators to understand — and take into account when considering any potential amendments to CECL — the standard’s regulatory effects on financial institutions.
The report also recommended that FASB further study CECL’s anticipated benefits and, together with the prudential regulators, examine its application to smaller lenders.
“I echo these sentiments. Indeed, for credit unions, in particular, the compliance costs associated with implementing CECL overwhelmingly exceed its benefits — especially for smaller credit unions with limited resources, expertise and available systems to help them implement the standard,” said Hood. “At a time when credit unions should be focusing their attention on serving their members and focusing on the world post-COVID 19, the absolute last thing they need is to be burdened by a costly methodology that could have a chilling effect on lending, especially in underserved and rural communities that are the most vulnerable to the pandemic and its effects.”
Hood said the final rule will give credit unions more time to prepare for the impact of CECL on their net worth levels, but it will nonetheless only limit some of CECL’s effects and costs.
“The only way to fully ameliorate the consequences of this methodology on credit unions is a complete exemption,” said Hood, saying it should be granted by FASB “now.”