After 7 Years, CECL Is Here. Quest FCU Was Ready.

Seven years after they were first announced, the new standards for accounting for loan losses (ALL) have arrived for credit unions.

CECL — short for current expected credit losses — shouldn’t take any federally insured financial institution by surprise. The rule’s implementation has been kicked down the road several times since it was first rolled out by the Financial Accounting Standards Board (FASB) in June 2016.

The rule, considered by many to be the biggest change in financial services accounting rules in decades, is a response to the loose lending practices that underpinned the housing market and financial crisis that sparked the Great Recession 15 years ago.

The required regulatory reporting under CECL for federally insured cooperatives begins with the March 31, 2023, call reports, the NCUA says, noting that credit unions with less than $10 million in assets are exempt unless required by their state regulators.

The long rollout has been accompanied by angst from trade groups concerned about CECL’s impact on their members.

“The CECL standard will affect credit union capital and reserves for expected losses, necessitate development of new forecasts, and ultimately lead to increased compliance costs — both in dollars and staff time — that many credit unions cannot afford,” NAFCU says.

Our members might never notice a change, but there could be potential for stricter lending in the future depending on the cost of CECL to the bottom line.

The Angst Remains As The Impacts Loom

Paige Wallace is the chief financial officer at Quest Federal Credit Union ($188.1M, Kenton, OH). The executive is accustomed to managing the financial actions of the credit union and is well-versed in financial reporting, but she’s also comfortable explaining the CECL concept to lay people such as employees and board members.

“It’s a new way to set aside funds for loans that end up not being repaid,” she says. “It looks back on all the loans made and how many have been charged-off, and it accounts for all that.”

For those who want to learn more about how the new standards might affect Quest, Wallace has some insight there, too.

“The new rule has put a strain on our asset management,” the CFO says. “We are being hit by the threat of losing overdraft fees and now the amount we have to put into our ALL has increased tremendously. Our lending standards are conservative, so that has helped prepare us for this in a way.”

Conservative standards or no, the credit union soon might have batten down the hatches even more.

“We know without a doubt that due to this increased expense, we’ll be watching our income closely,” says CEO Matthew Jennings, who has helmed Quest since 1997. “We might have to adjust fees or rates accordingly to generate revenue to help offset the overall cost. Our members might never notice a change, but there could be potential for stricter lending in the future depending on the cost of CECL to the bottom line.”

No Surprises And A Side-By-Side Response

The CECL rule didn’t take Jennings and Wallace by surprise. Quest began its journey to compliance as soon as the FASB changes were announced.

“We had been watching the rule the entire time it was being discussed,” Wallace says. “We didn’t really have an ‘oh no’ moment, it was more of a ‘yeah, it’s really finally here, they aren’t postponing it again.”

While waiting for software options to emerge, Quest first turned to its auditor, which provided an Excel option that Wallace says worked but was time-consuming and ultimately replaced by a more automated solution from its investment and reporting vendor.

“It incorporates our call report numbers, and I just have to add in the specific reserves and weighted percentages,” Wallace says. “The new solution is much prettier and more user-friendly and also gives us a reporting option. We’ve stuck with it to date and will continue to use it.”

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In With The New … Out With The Old? Not Quite Yet.

Quest, like many credit unions, is continuing to run its existing ALL models alongside its new CECL calculations.

“We’ve been running them side by side for at least a year now,” Wallace says. “We’re comfortable with our old method and have confidence in the output it gives us. Until we have that level of comfort with the new model, I think we’ll continue the dual processing.”

There is one big difference in reporting that Wallace has flagged.

“Our old method uses numbers that are prior to us closing our month out,” she says. “There’s not usually a lot of changes, but there’s always that chance. The new model is completed once the month has been closed, so it essentially is a month behind.”

Wallace says Quest’s collections team also has had to change its reporting to help her know where to place the charged-off and recovery amounts. The CECL method also requires Quest’s bean counters to create separate buckets for new and used autos instead of lumping them together as is incorporated into the software running the older ALL model.

“I’ve had to separate loan buckets to match it,” Wallace says. “It takes me longer to process than it used to. Part of that is because it’s still new, the other half of it is that it’s more in-depth than it used to be.”

Manageable Impacts, Conservative Lending, And Being Prepared

Wallace says the staff and financial commitments to adapting to CECL have so far been manageable.

“It’s been a staff member incorporating it into their current job load,” she says. “We worked with companies that allowed us to use trial-and-error and a free trial to find a solution that worked for us, so that helped with a financial commitment up front.“

Wallace also credits her auditors and reporting vendors for the support they provided during the process and says credit unions don’t have to settle for less.

Although Wallace sees an increasing financial commitment now that CECL is in place, she doesn’t think it will have a big impact on Quest’s loan operations.

“We’ve been conservative all along and will likely continue to be if needed,” she says.

Looking back, Wallace says she’s glad her shop didn’t dally or underestimate what was coming, even when leaders weren’t sure CECL would ever actually happen.

“We knew this would be a huge change for FIs, so we didn’t wait around to start looking for a new process,” she says. “We didn’t wait until we were sure that they were going to approve the rule. Even if we had done it for years and then they abandoned the rule, we preferred to have been prepared versus playing catch up.”

For credit unions that might be playing catch up now, Wallace has some advice.

“Find a solution you feel comfortable with and see about a trial run for a few months,” she says. “If that isn’t a good fit, look again until you find one that is. There are so many options, one will be the right fit. And don’t procrastinate. It doesn’t make it easier to find a good solution when you’re under pressure.”