Credit unions don't need CECL, they need an exemption
Two of my top priorities as chairman of the National Credit Union Administration have been regulatory relief and modernization, items that have grown ever more pressing since the COVID-19 pandemic began earlier this year. And while the NCUA is working to remove examination and regulatory burdens whenever possible, federally insured credit unions face an enormous burden in complying with the Financial Accounting Standards Board’s current expected credit losses methodology.
Over the years, stakeholders have voiced concerns about CECL’s potential effects on financial institutions and their regulatory capital and lending practices. Among these are serious concerns about the standard’s implications for regulatory capital, lenders, borrowers and the U.S. economy. Another worry is that CECL may have disparate effects on certain types of lenders and lending.
Exacerbating these challenges are the effects that COVID-19 is having on our nation’s economy. Indeed, according to a report issued recently by the U.S. Department of the Treasury, “Numerous market factors relating to the COVID-19 global pandemic (including government responses) have affected the economy, financial institutions, and borrowing and lending dynamics.”
And while Treasury’s report noted the difficulty in establishing a definitive linkage between such trends and the introduction of CECL due to the effects of the pandemic, it recommended that FASB expand its efforts to consult and coordinate with the prudential regulators to understand — and take into account when considering any potential amendments to CECL — the standard’s regulatory effects on financial institutions. Treasury also recommended that FASB further study CECL’s anticipated benefits and, together with the prudential regulators, examine its application to smaller lenders.
I echo these sentiments. Indeed, for credit unions, in particular, the compliance costs associated with implementing CECL overwhelmingly exceed its benefits — especially for smaller credit unions with limited resources, expertise and available systems to help them implement the standard. At a time when credit unions should be focusing their attention on serving their members, the absolute last thing they need is to be burdened by a costly methodology that could have a chilling effect on lending, especially in underserved and rural communities that are the most vulnerable to the pandemic and its effects.
That is why I wrote a letter in April to the previous FASB chairman, Russell Golden, requesting that he grant credit unions a permanent exemption from CECL. And in August I met with the new FASB chairman, Rich Jones. Although Chairman Jones and Mr. Golden respectfully listened to my concerns and those of other regulators, we have seen no movement on this issue to date.
In July, the NCUA board approved a proposed rule that would phase in the day-one effects of CECL on a federally insured credit union’s net worth ratio over a three-year period under the NCUA’s prompt corrective action regulations. This gradual, phased-in approach would apply only to federally insured credit unions that adopt CECL for the fiscal years beginning on or after December 15, 2022, the deadline for CECL’s implementation. Credit unions deciding to adopt the standard for the fiscal years before that date would be ineligible for the phase-in.
The proposal would also exempt credit unions with less than $10 million in assets from following generally accepted account principles for loan-loss reserves. Instead, these institutions could use any reasonable reserve methodology if it adequately covers known and probable loan losses. This proposed rule, if adopted in full, will give credit unions more time to prepare for the impact of CECL on their net worth levels. It will also give credit unions more flexibility to serve their members during this time of need.
But these measures can only limit some of CECL’s effects and costs. The only way to fully ameliorate the consequences of this methodology on credit unions is a complete exemption.
I respect FASB’s independence and the important role it plays in setting financial accounting and reporting standards. I also appreciate their openness to my concerns and those of the credit union community. But the industry needs a permanent exemption from CECL, and I urge FASB to grant it now.
Collectively, our focus should be on providing for the health and safety of our citizens, and crafting policy solutions that encourage lending, and support small business and entrepreneurship. We should also be laying the groundwork for an economic recovery when the pandemic is behind us. In the meantime, the imposition of the new CECL standard creates an unnecessary burden that will diminish the ability of our nation’s credit unions to serve their members and communities.