Shorter terms, higher rates: How CECL could upend lending

A new accounting standard could change more than the banking industry's handling of loan losses.

A number of banks are starting to warn the Current Expected Credit Loss standard proposed by the Financial Accounting Standards Board could force them to rethink the terms and conditions of certain loans.

Wells Fargo is “studying whether we will change the types of products we offer” as a result of CECL, Mario Mastrantoni, director of accounting policy at the San Francisco banking giant, said during a recent roundtable hosted by FASB at its Norwalk, Conn., headquarters.

“Concerns about the impact on lending are real,” Mastrantoni added. "I know our senior management is concerned.”

While a Wells spokeswoman did not respond to a request for additional comment, the remarks are noteworthy because they provide a glimpse into the discussions other banks are likely having as CECL's implementation deadline looms. Privately held banks must adopt CECL by Jan. 1, 2021. Adoption by credit unions will happen a year later.

Wells Fargo and other publicly traded banks are scheduled to convert in less than a year.

Options under consideration skew toward shorter-duration loans, less guaranteed money and tougher pricing, industry observers said.

“There have been whispers that banks will think about starting to offer shorter-term loans,” said Joe McBride, director of research and applied data at New York data provider Trepp, with mortgages and longer-term commercial real estate loans obviously in the crosshairs.

Lenders could try to charge higher rates to offset the reserves they will need to immediately record. They could also consider offering less guaranteed financing upfront on deals, McBride added.

“They may originate a $100 million [financing package] but only fund the first $10 million," McBride said. "They’ll push to reduce the amount of guaranteed funding to limit the effect of CECL.”

The new standard could also curtail subprime lending, said Doug Wright, chief financial officer at the $3.5 billion-asset Mission Federal Credit Union in San Diego. “Longer-lived assets and those with proportionately lower credit quality are going to take a greater hit up front,” he said.

CECL will require lenders to predict lifetime losses for the loans they make and recognize them on the day they are booked. It represents a sea change from the current incurred-loss formula, which permits lenders to record charge-offs when losses are imminent.

To date, most critiques of the new standard have focused on big-picture, balance-sheet issues. A proposal by regional banks, for instance, called for recording only near-term loan loss projections on balance sheet and categorizing longer-term expectations as accumulated other comprehensive income. In December, federal banking regulators approved a rule that gives institutions the option of phasing adverse, CECL-related effects on regulatory capital in over three years.

Credit unions are looking to the National Credit Union Administration for similar relief, Wright said.

“I think credit unions are very interested in additional guidance,” Wright said. “We’d certainly welcome some kind of relief.”

Though a recent survey conducted by the National Association of Federally-Insured Credit Unions tabbed CECL as one of that industry’s most pressing issues, a lot of smaller banks and credit unions aren’t as far along in their preparations as larger banks, Wright said. They’re just beginning to look at the alternatives that Mastrantoni said Wells Fargo and other big banks are considering.

“Due to a combination of additional implementation time, limited resources, the complexity of the standard, and a lack of detailed guidance, the credit union industry and smaller banks are not as focused or as well prepared,” Wright added. “We’re further behind the curve as an industry than I’d like to see us, and I think than FASB would like us to be.”