CECL Compliance Challenges: Community Banks vs. Credit Unions

While SEC registered financial institutions are readying for the current expected credit loss (CECL’s) implementation deadline in first quarter of 2020, community banks and credit unions are not far behind with their own planning and measures. As always is the case, having accurate historical and current data is the foundation for compliant allowance for loan and lease losses (ALLL), and will be especially so when community banks and credit unions implement CECL before the Financial Accounting Standards Board (FASB’s) deadline of December 15, 2022.

What the FASB hopes community banks and credit unions will gain over the extended implementation deadline is a workable blueprint for compliance based on larger lenders’ successful examples. However, with helpful blueprints or not, smaller financial institutions may be still at a disadvantage compared to their larger counterparts due to the lack of or type of data they have. Upcoming CECL compliance is forcing community banks and credit unions to look for solutions that solve their internal data-gathering challenges. And, with fewer internal resources than big banks have to collect and aggregate the data, they are turning to loan management software data extract solutions to help automate and simplify what can be a tedious process.

How Much and What Type of Data are Needed for CECL Compliance?
The FASB’s extended deadline and scarcity of proven big bank CECL models can leave community banks and credit unions wondering if they are making sufficient progress in their own data collection efforts. Specifically, is it the right data and is it enough?

Further complicating adequately answering these questions is the fact that no community bank or credit union has the same specific needs. Estimating the allowance for credit losses under CECL will be determined at the institution level. At this point, it’s safe to say that most community banks and credit unions have started collecting data, but loan management software with data extraction capability can facilitate the process.

CECL compliance requires a longer loss horizon and forward-looking requirements in contrast to the incurred loss method for estimating the ALLL. Loan level data may be needed depending on the methodology or methodologies a community bank or credit union selects for its portfolio. And, there will be institutions that decide to test different methodologies and their effect on making capital adjustments. Collecting and archiving data at the loan level gives these institutions that flexibility.

It is the historical data that creates the biggest hurdle for many community banks and credit unions. Running a specific CECL model or generating a valid, reliable result with a particular CECL methodology is difficult, if not impossible, when issues arise associated with core conversions, incomplete data fields, missing data fields, and a lack of historical losses in a loan segment or in an institution’s portfolio.

Ideal and available data are two different things for community banks and credit unions. Not having enough historical data makes it impossible to gauge their past losses or defaults to calculate an accurate CECL result. For community banks, it can be even more difficult as they are less focused on consumer loans than credit unions are. Fortunately, the FASB’s latitude for estimating expected credit losses gives community banks and credit unions leeway in how they calculate their reserves in CECL compliance.

It is Past Time to Collect Data Using Loan Management Software
It is time for community banks and credit unions to use loan management software to prepare for CECL compliance. The software must collect data to help determine which model is best suited to forecasting losses, which will then determine how banks and credit unions set credit loss reserves and manage risk.

The Square 1 Credit Suite’s loan management system houses a majority of the data needed for CECL calculations. The CECL Data Extract product extracts the data from the system to be used in combination with any CECL vendor.

With the Square 1 Credit Suite and the CECL data extract compatible with your CECL vendor, decision makers have the powerful data extracting and aggregating tools needed to successfully predict losses and manage a loan’s life cycle while ensuring you are managing risk at the highest level possible, as well as be CECL compliant.

Learn more about our CECL data extract solutions.

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