NORWALK, Conn. NCUA issued a critique this afternoon of the proposal by the Financial Accounting Standards Board to incorporate predictions of future loan performance in their calculations for allowance for loan losses and asked the accounting rule makers to make special allowances, such as an exemption, for credit unions and other small entities, if it finalizes the rule.
In a last-minute comment letter submitted on the proposal, Credit Losses for Financial Instruments, NCUA Chairman Debbie Matz said she has concerns about the impact the proposed rule will have on small- and medium-sized credit unions.
The NCUA Chairman noted that the FASB has the authority to institute “practical expedients” for small- and medium-sized entities when writing accounting rules and urged the accounting rule makers to exercise that power for small- and medium-sized credit unions.
“I urge the FASB to consider the unintended consequences of enacting financial reporting rules that may unduly impact the financial performance of small- and medium-sized credit unions and discourage these institutions from making loans to low-income borrowers, particularly during times of economic stress,” said Matz in her comment letter.
Matz, in a letter submitted as the FASB’s commenter period expires tonight, expressed particular concerns about the compliance burdens the proposed rule will pose.
The proposal would require credit unions and bank to use a single "expected loss" measurement for the recognition of credit losses, instead of the traditional “historic loss” method. The proposal would replace the multiple existing impairment models that generally use an "incurred” or historic loss approach. Under the FASB proposal, the reporting entity would be required to estimate the cash flows on an asset that it does not expect to collect, using all available information, including historical experience and forecasts about the future.
The NCUA comment letter comes after credit unions have unanimously expressed their opposition to the proposal in more than 100 commenter letters submitted to the FASB. Some credit unions are suggesting the FASB issue an exemption from the rule for credit unions.
Matz told the FASB that small- and medium-sized credit unions have limited managerial and financial resources which make it difficult to perform complex economic analysis at the time of loan underwriting. “As a consequence,” she wrote, “these micro depository institutions would likely be faced with the difficult choice of paying third-party economic consultants or simply cutting back on lending.” “As a consequence,” she wrote, “these micro depository institutions would likely be faced with the difficult choice of paying third-party economic consultants or simply cutting back on lending.” Either choice she wrote, would result in lower net income and reduced services to consumers, “which would threaten the viability of these institutions over the long term.”
