While many in the credit union industry continue to call for an exemption from the Financial Accounting Standards Board’s current expected credit losses plan, industry groups want the National Credit Union Administration to make changes to its proposed CECL phase-in rule that allow for additional flexibility.
The agency
In comment letters submitted to the regulator after the NCUA proposal was issued, credit union representatives acknowledged that the regulator is largely subject to FASB’s decisions on the standard, but still found plenty of ways the proposal could be improved.
A key component of CECL is a provision that allows institutions under $10 million in assets to be exempted from following generally accepted accounting principles when determining loan loss reserves. But while only a relative few banks are that small, over 1,200 credit unions — nearly 25% of the entire industry — fall into that asset class.
But that measure could still cause problems for some credit unions. For instance, some state-chartered institutions — even those under $10 million of assets — must establish methodologies for losses in accordance with GAAP, noted Stephen Nelson, VP of support for Utah’s Credit Unions. Because of that, he added, it is incumbent upon the federal regulator to work with state supervisory agencies on regulatory changes that can provide similar CECL relief for state-chartered CUs.
For many credit unions under $10 million, wrote Nelson, “their loan losses are so far and few between, and their volume of loans is so small, that rigorous modeling is less effective than their regular daily monitoring of asset quality. In fact, $10 million may be too low of a limit — although I recognize that … NCUA is limited in that regard.”
Some credit unions have also raised concerns surrounding the rule’s transition timing, including dates at which implementation begins.
“We are concerned the language within the proposed rule fails to properly account for credit unions that have a non-calendar fiscal year,” wrote Rex Spivey, chief financial at State Employees’ Credit Union in North Carolina. “This directly impacts SECU, which as a state-chartered federally insured credit union, has a fiscal year end of June 30th. Other state-chartered credit unions may have fiscal years ending at other times.”
Spivey added that CECL takes effect “for fiscal years beginning after Dec. 15, 2022, not calendar years. As such, the day-one impact occurs by reference to an entity’s fiscal year. Because credit union fiscal years can vary, the calendar day in 2023 when the impact comes into existence likewise varies. But while the exact date of the CECL implementation may differ from credit union to credit union, the regulatory impact to capital will not.”
The League of Southeastern Credit Unions, which serves CUs in Alabama, Florida and Georgia, suggested allowing institutions to adopt the full day-one impact whenever they choose, so long as they do so before the implementation date, “rather than being required to phase-in the transition and to make accommodations for those credit unions that may transition from under the $10 million asset adoption threshold to above it,” wrote LSCU President Jared Ross. He added that league recommends NCUA explore raising the $10 million-asset threshold.
The National Association of State Credit Union Supervisors noted that CUs approaching the $10 million-asset threshold should be given options for when and how they implement the rule. Over 90 credit unions have assets between $9 million and $10 million, according to second-quarter data from NCUA.
“It would seem that a [credit union] with less than $10 million in assets…that reaches the $10 million-asset threshold during the proposed transition period would be required to recognize the full day-one adverse impact of the CECL immediately,” wrote Brian Knight, EVP and general counsel at NASCUS. That requirement, he continued, “could force otherwise healthy credit unions into [prompt corrective action] remediation unnecessarily. Without the protection of a delayed phase in for credit unions that cross the $10 million asset threshold after Jan. 1, 2023, a small credit union … would be required to recognize the full adverse effects of CECL on day one while vastly larger and more sophisticated credit unions are still allowed to continue gradually phasing in the CECL effect.”
On the other hand, the National Association of Federally-Insured Credit Unions suggested a three-year phase-in may not be long enough, noting that some of its member institutions have suggested they may need as many as five years to absorb the rule’s impact on capital levels.
“The federal banking agencies chose to use a three-year period in their own CECL phase-in rule and, by design, the NCUA’s proposal must adhere to this limitation. However, the NCUA should consider other options that accommodate greater flexibility,” wrote Andrew Morris, NAFCU’s senior counsel for research and policy.
In a recent press call with the Credit Union National Association, Luke Martone, CUNA’s senior director of advocacy and counsel acknowledged the bottom line for credit unions, regardless of anything NCUA might do.
“One thing we’ve got to keep in mind is this doesn’t change the ultimate affect CECL has on credit unions,” he said. “CECL is a FASB standard, so NCUA can only do so much. But we do support what NCUA is doing in this proposal.”
