The National Association of Federally-Insured Credit Unions has released a study intended to help credit unions make some of the “hard choices” they will face in implementing the new Financial Accounting Standards Board current expected credit loss accounting standard.
That standard will take effect for credit unions in fiscal years beginning after Dec. 15, 2020.
The study outlines some of the key qualities and trade-offs for a variety of models for implementation of CECL. The study was conducted by Deep Future Analytics, was sponsored by NAFCU, Allied Solutions and OnApproach. Joseph L. Breeden, Ph.D., founder and CEO of Prescient Models LLC, led the research team.
In June 2016, FASB issued its CECL accounting standard, which requires that "life of loan" estimates be recorded at a loan's origination or purchase. Early adoption of the standard is permitted for all entities for fiscal years beginning after Dec. 15, 2018.
The CECL standard allows some flexibility in selecting estimation methods appropriate for the particular institution or product. Due to this, the NAFCU-sponsored study includes the following types of loss estimation models: time series, roll rate, vintage, state transition and discrete time survival. Each of the models in the study was tested against a common loan portfolio comprised of large data-sets of conforming mortgage loans from Fannie Mae and Freddie Mac.
These models, NAFCU indicated, were assessed for accuracy, robustness to small data sizes, complexity, computation time and pro-cyclicality of lifetime loss estimates.
The CECL guidelines provided by FASB also provide the option of using a discounted cash flow approach. Each of the models used in the study incorporated DCF, which allows credit unions to assess the impact of this modeling feature on the loan loss estimate.
"Due to the sweeping nature of the proposed changes credit unions will have to endure under this new accounting standard, NAFCU has co-sponsored this study to provide critical data and information to help credit union CEOs and their teams work with the preferred model for their institutions," NAFCU President and CEO Dan Berger said in a statement. "This study will also help credit unions answer some of the most commonly asked questions they are likely to confront regarding the new accounting standard.”
Time, Berger added, is “of the essence” for credit unions in deciding which loss estimate model is the most appropriate.
"We hope this study provides credit unions with the guidance they need to make these difficult decisions," Berger concluded.
