NCUA takes steps to blunt CECL's immediate impact on credit unions

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The National Credit Union Administration’s board voted to advance a proposed rule that would phase in the immediate impact of the Current Expected Credit Losses accounting standard over three years.

The unanimous vote on Thursday at the board’s regular monthly meeting allows for a 60-day comment period to begin once agency officials publish the rule in the Federal Register.

The proposed phase in mirrors a rule banking regulators implemented in February 2019 and is intended to cushion CECL’s impact on credit unions’ capital levels. While credit unions are not scheduled to convert to CECL until January 2023, Chairman Rodney Hood said they would likely need extra help building reserves due to the coronavirus pandemic and the resulting recession.

CECL, which took effect for many publicly traded banks in January, “entails greater complexity, higher costs and a significantly heavier compliance burden, while bringing little additional benefit,” Hood said during the virtual meeting.

Hood advocated exempting credit unions from CECL altogether in an April 30 letter to former Financial Accounting Standards Board Chairman Russell Golden. National Association of Federally-Insured Credit Unions President and CEO Dan Berger echoed the exemption call Thursday in a letter to Golden’s successor, Richard Jones.

“The NCUA took a strong first step toward providing credit unions with needed relief from the FASB’s CECL standard,” Berger said Thursday in a press release.

In a similar vein, board member Mark McWatters labeled the CECL standard “an exceedingly complex mechanism by which to increase loan-loss reserves” at the Thursday meeting.

CECL requires lenders to make an upfront projection of loan losses, allowing for earlier recognition than the incurred-loss standard it is replacing. Under the incurred-loss standard, lenders must wait until credit deterioration becomes apparent to add to their loan-loss allowances.

Under NCUA’s proposed rule, the agency will itself calculate the amount of phase-in relief available to individual credit unions based on the difference in retained earnings an institution reports immediately before the transition and the number once it goes into effect.

For the first three quarters of 2023, NCUA would increase credit unions’ retained earnings and total assets by 100% of the transition differential, then gradually reduce the adjustment through the end of 2025.

A handful of credit unions have elected to convert early to CECL. Any credit union that starts using the standard early would not be eligible for the phase-in.

At the same time, credit unions with less than $10 million of assets would be exempted altogether from following generally accepted accounting principles in determining their loan loss reserves.

The board also formally readopted a provision allowing credit unions to designate a combined statistical area or any contiguous portion of one as a field of membership, subject to a 2.5 million-person population cap.

The move follows the Supreme Court’s refusal last month to hear an appeal of the American Bankers Association’s suit challenging NCUA’s October 2016 revisions to its field-of-membership rules.

To address redlining accusations ABA leveled in its lawsuit, the field-of-membership rule also formalizes changes the agency made to its chartering manual requiring credit unions seeking to serve a combined statistical area or core-based statistical area to detail how it plans to serve the needs of various demographic groups in its proposed field of membership.

The rule also clarifies and bolsters NCUA’s authority to reject applications it deems discriminatory.

“I often call financial inclusion the civil rights issue of our time, and this rule will help maintain and expand financial access to more Americans in rural and underserved communities,” Hood said.

In other actions, the board approved for comment a proposed rule that exempts Paycheck Protection Program loans from calculations to determine a federal credit union’s operating fee, and moved to republish the methodology it uses to calculate the agency’s overhead transfer rate.

When it approved the methodology in 2017, the board committed to republish it in three years and seek additional comment. McWatters called the methodology effective and transparent but added that “there is always room for improvement.”

The overhead transfer rate determines the annual sum the agency transfers from its share insurance fund to pay for normal operations. That transfer, along with fees paid by federal credit unions, funds NCUA’s annual budget.

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