CECL Guidance Released by June 30

Financial institutions can choose from a variety of methodologies to comply with the Current Expected Credit Loss (CECL), according to the Transition Resource Group for Credit Losses (TRG). The TRG, comprised of industry and allowance experts and under the banner and direction of FASB, and established to help financial institutions make the transition from the incurred to expected loss model, held its first meeting, April 1. The meeting centered around content in a document titled Sub-topic 326, distributed at the beginning of the meeting and designed to clarify, provide examples and present disclosures for CECL.

“Every version of the standard has gotten farther and farther away from discounted cash flow as the primary method for calculating the allowance under CECL,” commented MST’s Chris Emery, the lead developer of MST’s CECL solution. The TRG and most recent draft of CECL requirements, also released April 1, “further clarified that banks would not be considered shortcutting CECL by not conducting a discounted cash flow.”

Clarifying CECL, the TRG indicated, is the group’s first order of business. The question, “Is it clear?” dominated the agenda for the meeting, held at FASB headquarters in Norwalk, Conn.

As for acceptable methodologies, 326-20-30-3 of the draft lists “loss rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule” as examples. There was also extensive discussion on the alternative use of, or reversion to, historical loss data. Specifically, 326-20-30-9 states “…an entity is not required to develop forecasts over the contractual term of the financial assets if those forecasts are not supportable. Rather, for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses, the entity shall revert to historical loss information.”

“How do you do that?” Emery questioned. “Do you revert back to the historical mean? That’s what it says now. That might require more clarification before final release of the standard.”

Overall, the meeting and discussion was not marked by bombshell announcements. “I didn’t hear anything that surprised me,” said MST’s Gus Alexander, who attended the session. “Generally, there seemed to be more agreement around the draft the way it is now written, which includes the requirement for much more historical loan level data than most financial institutions are currently collecting or have available.”

Wording from Example 1, 326-20-55-20, which includes, “The community bank’s cumulative historical lifetime credit loss rate for the most recent 10-year period…” should “strike fear in the hearts” of those who will be responsible for implementing a CECL compliant methodology, according to MST’s Emery. He added that, “this line should be highlighted in bold and italicized.

“How many community banks and credit unions have ten years of data to calculate cumulative lifetime credit losses?” Emery continued. “Ten years is just an example. Banks and credit unions originate 15- and 20-year amortized loans.”

The TRG indicated the CECL standard will be issued prior to June 30 of this year.  The issue date had not been announced until this meeting.

The TRG said it will evaluate the comments from Friday’s meeting and meet again at the end of April. In that meeting, the group plans to offer more information on the effective date of release.

With the announcement of an official release date, MST decided to extend the registration deadline for our 2016 National ALLL Conference, which had been March 31. The new deadline is April 30.

“The announcement of a release date puts to rest any doubts the industry might have been harboring that FASB would postpone or substantially change CECL and its requirements,” said Dalton T. Sirmans, CEO of MST. “As our conference will cover CECL from virtually all angles, there are likely representatives from financial institutions, auditors and examiners who have not yet registered who will now want to attend.”

The MST National ALLL Conference will be held May 24-26 in La Jolla, California at the Torrey Pines Hilton. The event offers three days of presentations and workshops specific to the Allowance for Loan and Lease Losses with the transition to CECL occupying center stage.

Graham Dyer, with Grant-Thornton and also a member of the TRG, will be presenting at the National ALLL Conference. Rahul Gupta, FASB CECL Project Manager, will also be a speaker at the event, along with an exceptional slate of industry experts and representatives from various financial institutions. 

Since 2005, MST has implemented technology solutions to help financial institutions simultaneously simplify and sophisticate the way they manage the inherent risk in their loan portfolios. MST is the leader and pioneer in ALLL software solutions and education for financial institutions across the U.S., and is committed to its leadership role in developing and refining products that address ALLL compliance requirements as they evolve, including under the new CECL accounting standard. MST solutions are bank-tailored, integrate with core & other data systems, deliver greater control to policy, and exponentially improve efficiencies – all of which positively impact profitability.