Ready or Not, Here Comes CECL
We’ve all heard it before, “Don’t put off until tomorrow, what you can do today.” This is easier said than done. It seems, more often than not, completing a presentation for our boss, and dare I say even filing our taxes, can easily become an afterthought. With the idea that we have days, months, and in this particular situation – CECL – years, getting ahead can quickly turn into angst.
It should come as no surprise (I hope not!) that the Financial Accounting Standards Board is moving full steam ahead with the release of its Current Expected Credit Loss (CECL) model. I don’t blame you if this was an afterthought, considering CECL originally came as a response to the 2008 financial crisis. But, the time has come to prepare, collect, and replace an incurred loss approach with a lifetime expected loss estimate.
Now, before you panic or the nerves set in, keep in mind you are already ahead of the CECL preparation by simply acknowledging that it’s coming. Remember, since increased data is at the core of this change, it is important to take an active approach in obtaining all data to create a clear loss picture of member accounts. In addition, balances as well as segmentation, risk, and historical information are essential.
Remember, data history is only half the battle. It is also important to create and revise forecast models. Due to the allowance being a larger component of the financial statements, complex reporting and analytics should be expected. This data may not be needed immediately, however building a solid history offers greater flexibility to adjust models.
Are you still with me? Let’s say it together, “we can do this.”
Although there is great pressure to comply and meet all requirements during this transition, CECL can be considered a positive. Evaluating loan portfolios under the expected losses model could serve as a tool for product pricing as well as lower losses. Thus, lowering the overall required reserve.
In an effort to make this transition a little easier, CU Direct’s Lending Insights will introduce a CECL compliant report following the release. The report will serve as an added benefit, offering default probabilities based on multi-variant linear regression analysis.
Simply put, it is the analysis of multiple risk attributes working together to determine how we can expect a loan to perform, based on historical experience. For example, how much influence on a loan’s probability of default does a low payment to income (PTI) ratio actually have on a loan with a 600 credit score? Utilizing a multi-variate linear regression analysis methodology helps answer that question.
By now, I’m sure you are asking the question, “is our credit union ready?” Remember, Lending Insights is actively moving ahead in preparing for the CECL guidelines to ensure a steady stream of efficiency. If you have additional questions regarding how to prepare for CECL, please fill out and submit an inquiry request.
Let’s tackle the CECL angst together.