Skip to main content

How do adjustment factors (so-called Q factors) change under CECL?

March 16, 2018
Read Time: 0 min

On March 13, 2018, some of MST’s advisory group teamed up to offer their thoughts in a webinar entitled, “Key Issues and Trends in CECL Transition: A Panel Q & A Webinar.” In this Q & A style webinar, MST Senior Advisors Paula S. King, Garry Rank, and Dorsey Baskin answered questions moderated by Regan Camp. This panel of allowance experts from MST Advisory Services answered questions and shared the key issues and trends in preparation and transition to CECL for financial institutions from their hands-on experience. They all have been intimately involved in studying the allowance both in its incurred loss form as well as what we can expect from the expected credit loss estimation.

This is the first in a series of questions and answers from the webinar.

Question:

How do adjustment factors (so-called Q factors) change under CECL?

Answer:

This answer should be prefaced by first reminding all that adjustment factors (qualitative and quantitative) have one and only one purpose –

Adjustment factors are needed to adjust the average charge-off rates calculated over a historical charge-off accumulation period for the differences between:

  1. The conditions that existed when the loss-causing events were occurring that resulted in the charge offs captured in the accumulation period, and
  2. The conditions expected during the expected life of a pool of loans.

Thus, adjustment factors are a consequence of the use of that average historical charge-off rates to estimate losses over a future period that likely will be subject to different (and changing) economic, loan underwriting and/or loan servicing conditions than existed during the historical period.  Adjustment factors have no other purpose if used in a manner consistent with GAAP.

So, what’s new under CECL:

  1. The loss (charge off) accumulation period changes from an arbitrary number of years or quarters to a period that covers the lives of historical pools of loans
    • Depending on lives of the pools, this may be longer than has been used in the past, thus, it would be capture the charge offs resulting from more different and changing conditions.
    • Adjustment factors will need to be “adjusted” for this change. And as an unfortunate consequence of this change to expected losses, correlations between past conditions and observed losses may or may not be as strong.
  2. The adjustment factor(s) applied under CECL will need to be based on forecasted future conditions rather than on recently observed actual conditions.

To access a recording of the webinar, click here.

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.

 

Looking for Banker’s Toolbox? You are in the Right Place!

Banker’s Toolbox is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to Banker’s Toolbox Community Online.

Make yourself at home!

Looking for MainStreet Technologies? You are in the Right Place!

MainStreet Technologies is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the contact us button here, or the link in the top navigation, to reach product support for your MST products.

Make yourself at home!

Looking for Sageworks? You are in the Right Place!

Sageworks is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to your Sageworks products.

Make yourself at home!

Looking for Farin? You are in the Right Place!

Farin is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to your Farin client portal.

Make yourself at home!

Abrigo acquires construction loan management solutions

Coupled with our lending suite, Construct and +Pay from BankLabs enable end-to-end automated residential/commercial construction loans.

Read the press announcement

BankLabs Logo Abrigo Logo