Tips for Preparing for Current Expected Credit Loss

Five things compliance teams need to know about the rule before it takes effect.

The new accounting rules from the Financial Accounting Standards Board (FASB) for estimating loan loss reserves on the Current Expected Credit Loss (CECL) model offer general guidelines and a list of implementation possibilities, but no specific recommendations.

Your Northwest Credit Union Association (NWCUA) compliance team recommends five things to consider as you prepare to implement CECL.

  • Evaluate and determine the right model for you. CECL does not prescribe the use of specific estimation methods. Rather, allowances for credit losses may be determined using various methods that reasonably estimate the expected collectability of financial assets and are applied consistently over time. Additionally, a credit union may apply different estimation methods to different groups of financial assets. Credit Union Executives Society CFO Focus recently ran an article showing the results of a study that tested a broad range of modeling techniques, which might be of interest when evaluating which model is best for your credit union.
  • Locate and collect the data. CECL evaluation models will take a lot of data and look at multiple years of historical performance, such as risk rating by individual loan, loan duration, individual loan balances, individual loan charge-offs and recoveries, and individual loan segments. Your loan data may be stored in various locations within your credit union.  Locating and storing the data in one location will be very important under CECL.
  • Data cleansing. While it is critical to gather the data you need in one location, it is also important to ensure you data is accurate and reliable. Take steps to validate your data so it will provide you with good modeling.
  • Don’t wait, but don’t panic. While the rule will take effect for annual periods beginning after Dec. 15, 2020, credit union teams should not wait until the last moment to start preparing. Over the next two years, credit unions should be creating their models and start testing scenarios.
  • Validate. Once you have created the models you plan to use, validate and document to provide support of your models and reserve levels for auditors and examiners. This should be the focus of CECL implementation in 2019.

Compliance Question of the Week

We have the executor of the estate of our deceased member in to close the member’s account. However, this account has a beneficiary. The funds in this particular account go to the beneficiary, but can we give that information to the executor?

You may inform the executor that there is a beneficiary to the account.  As the person responsible for settling the estate, the executor is entitled to information about the account prior to the death of the member. This includes information from the signature card showing the designation of the beneficiary. The beneficiary is entitled to the funds in the account.

If the executor wishes to fight that, they can take the matter to court. Should they decide to do so, you as the credit union would freeze the account under RCW 30.22.210 until you are provided direction from the court about who should receive the money in the account.

Related Links:

Legal Briefs

National Credit Union Administration (NCUA)

The NCUA issued a warning to consumers regarding fake check scams, reminding consumers to be wary of checks received from unknown parties and to take steps to report fraud.

NCUA also released the board agenda for its upcoming Apr. 20 open board meeting. The April meeting will address the share insurance fund quarterly report, corporate stabilization fund quarterly report, and proposed changes to the Illinois member business loan rule.

Consumer Financial Protection Bureau (CFPB)

CFPB Director Cordray delivered prepared remarks at the Operation HOPE Global Forums Annual Meeting. Cordray’s remarks focused on the steps the CFPB is taking to improving the accuracy of credit reports.

The CFPB announced the release of its 2016 Fair Lending Report. The CFPB also announced that its 2017 report will focus on redlining, mortgage and student loan servicing, as well as small business lending.

The CFPB announced it is proposing to amend Reg C (HMDA) to provide clarifications to the rule that will help financial institutions comply with the recent HMDA changes.

Office of the Comptroller of the Currency (OCC)

The OCC released a new booklet for its Comptroller Handbook. The booklet, Retail Lending, focuses on the risks associated with retail lending.

Federal Trade Commission (FTC)

The FTC announced it is hosting a workshop on July 19 that will focus on scams and financial that can impact military consumers.

Federal Reserve Board (FRB)

The FRB released the April edition of its FedFlash publication.

The FRB released its conference summary from the October 2015 conference focused on research in consumer credit and payments.

The FRB released the minutes from its Feb. 13- Mar. 15, 2017 discount rate meetings.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of Apr. 13, 2017. The last update prior to this was Apr. 12, 2017.

Questions? Contact the Compliance Hotline: 1.800.546.4465; compliance@nwcua.org.