October 13, 2022

NCUA provides NAFCU-requested guidance on how CUs can use new simplified CECL tool

NCUAThe NCUA Wednesday hosted a webinar to break down its new simplified current expected credit loss (CECL) tool, which uses the weighted average remaining maturity (WARM) methodology to estimate the allowance for credit loss.

NAFCU wrote to the NCUA in September to request that the agency issue specific guidance emphasizing that credit unions under $1 billion in assets may use the tool.

The NCUA clarified that, while primarily designed for credit unions with less than $100 million in assets, any size credit union can use the tool if the tool fits the business and financial products of the credit union.

“While this tool is designed for the small credit unions, it does not preclude larger credit unions from using the tool,” said NCUA Director of the Office of Examination and Insurance Kelly Lay. “We made the tool flexible to allow any credit union to adopt the tool to their specific circumstances.”

During the webinar, the NCUA highlighted that the tool is only for estimating the allowance for credit losses on loans and lease portfolios. Credit unions needing to estimate losses on investments will need to work with an accountant on an appropriate methodology. Similarly, loan participations would need to be calculated separately, outside of the CECL tool.

Of note, the NCUA will not require the tool to have third-party validation, something NAFCU also requested.

In addition, the NCUA explained that examiners will evaluate each credit union’s compliance with CECL on an individual basis. The agency also said it will use judgement to address specific strengths and weaknesses through the supervisory process, which could include supplemental facts, examiner findings, or other administrative tools.

To learn more, view NAFCU’s CECL resources or visit the NCUA website for several updated resources on CECL that are available for credit unions. NAFCU will continue to work with the NCUA to ensure that credit unions have the necessary resources and guidance to effectively implement CECL.