Current Expected Credit Losses (CECL): How it Could Impact YOU

Have you ever been presented with a solution in search of a problem? The general outlook for most people is if it isn't broke, don't fix it. The Financial Accounting Standards Board (FASB) several years ago decided that the method by which all financial institutions reserve funds for loan losses needed to be changed. The current method of reserving funds for loan losses is historical, meaning it looks at loan losses of the past and applies that loss ratio to similar loan pools on hand now. Sounds reasonable, right? It should also be noted that financial institutions in general, especially credit unions, have not suffered any major problems with adequate funding of reserves for loan losses under the current system.

FASB has decided, on their own, that a new method of reserving for losses called "Current Expected Credit Losses (CECL) would be a better method for providing a more accurate picture of a financial institution's balance sheet to potential investors or anyone evaluating a particular institution. When implemented, a credit union would have to immediately incur an expense to the allowance account (a reserve fund for loan losses) when a new loan is funded. This would be before any loan interest is collected on that loan or before a first payment even has the chance to be delinquent. The allowance amount to be funded would be the "expected" total loss of that new loan. Again, no income will have been earned yet before the credit union is being asked to incur expense for funding a loan. Seems a bit backwards, doesn't it? Crystal balls are also not readily available so determining a future loss is largely reliant on what we use now, past loss history of a loan type.

What could be the negative impact of CECL on consumers? Some institutions could limit lending to higher credit risk members who have lower credit scores. The cost of that credit will also likely rise to offset the added expense of immediate funding for a loss that may or may not occur. Our delinquency rate by the way is consistently less than 1% of our total loans to members so delinquency is not a huge problem now. Members with lower credit scores need access to credit just like everyone else does. CECL could greatly impact a credit union's ability to serve the very members that we exist for. It is generally accepted that most credit unions will see more expense to their bottom line using the CECL method versus our current allowance for loan losses method.

Unless further delays are enacted, CECL funding requirements will be required of all institutions by the fiscal year after December 15, 2021. Significant expense resources are also being utilized to insure that data systems are in place to support and comply with CECL prior to the implementation date. All these adverse impacts for a solution to a problem that never existed. North Alabama Educators Credit Union is proceeding with CECL models for consideration/testing and use by the required date in accordance with what the regulation will require.

There is a Senate bill in Washington, DC to delay implementation of CECL to study the possible negative effects on consumer credit. Senator Thom Tillis of North Carolina introduced the Continued Encouragement for Consumer Lending Act (S. 1564) earlier this week.