Qualitative factors, or Q factors, play a crucial role in calculating the allowance for credit losses (ACL), especially under the CECL (current expected credit loss) standard. As banks and credit unions adjust to this new accounting framework, questions around the development and control of Q factors under CECL have become a central focus—both for institutions and their auditors.
Before CECL, financial institutions often relied heavily on Q factors to supplement their allowance estimates, particularly when quantitative data was pressured by periods of strong credit quality. However, with the transition to CECL, many institutions questioned how these qualitative adjustments would evolve and what balance between quantitative and qualitative components auditors would expect. Today, Q factors offer a way to adjust for risks that aren't fully captured in historical data or quantitative models.
In this blog, we explore how banks and credit unions have adapted their approach to Q factors under CECL and share insights from an Abrigo advisory webinar on managing this critical part of the ACL process.