CECL Implementation Insights for Credit Unions

CPAs specializing in credit union audits recently attended Brown Edwards' Credit Union Seminar. Andrew Shear, a senior manager in the firm’s financial institutions practice, shared valuable insights on the Current Expected Credit Losses (CECL) model, now that the industry is nearly two years into its implementation. Here are the key takeaways from his presentation that will be useful for credit union financial professionals.

Overall Implementation Observations

1. Forward-Looking Adjustments: One of the biggest changes in moving from the incurred loss model to CECL is the incorporation of forward-looking adjustments. These can include changes in unemployment, interest rates, or GDP. It's crucial for credit unions to understand how these are incorporated into their models and ensure they're not double-counted in qualitative factors.
2. Held-to-Maturity Investments: Credit unions should remember that held-to-maturity investments fall under CECL. While U.S. Treasuries can have an expected credit loss of zero, other investments may require some level of reserve.
3. Loan Portfolio Completeness: Credit unions should ensure all loans are captured in their CECL models, including off-system loans, purchased participations, and credit cards.
4. Unfunded Credit Commitments: Institutions should be clear on which commitments are unconditionally cancelable. For example, credit card unfunded balances typically don't require a reserve, but HELOC unfunded commitments often do.
5. Use of the NCUA CECL Tool: This tool can be useful as a "gut check" or for stress testing CECL calculations.

Qualitative Factors

Qualitative factors continue to be a significant component of the CECL model. Here are some key points:

1. Understand the Model: Before adjusting qualitative factors, credit unions should thoroughly understand what's already captured in their quantitative model to avoid double-counting.
2. What's Not Captured: Focus on what isn't captured in the expected loss model when determining qualitative factors.
3. Model Limitations: Be aware of the model's limitations and consider these when applying qualitative factors.
4. Directional Consistency: Ensure qualitative factor adjustments are directionally consistent with quantitative results and economic outlook.

3 Common Approaches to Qualitative Factors

1. Scorecard Approach: This involves assigning weights to different factors and scoring each based on current conditions.
2. Standard Deviation Approach: This uses statistical analysis to determine adjustments based on deviations from historical norms.
3. Basis Point Ranges: This involves setting predefined ranges of basis point adjustments for each factor.

Best Practices and Common Mistakes

1. Policy and Procedures: Develop a comprehensive CECL policy and detailed procedures for running the model.
2. Data Integrity: Implement strong controls around data input and reconciliation processes.
3. Periodic Review: Regularly review CECL assumptions and methodologies, especially as economic conditions change.
4. Stress Testing and Back Testing: Incorporate these practices to validate the model's effectiveness and identify potential weaknesses.
5. Avoid Overcomplication: Choose a model that fits the credit union's size and complexity. A simpler model that is fully understood is often better than a complex one that isn't.
6. Open Dialogue: Maintain open communication with external auditors and examiners about the CECL process and any changes being considered.

As the industry continues to navigate the CECL landscape, it's clear that ongoing refinement and attention to detail are crucial. By focusing on these key areas, credit unions can ensure their CECL implementation remains robust and effective in the face of changing economic conditions.