Capture and Store Loan-Level Data
Many of our customers have asked questions about the upcoming changes for the allowance due to the Financial Accounting Standards Board (FASB) proposed Current Expected Credit Loss Model (CECL) update. The proposal is a little short on detail as far as actual implementation, but there is enough information available for banks to start making some preparations now. In our view, the single most important of these is to begin capturing and storing loan-level detail and transactional information on a regular basis.
Under the current incurred loss model, many community banks have calculated the ASC 450-20 portion of their allowance using aggregate, pool-level information. In most cases, this was an acceptable method both from a regulatory and accounting standpoint. However, every indication from the CECL proposal is that historical pool-level data will no longer be acceptable for calculation of loss rates that are applied for the estimation of the allowance. For many financial institutions, this may result in a lack of required data at CECL implementation. Isn’t all this data currently available from your core loan system? Often that is not the case. Many core systems only store maximally 12 months of loan information, and sometimes even that data can be difficult or expensive to access. With many experts indicating CECL may require five or more years of historical data, core information is not likely sufficient.
Banks will be familiar with most types of the loan-level data they should be storing. Items like book balance, interest rate and origination date are all fields that all bankers are familiar with; however, they might not be storing it on a month-by-month or quarter-by-quarter basis. The transaction detail of charge-offs and recoveries is also probably a familiar dataset to many bankers. Again, this may not be stored at regular intervals.
If you already use the MST Loan Loss Analyzer, I have great news! In all likelihood, all the data you will need for an expected loss model is already in your monthly or quarterly reporting periods. We suggest that you still review the types of data you are storing. MST can provide a list of suggested fields to be included in the import file or files you are feeding into the Loan Loss Analyzer. Consider adding these fields to your current feed, even if you are not using them at this time. Please contact us for a list of recommended fields.
Jennifer Watson, MST Accounts Manager