'Absolutely devastating’ to small lenders: Lawmakers lay into CECL

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WASHINGTON — House lawmakers mounted a bipartisan attack on a new accounting standard for loan losses that community banks and credit unions fear will be overly costly.

At a hearing with banking regulatory chiefs Thursday, criticism by members of the House Financial Services Committee about the Financial Accounting Standards Board’s Current Expected Credit Loss standard ranged from calling for a delay in its implementation to suggesting legislation that would stop the new standard from taking effect.

“I’m very concerned about CECL,” said Rep. Greg Meeks, D-N.Y. “My main concern is the real-world impacts on small community banks, minority banks and access to credit by the underbanked. I believe that we should seek to confirm and quantify the expected impact on these groups before implementing an accounting rule that has material, real-world consequences.”

Members of both parties agreed that community lenders face an unprecedented transition with the switch to CECL.

“Financial institutions across this nation are facing the most significant accounting change in decades,” said Rep. Blaine Luetkemeyer, R-Mo. “I have expressed my strong concerns over the broad potential impacts of FASB’s CECL standard and urge delayed implementation until you all have thoroughly studied CECL and understand the consequences.”

The hearing with principals of the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and National Credit Union Administration was the regulators' second appearance before Congress, after they testified in the Senate on Wednesday.

Highlights also included testimony by FDIC Chairman Jelena McWilliams that the agency plans "soon" to develop policy authorizing banks to make small-dollar loans. Meanwhile, McWilliams and Randal Quarles, the Fed's vice chairman of supervision, said they were confident about the agencies' ability to fairly judge the proposed merger of BB&T and SunTrust.

The CECL model, adopted by FASB in 2016, is a more conservative approach than the current loss accounting standard, requiring financial institutions to estimate losses over the entire life of a loan. Publicly traded banks must convert to the new model by Jan. 1, 2020, followed by privately held institutions and credit unions, which have until Jan. 1, 2022.

In January, regional banks proposed to split the loan-loss estimates in two to soften the burden of CECL. But that idea was met with opposition from the biggest banks.

Rep. David Scott, D-Ga., suggested that the committee should consider legislation to stop the new standard from going into effect altogether.

“We need to put a stop, a stop right now on FASB’s ruling in terms of CECL,” Scott said. “This ruling is absolutely devastating to our smaller banks, without question, and our credit unions. The larger banks don’t have to worry about it. They’ve got the capital. … I hope [House Financial Services Committee Chairwoman Maxine] Waters that, if necessary, we may need to pass legislation or something to put a stop to this.”

Later in the hearing, other members made a point to clearly state their opposition to CECL.

“I do want to add my name to those expressing concern about CECL and FASB’s decision to forgo a cost-benefit analysis before implementing those requirements,” said Rep. Jennifer Wexton, D-Va. “I’m especially concerned about the impact on credit availability for low- to moderate-income borrowers and small businesses.”

The lawmakers' concerns were largely echoed by the regulators at the hearing.

“I have made it a point to go to different states and meet with bankers, and I have to tell you, the first question that comes out in these meetings from community bankers … is CECL and their concerns about implementing it,” said McWilliams.

She added that the FDIC is somewhat hampered in its ability to quell some of the concerns raised by banks about CECL, because it is under FASB’s jurisdiction, but that the agency is working with banks to ease the implementation process.

“As you know, that rule is promulgated by FASB, so long as U.S. banks have to follow U.S. GAAP, which is a statutory requirement,” McWilliams said. “The FDIC has held workshops to help banks navigate this process without having to hire outside consultants and pay a lot for the implementation systems. And we’ll do whatever we can to ease the implementation burden on the banks. But the rulemaking itself, including the studies, etc., is outside of our purview.”

McWilliams and Quarles were joined by Comptroller of the Currency Joseph Otting and NCUA Chairman Rodney Hood. They all testified to the Senate Banking Committee Wednesday.

House Republicans echoed their Senate counterparts’ wishes for regulators to swiftly implement a regulatory relief bill, known as S 2155, which President Trump signed into law a year ago.

“Last week, I wrote three of you on the panel about the faithful and swift implementation of this change in public law, notably the Volcker Rule, community bank capital simplification, tailoring for banks with more than $50 billion in assets, and improvement to the Supplemental Leverage Ratio for custody banks, among others,” said Rep. Patrick McHenry, R-N.C., the ranking member of the committee. “These four alone have the potential to provide billions of dollars in banking services for institutions and retail customers. I urge you to swiftly implement and faithfully implement the contents of what we commonly call S 2155.”

The regulators, who were all appointed by Trump, appear to be moving forward with the administration’s deregulatory agenda, despite pressure from the newly Democratic-controlled House.

Waters warned that deregulatory efforts would lead to bank consolidation and has called on regulators to hold more public hearings before approving a proposed merger between BB&T and SunTrust. So far, public hearings have been held in Charlotte, N.C., and Atlanta, though the banks have footprints in several other states.

Waters said that the CEOs of both banks have “no problems with having additional hearings,” but the regulators said they are confident in their approval process.

“We are mindful that we do have a congressional framework that establishes what it is that we look at and the time frames in which we are to look at them,” Quarles said. “And we are trying to balance, and I think we are doing a good job of balancing the need for public input particularly on a merger of consequence like this, and we have gotten a lot of public input, with the congressional mandate to act in time frames and with the considerations that we are directed to use.”

And as Democrats in Congress have been highly critical of payday lenders, McWilliams signaled that the agency is preparing to follow the OCC in encouraging banks to make small-dollar loans.

The OCC issued a bulletin last year authorizing national banks to compete with payday lenders. The FDIC took a step in the same direction in November when it asked for public feedback on how the agency can help banks “offer responsible, prudently underwritten credit products."

McWilliams told the House committee that she expects the agency will act “soon” to unveil small-dollar loan policy.

“It is my personal belief as well as, I think, good regulatory policy that these products be offered by banks, where we can monitor for consumer protection and we can look for the other signs of weaknesses in the marketplace and what the banks offering,” McWilliams said in response to Rep. Barry Loudermilk, R-Ga. “My preference would be that banks offer these products.”

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Regulatory reform CECL Small-dollar lending Regulatory relief M&A Community banking Jelena McWilliams House Financial Services Committee FDIC OCC Federal Reserve