Implementing Third Party Software for CECL? The Time to Start Is Now.
Thirty-five percent of those who responded to the 2017 MST annual lender survey told us they use a software solution to estimate their allowances. Seventy-five percent said they would use a software solution under CECL. For those of you who are making the conversion from Excel to a third party automated CECL solution, the message is, “Start now.”
Three reasons to start CECL software implementation now:
- You want to get comfortable with the software with your current methodology before you change methodologies for CECL.
- The software will allow you to analyze your data and determine your data needs, test potential methodologies and other processes required to transition to CECL.
- You have just enough time to accomplish steps one and two before you begin estimating under CECL.
What are the steps to CECL implementation?
In the “Seven Steps” process for transitioning to CECL, we propose automating the allowance calculation process as Step One. Learning the software on a methodology you are familiar with just makes sense. The process of converting to software involves running parallel allowance estimates for six months to a year, reconciling the numbers, ensuring outcome consistency. You won’t be able to do that if you are implementing the software at the same time you’re implementing or testing a new CECL methodology.
Systems like the MST Loan Loss Analyzer save time and improve accuracy. CECL will require you to analyze significantly more data and more types of data than you are likely using today. Using the system will not only be significantly less work than plowing through piles of spreadsheets, but provide you with an accurate picture of your data – to determine if you have enough data, to assess the quality of your data, to get the infrastructure and interfaces in place – so that you will know where your gaps are and can address them in time for CECL and more easily match an expected loss methodology to your data.
Timing is already a key issue. Lenders who have not started their CECL transition are behind. Publicly traded institutions must estimate their allowances according to CECL for the first quarter of 2020, so their methodology must be in place and running by December 31, 2019. But selecting one or more CECL methodologies requires testing, and testing will require at least a couple of quarters to see how an identified methodology will perform, how CECL will impact your institution. So minimally a publicly traded institution will need to start running a parallel CECL allowance as of the end of the second quarter of 2019, giving them eight quarters from the end of the second quarter of this year before they are required to start running CECL estimates. Privately held institutions that start running parallel CECL allowances at the end of the second quarter of 2019 will have 12 quarters of shadow loss analysis before being required to run according to CECL.
How much time is needed to implement a software solution for CECL?
That varies from project to project, but typically anywhere from three months for a simple, small portfolio to a year for larger, more complex portfolios. One way to get an idea is to consult with your IT department on the length of other similar implementation projects at your institution. Beyond installing the Loan Loss Analyzer or another software solution, you’ll need time for training and user acceptance, getting comfortable with the new tool and ensuring consistency by running your current process in parallel with your new tool, which most institutions do for two to four quarters.
Getting started now will have you comfortable with and relying solely on your new software by sometime before the end of 2018 – which leaves you two quarters if you are publicly traded, six if you are privately held, to hurdle steps two through seven in your Seven Step process to selecting a CECL compliant methodology.
Supply and demand for CECL services
There is one more good reason for starting now. As we draw nearer to expected credit loss, the demand for a third party solution will increase. The longer you wait, the harder it will be to implement a solution in the most timely and cost-efficient manner.
“There is a limited supply of external expertise available for both the process and the technology,” warns Tom Cunningham, former senior economist of the Atlanta Fed and a consultant to MST. “As the implementation deadline approaches, demand for that expertise will increase, and we all know what happens when supply is limited and demand is surging. Establishing relations with the external support necessary for CECL early in the process will assure both availability and cost. Waiting until late in the process when other last-minute institutions are gobbling up resources and bidding up prices is not a sound business decision.”
Other current expected credit loss related papers and articles you may enjoy.
- CECL-Compliant Solutions: Every Lender Is Different
- CECL News You Can Use
- “Wait and See” Could Prove a Costly Strategy