CECL is a term that has been going around in the financial world, but the standard itself is confusing, the timing of compliance is different for different institutions and the impact to banks and credit unions will vary widely depending upon lending portfolios and purpose.
CECL, Current Expected Credit Losses, is an accounting method requiring financial institutions estimate and recognize how much overall loan losses they could see in their loan portfolios from the time of origination. This policy was issued by the Financial Accounting Standards Board and will become effective in January 2023 for privately held banks, credit unions and smaller public companies, while its already in effect for larger banks. Many in the financial services industry are concerned it will have an effect on the ability of banks and credit unions to provide loans to lower-income borrowers. These worries have been greatly increased by the coronavirus pandemic and the impact it has had on the American economy.
Currently, the full impact of CECL remains unknown – even to FASB. According to an article from the Journal Of Accountancy, a Treasury report issued in September 2020 stated that due to the pandemic, FASB could not get a definitive assessment on the impact CECL has had on accounting for credit losses. In 2020, financial institutions tightened loan qualification standards, but the pandemic left FASB unable to determine a definitive link between the changing standards and CECL. The report also mentioned FASB recognizes the concerns of lenders and what affect the policy could have on credit availability and the United States economy in general. Also of note is Congress directed Treasury to study what regulatory changes would be necessary because of CECL, including how it would apply to smaller lenders and to learn what potential benefits this new standard would have.
On Feb. 16, 2021, the CFPB began revisiting Trump-era qualified mortgage rules, the FDIC adopted a final rule addressing the temporary deposit insurance assessment effects resulting from certain optional regulatory capital transition provisions relating to the implementation of the CECL methodology, according to a report from JDSUPRA. While this methodology might not be fully implemented yet, changes are being made, but uncertainty lingers. Financial institutions will need to keep an eye on what lawmakers are doing to see where this policy goes and to ensure that lenders can continue to address the needs of all borrowers.