The National Association of Federally Insured Credit Unions (NAFCU) recently reiterated its position regarding a significant accounting change coming later this year.
To recap, the Financial Accounting Standards Board (FASB) is looking to ensure that financial institutions have solid measures in place to ensure they have appropriate reserves for any future losses based on the life of each auto loan. As a result, the board has instituted its new Current Expected Credit Loss model (CECL).
The new model will require higher levels of loan loss reserves and lead to changes in lending practices and portfolio management. It will also require a significant amount of data capture, analysis and modeling to meet the implementation deadline of Dec. 15.
NAFCU sent a letter to FASB asking for credit unions to be excluded from CECL or, alternatively, a one-year delay of the effective date.
Noting implementation difficulties and impact on credit unions’ capital under the CECL standard, NAFCU’s Andrew Morris urged FASB to “reconsider its decision to include credit unions within the scope of CECL.”
Morris, NAFCU’s senior counsel for research and policy, continued by writing, “NAFCU continues to believe that credit unions should not have been included in the CECL standard, especially because credit unions have a unique capital framework and face certain regulatory constraints.”
Morris explained how credit unions’ capital framework limits the NCUA’s ability to mitigate CECL’s effect on institutions’ net worth without action from FASB.
“To deal with this problem, we urge the FASB to partner with the NCUA to identify opportunities for capital relief and prevent a scenario where credit unions must dramatically scale-back asset growth or face mandatory supervisory action in the event that net worth ratios fall below minimum levels,” Morris said.
Outside of an exclusion, Morris asked that FASB proactively provide credit unions with relief and consider a one-year delay of the effective date for non-public business entities (non-PBEs).
In January, Morris attended a roundtable discussion that covered a proposal outlining an alternative to the income statement impact of the CECL standard put forward by a group of banks along with the FASB’s consideration of charge-offs and recoveries and other transition issues.
FASB indicated that it would consider the banks’ alternative proposal in more detail and also hold a formal vote in March. In addition, the board is expected to make a final determination regarding the reporting of gross write-offs and recoveries by origination year at that time.
NAFCU insisted it has devoted considerable time and resources to educate credit unions on CECL requirements and to share the industry’s concerns with FASB. The association has also shared concerns with lawmakers, the NCUA and Federal Reserve, and has worked to obtain certain changes and more guidance on the standard.