Part One: Where Do We Start?
For calendar year end credit unions, CECL will need to be adopted no later than 2021. At the AICPA Credit Union Conference in October 2017, the CECL discussion panel asked the audience of Credit Union financial professionals how far along they were at their credit union on the CECL implementation process. In that informal electronic survey, 22% said that they had formed an implementation committee and had at least started looking at models and data, 30% said they had formed an implementation committee but hadn’t done any significant work, and the remaining 48% said that while they may have attended a seminar or webinar on CECL, they hadn’t formed a committee or taken any other steps yet. These survey results were similar to what we were seeing in practice at that time. However, since then, many of our credit union clients have made significant progress in organizing their committee and interviewing and selecting a vendor. If you are still in the group of credit unions who are just getting started, we’ve put together this “CECL: Mapping the Road Ahead” series to help you in your journey. We welcome the opportunity to connect with you and help you navigate the road ahead as you work towards implementing CECL at your credit union.
Understanding the Accounting Standard
The first step to implementing CECL is to get an understanding of the standard and its implications. There are many webinars available through third party providers. Macpage has a PowerPoint presentation that we can provide to your implementation team to introduce a summary of the standard and to highlight key considerations in adopting it. NCUA has issued an FAQ document jointly with other federal regulators on CECL, and it is expected to be updated every six months.
Form an Implementation Team
Along with getting a basic understanding of the new CECL standard, an early crucial step is to assemble a formal implementation team. While the overall responsibility of adopting CECL will likely be assigned to one person at your credit union, your implementation team should include team members from Lending, Information Technology, Accounting/Finance, and Operations. Some of the key early assignments of the implementation team might include the following:
- Prepare a timeline of major tasks and review with management and the Board of Directors
- Form a CECL implementation network with other credit unions
- Determine if your current ALM provider has a CECL solution
- Determine if your core system provider has a recommended CECL solution
- Identify and contact third-party providers to obtain information on process, products and costs
- Prepare list of data needed, including how far back and identify where data is located
- Set a deadline for first run of calculation models to determine potential impact
- Have your CPA firm meet with the implementation team to discuss challenges
Some of the early challenges will likely be determining what data you will need
to gather, and figuring out where it is located. While some information will be on your core system, other data may be in separate loan software or on excel spreadsheets. Detail data relating to loans that have been charged off, including credit scores (original and at time of charge-off) and loan to value ratios, as
well as recoveries, may be scattered in various areas. Before you spend a considerable amount of time on data gathering, you should have a good idea on what methodologies or third-party providers you will use, because your selected approach will drive what data you will need. There are a number of different methodologies that may be used for CECL calculations. You may use one method for one pool and a different method for another pool. We have been continuously gathering information on third-party providers, and are available to discuss what we have learned. There is a wide range of costs and complexity to third-party solutions.
Part Two: Interview Questions for Third-Party Providers
Small credit unions may decide that their loan portfolio is simple enough so that they can perform their own calculations. However, we expect that the majority of credit unions will decide to use a third-party solution, although there is no requirement to do so in the accounting standard. Here are some of the initial questions that you should ask a third-party provider:
- Is more than one method available from your solution (e.g. probability of default, vintage)?
- Provide a sample calculation for each method that you use.
- What have been the results for credit unions that have used your models, i.e., how much of a percentage change was the result from their existing recorded allowance?
- How far back do you recommend that credit unions go for charge-off and recovery data, and what level of detail will your model(s) require for each charge-off? In other words, how much data from the time of origination of loans charged off will be needed (e.g. credit score, LTV, delinquency status)? What are the key data elements that should be gathered?
- Will any of the models use discounted cash flows to reduce the amount of ALLL needed?
- What kind of testing has been done on the model(s) to determine their accuracy at predicting losses?
- How do the models coordinate with ALM modeling assumptions that are used by the credit union?
- What is the pricing structure for the product? Are there extra charges for CECL readiness assistance? How long can the current pricing be locked in?
- What kind of reports will be provided along with the calculation? Will the credit union be able to customize report packages? For example, is there an overview report package that can be provided to board members?
- Have you met with NCUA to demonstrate/discuss your models? Are you making any changes in response to their input?
- Does your product provide a loan analytics package that can be used for lending decisions?
- Please provide several references from credit unions who are working with you.
It’s important to get an idea of the cost and effort that will be required of your credit union for each third-party solution that you consider. Knowing the potential impact of a method on your credit union’s capital could also be particularly important. We have heard a variety of ranges for the comparison of the CECL allowance versus the existing allowance, depending on which third-party provider we have spoken with. The sooner you start doing modeling, the better sense you will have as to what models make the most sense for your credit union along with the impact that they will have on your capital.
Part Three: Data Challenges
After you have either selected a third party provider to work with, or have determined that you are going to do your own calculations, you can focus on getting your data ready so you can start doing some CECL modeling. The data that you’ll need will depend in large part on the models that you are going to use, however, in most cases you will need to gather at least the following information:
Date of Loan
Date of charge-off
Date of recovery
How far you go back to capture data is up for debate, and you may have limitations as a result of past core system conversions or mergers. Some have the opinion that you need to go back to cover a full economic cycle, others say that is unnecessary. The prevailing thought at this time seems to be to go back as far as you can reasonably do so. With an implementation date of 2021, if you can get good data back to 2011, that may be a reasonable goal. This is a good upfront discussion item with your third- party provider.
Here are some of the challenges that we are hearing from credit unions with getting their data together:
- Charge-offs: in some cases the loan type may have been changed in the core system to “999999” from its original type so research needed to learn loan type.
- Recoveries: these are one of the biggest headaches because you may have a series of recoveries on a single loan that may not be easily matched to it within the core system.
- Credit card data may be on a different system than the core. Information such as whether or not the member pays the balance off monthly, expiration date, charge-offs and recoveries may need to be gathered from different places.
- You may need to capture monthly snapshots of member credit scores by loan if the data gets overwritten periodically.
- AIRES files may need to be archived so you can capture older data.
- In AIRES, the real origination date can be overridden with an advance date for home equity loans or other open lines of credit.
- Manually-entered data, such as LTV, is more subject to error.
- You may need to add some core system fields to more easily capture necessary data going forward.
- There is inconsistency regarding use of fields within the same core system by different credit unions.
There will be a considerable amount of work related to data gathering and getting your data in “good health”. As data is being gathered, analysis of the data may help to identify missing information as well as outliers and unexpected results that need further review. The implementation team will need to designate a “Data Champion”, but many members of the team will need to be involved in getting this information together.
CECL Questions? Contact Mark: