Perhaps accounting specialists at some auto-finance companies and buy-here, pay-here dealerships can exhale a bit as major new mandates involving how they track bad debts might not be implemented for another year.
An update from the Financial Accounting Standards Board (FASB) indicated its board voted unanimously this week to propose delaying the effective date of the its new Current Expected Credit Loss model (CECL). For smaller, publicly traded companies, the delay would be from 2021 to 2023 and from 2022 to 2023 for private companies and nonprofits.
The update SubPrime Auto Finance News received also mentioned that large, publicly traded companies such as nationwide banks still would be expected to implement the standard on Jan. 1.
Earlier this summer, FASB looked to reinforce its position concerning the upcoming mandates placed on banks, credit unions and finance companies in connection with reserving for losses, emphasizing the changes could be implemented without incurring “significant costs.”
In June, FASB issued a proposed Accounting Standards Update (ASU) that included amendments designed to address issues raised by stakeholders, which have triggered proposals by federal lawmakers who are looking to delay these significant accounting changes.
To recap, 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.
A day short of three weeks after a proposal surfaced from six members of the Senate, 10 House representatives crafted potential legislation to delay this major accounting shift for auto-finance providers and other lending operations. Rep. Ted Budd, a North Carolina Republican, led the charge for the House bill that was introduced on June. A similar proposal arrived in the Senate on May 22.
“I never knew when I took office that the implementation of accounting standards would prove to be such an important issue, yet I’ve been pleased to see it provide so many opportunities for working across the aisle in this hyper-partisan era,” Budd said in a news release. “The Financial Accounting Standards Board, or FASB, is moving forward with an accounting standard affecting generally every financial institution in the country and the customers they serve, without a proper study of its broader economic impact. To me, this is yet another example of an unaccountable bureaucracy not taking the appropriate steps to ensure that it is helping instead of hurting folks.
“I am particularly concerned about how this new accounting standard will impact lending in economic recessions and affect access to capital for the consumer in financial downturns. It is now up to us in Congress to make FASB complete this common-sense task and that’s what my bipartisan bill would do if enacted,” Budd went on to say.
FASB noted in its update this week that the board expects to issue the delaying proposal in August with a 30-day public comment period to follow. After the public comment period has ended, FASB said its board will discuss the feedback received at another public meeting.
“Depending on the outcome, the FASB could finalize the proposal as early as this fall,” the organization said in its update to SubPrime Auto Finance News.
The latest CECL development came as welcomed news to the industry. Curt Long is chief economist and vice president of research at the National Association of Federally-Insured Credit Unions (NAFCU).
“We appreciate FASB considering credit unions’ concerns and moving forward with a delay of the CECL standard and committing itself to conducting a cost-benefit analysis to better understand this new standard’s impact on consumers, credit unions and the economy as a whole,” Long said in a news release.
“NAFCU will continue to advocate for credit unions to be exempt from this onerous and costly accounting standard as it could adversely affect credit unions’ capital levels immediately upon implementation. Long continued.
“More so, credit unions did not cause or contribute to the financial crisis or the poor lending conditions that led the FASB to consider a new standard,” he added.
Furthermore, Rob Nichols still has plenty of concerns about implementation of CECL. Nichols is president and chief executive officer of the American Bankers Association.
“FASB’s vote to delay CECL for certain smaller banks offers further proof that the required efforts to implement this costly standard are far greater than the board has previously led bankers to believe,” Nichols said. “A partial delay without a requirement for study or reconsideration simply kicks the can down the road — it does not reduce the ongoing data, modeling and auditing requirements facing smaller banks or address the increased procyclicality it will cause.
“The delay should apply to banks of all sizes, and should be used to conduct a rigorous quantitative impact study to properly assess the effect this new standard will have on their ability to serve their customers and the broader economy, particularly during an economic downturn,” he continued.
We encourage Congress to act quickly to ensure this flawed standard is delayed for all institutions until such a comprehensive analysis can be completed,” Nichols went on to say.
Before this week’s vote, FASB previously sought to address four issues along with sharing a summary of its amendments and proposals. The rundown included:
Issue No. 1: Negative allowance for purchased financial assets with credit deterioration
Summary: The proposed amendments would clarify that an entity should include expected recoveries of the amortized cost basis previously written off or expected to be written off in the valuation account for purchased financial assets with credit deterioration (PCD). The proposed amendments also would clarify that recoveries or expected recoveries of the unamortized noncredit discount or premium should not be included in the allowance for credit losses.
Issue No. 2: Transition relief for troubled debt restructurings
The proposed amendments would provide transition relief by permitting entities to adjust the effective interest rate on existing troubled debt restructurings (TDRs) using prepayment assumptions on the date of adoption rather than the prepayment assumptions in effect immediately before the restructuring.
Issue 3: Disclosures related to accrued interest receivables
The proposed amendments would extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis.
Issue No. 4: Financial assets secured by collateral maintenance provisions
The proposed amendments would clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient.
“The amendments in this proposed update include items brought to the board’s attention by stakeholders. The proposed amendments would clarify, correct, and improve the guidance related to the amendments,” board members said. “Therefore, the board does not anticipate that entities will incur significant costs as a result of these proposed amendments.
“The proposed amendments would provide the benefit of improving the consistent application of GAAP by clarifying guidance that already exists within GAAP,” they added.