April 19, 2017

NAFCU-sponsored CECL study gives CUs guidance

A newly released, NAFCU-sponsored study outlines some of the key qualities and trade-offs for a variety of models for implementation of the Financial Accounting Standards Board's current expected credit loss accounting standard, which starts taking effect for credit unions in fiscal years beginning after Dec. 15, 2020.

NAFCU President and CEO Dan Berger said the purpose of the study, available to all credit unions, is to help credit unions make some of the hard choices they will face in implementing the new standard.

"Due to the sweeping nature of the proposed changes credit unions will have to endure under this new accounting standard, NAFCU has cosponsored this study to provide critical data and information to help credit union CEOs and their teams work with the preferred model for their institutions," said Berger. "This study will also help credit unions answer some of the most commonly asked questions they are likely to confront regarding the new accounting standard."

In June 2016, FASB issued its CECL accounting standard, which requires that "life of loan" estimates be recorded at a loan's origination or purchase. Early adoption of the standard is permitted for all entities for fiscal years beginning after Dec. 15, 2018.

The CECL standard allows some flexibility in selecting estimation methods appropriate for the particular institution or product. Because of this, the NAFCU-sponsored study includes the following types of loss estimation models: time series, roll rate, vintage, state transition and discrete time survival. Each of the models in the study was tested against a common loan portfolio comprised of large datasets of conforming mortgage loans from Fannie Mae and Freddie Mac. These models were assessed for accuracy, robustness to small data sizes, complexity, computation time, and procyclicality of lifetime loss estimates (i.e., responsiveness to fluctuations in the business cycle).

The CECL guidelines provided by FASB also provide the option of using a discounted cash flow (DCF) approach. Each of the models used in the study incorporated DCF, which allows credit unions to assess the impact of this modeling feature on the loan loss estimate.

The study, conducted by Deep Future Analytics, was sponsored by NAFCU, Allied Solutions and OnApproach. Joseph L. Breeden, Ph.D., founder and CEO of Prescient Models LLC, led the research team.