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CECL spells trouble for small banks, consumers

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I would venture to say everyday Americans are not waiting with bated breath to tune in to the next House Financial Services Committee hearing. Our committee hearings are often focused on truly captivating issues such as the intricacies of federal banking regulations, monetary policy, or more recently, accounting standards.

Lacking the intrigue and entertainment value of some other committees, many financial services issues fly under the radar. These policy debates aren’t on the 5 o’clock news or a major headline in the newspaper, but their effects on everyday citizens can be enormous. Misguided policies can cripple the ability of American consumers to open a bank account, get a loan to start their business, or even buy a home.

One of these lesser-known issues is the Current Expected Credit Loss standard proposed by the Financial Accounting Standards Board. Put simply, this standard would be the most significant accounting change to the financial services industry in decades. By requiring financial institutions to account for the expected lifetime losses of a loan at the time of origination, CECL threatens to eliminate some lending services and restrict access to credit, particularly for low-income families. The potentially drastic consequences of CECL are looming over communities across the country and should be a cause for alarm for all consumers.

I recently spoke with a community banker from the Midwest whose major takeaway is that CECL compliance would be extremely challenging and from their perspective “there really is no benefit.” Echoing the sentiments of bankers across the nation who have expressed tremendous concern regarding CECL, he said he doesn’t believe it will make the calculation of their reserves any more accurate: “If the guys on Wall Street and at the Federal Reserve can’t get economic forecasting right, there’s no way we can.” For smaller institutions, the banker said in no uncertain terms that CECL has no benefit for their customers nor would it have any bearing on the safety and soundness of their institution, but it will present onerous operational challenges.

Not only will the proposed CECL standard prove to be unduly burdensome for community banks and other financial institutions, it could also affect large swaths of the economy including credit cards and the government-sponsored enterprises Fannie Mae and Freddie Mac. With GSEs holding more than $5 trillion in mortgage-backed securities, CECL could have major implications for the U.S. housing market, which again will fall hardest on low- and moderate-income families.

Back in December, I chaired a subcommittee hearing to discuss the concerns surrounding CECL. The panel of expert witnesses reiterated different versions of the same conclusion, CECL will drive up costs and those costs will either be passed along to consumers or force institutions to curtail lending. According to the National Association of Home Builders, for every $1,000 increase in the price of a home, more than 100,000 Americans are priced out of a home. In my mid-Missouri district, we already have banks that can no longer offer home loans due to increased costs. If CECL is implemented, millions of Americans could see their dream — the American Dream — of homeownership fall by the wayside.

A Democratic colleague recently raised concerns about the potential impact of CECL on consumer lending. Specifically, they discussed the major impact CECL could have on “mortgages for a segment of our population who [are] already not participating in capital access, such as low-income borrowers or small businesses.”

With a far-reaching proposal and immense confusion among bankers, bank examiners and members of Congress on both sides of the aisle, I’ve continually elevated my concerns over the last few months. I introduced legislation to prevent the implementation of CECL. I cohosted a roundtable discussion bringing together banking stakeholders, FASB officials, and financial regulators. I’ve spoken with FASB leadership, the comptroller of the currency and acting director of the Federal Housing Finance Agency, Joseph Otting, and Securities and Exchange Commission Chairman Jay Clayton to highlight the risks of CECL. And alongside many of my colleagues on the Financial Services Committee, I raised the issue during Federal Reserve Chair Jerome Powell’s appearance before the committee.

Federal banking regulators at the highest levels have repeatedly assured me they will be watching carefully to see how CECL affects the economy. However, at the same time, they’ve admitted no quantitative studies have been done to gauge the possible effects of CECL. No consideration has been given to the economic effects of a policy that has the potential to negatively impact millions of Americans. It is simply reckless for FASB to move forward with implementation of the CECL standard without adequate information on possible outcomes.

Decreased lending would affect our economy and directly hurt consumers, the blame for which would fall squarely on the shoulders of FASB and financial regulators who have ceded their regulatory authority to the unelected, unconfirmed standard setting board. From lenders across the financial spectrum to bipartisan congressional leaders in financial services, we’re making noise and raising alarms as financial institutions brace for CECL, yet it seems to date that our concerns are falling on deaf ears.

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CECL Accounting regulations Accounting standards Community banking Community banks Consumer lending Policymaking
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