Current Expected Credit Loss (CECL)

Impact

In 2013, the Financial Accounting Standards Board (FASB) proposed an Accounting Standards Update (ASU) to change the way reporting entities (including credit unions) determine credit losses. Adopted in 2016, the ASU requires entities to utilize a current expected credit loss (CECL) model on all financial assets and financial liabilities.

CECL requires entities to incorporate forward-looking estimates into their calculations, which differs from the previous incurred loss approach that relied on historical data. This approach will have a dramatic impact on credit unions, due primarily to a change that will require them to hold much more in reserves for future possible loan losses.

Where We Stand

CUNA's longstanding position has been and continues to be that application of CECL to credit unions is inappropriate. CECL is intended to address delayed recognition of credit losses resulting in insufficient funding of the allowance accounts of certain covered entities. However, 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 NCUA.

In addition to the direct impact the upcoming changes will have on credit unions' financial positions, credit unions are very concerned with the compliance burden of the changes, which require extensive resources to analyze the loan portfolio on a granular level to calculate and project life of loan losses. This comes at a time when many credit unions are struggling to comply with a historic level of new and amended regulations. Even those credit unions able to allocate the resources necessary to comply are encountering major challenges since the level of data analytics required is less common among credit unions, unlike much larger, complex banks.

Lastly, we maintain that CECL will hinder lenders' (including credit unions) ability to uplift low- and moderate-income borrowers in their goal of achieving financial independence and the American dream. A completely unintended, though real, consequence of CECL is that it will force lenders to be much more discerning of potential borrowers with less than perfect credit.