For better or worse, the Current Expected Credit Loss (CECL) rule is headed to a credit union near you.
Partially the offspring of the 2008 banking crisis, CECL is a loan-loss provisioning rule still technically in the developmental stage that will require financial institutions, including credit unions, to forecast all potential losses for loans at the point of origination, as opposed to the current rule that prohibits reserving until a loan loss is deemed probable.
It also requires financial institutions to set aside substantial reserves for those losses, which is intended to allow investors a quicker view of the potential costs of a loan over its lifetime. While there are many different voices in the industry, both pro and con, some feel that CECL is good for financial institutions in that it could potentially reduce volatility in earnings over loan credit cycles and requires deeper disclosures than what is found in existing financial reports. When viewed holistically, CECL is essentially geared to better prepare financial institutions for the next big economic downturn.
Final rules and regulations for CECL are expected to be completed by late this month and issued in early 2016. Full-blown implementation is expected by 2019.
What are the potential impacts to your credit union?
Obviously, CECL will require a substantial change in the approach by which credit unions take to their business lending portfolios. And since the ruling is still technically in development, it is impossible to identify every single potential preparation credit unions can take in anticipation of it. However, generalizations based on CECL as it stands now can be made.
For example, next year your credit union could do the following to prepare for CECL and its impact on business lending portfolio.
- Ramp up your loan data collection at all possible levels
- Work to gain a deeper understanding of your existing loan data and processes
- Develop a “CECL Implementation Task Force” at your credit union that will include representatives from lending, IT, auditing and other key departments
As with any other major regulatory change, CECL represents potential headaches for credit unions already struggling to maintain their existing business lending portfolio. A proactive and thought-leading way to prepare for CECL and how it will impact your credit union and its members is to employ the services of a qualified credit union service organization (CUSO) that already brings to the table the expertise, knowledge and staffing to handle it.
For more information on CECL and how MBL can help your credit union prepare, please visit www.mblllc.com or call (866) 462-5552 today.