Residential: Congress takes on CECL in the 11th hour

As the first deadline for the Financial Accounting Standards Board’s (FASB) new current expected credit loss (CECL) standard nears, Congress has decided to take a closer look at its impact.

“With only six months to go until Securities and Exchange Commission (SEC) filers must implement the changes, it seems unlikely that a divided Congress will be able to pass legislation quick enough,” said Tim Rood, Chairman of The Collingwood Group, a Situs company. “However, the deadline for community banks and credit unions isn’t until 2022 – providing a more reasonable amount of time for intervening legislative action.”

CECL was finalized in June 2016 and is widely considered to be one of the most significant accounting changes the financial services industry has ever faced. The life of loan loss concept requires a shift from incurred or historical impairment reporting to forecasted impairment reporting, “going far beyond a simple accounting update,” said Rood.

MountainView Financial Services, a Situs company, has written extensively on the depth of effort required of institutions of all shapes and sizes to analyze and model a considerable amount of data to comply with CECL. Industry stakeholders have repeatedly expressed concern with the compliance burden and the impact on the availability of credit to low-income households. The Credit Union National Association (CUNA) said nearly one in five credit unions expect their members’ ability to obtain credit to be hampered.

With these concerns in mind, several members of Congress have suggested delaying CECL implementation. In December, Rep. Blaine Luetkemeyer, R-MO, introduced legislation that would make implementation contingent on the completion of a quantitative impact study.

Last month, Sen. Thom Tillis, R-NC, introduced a similar “Stop and Study” bill, The Continued Encouragement for Consumer Lending Act. The bill is co-sponsored by several other Republican senators and would delay CECL until the SEC and other federal regulators, including the National Credit Union Administration (NCUA), assessed the economic impact of the new standard. Financial institutions would not be required to comply with CECL until one year after the study is completed.

“This issue has certainly generated a lot of attention in Congress and in the media that could eventually generate the bipartisan political will needed to delay the effective date for the entities not included in the first phase of implementation, such as community banks and credit unions,” said Rood.

FASB has said it “continues to refine and improve the CECL standard” and will engage stakeholders in an ongoing process. Although the organization has not expressed any intention to delay implementation, it did issue an update to provide “targeted transition relief.”

The update addresses concerns that certain financial institutions would be required to maintain dual measurement methodologies for similar products, which would result in incomparable financial statement information. In response, FASB will allow financial institutions to “to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis.” This should improve comparability of financial statement information and “reduce the costs for some entities to comply,” according to FASB.

“If nothing else, FASB’s recent update is evidence of the heightened sense of uncertainty around the rule,” said Jeff Prelle, Managing Director and Head of Risk Modeling at MountainView Financial Solutions.

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