Preparing Your Community Bank or Credit Union for the New Current Expected Credit Loss Model (CECL)

How Credit Risk Management Software Will Help Streamline the CECL Implementation Process

The Financial Accounting Standards Board, better known as the FASB, is giving smaller lenders like community banks and nonprofit credit unions more time to prepare for and implement the “current expected credit losses” standard (CECL).

Originally adopted in 2016, CECL requires lenders to record expected future losses at the time the loan is issued. This new standard is in response to post-Great Recession times when banks were criticized for recording losses too slowly.

For big, public banks, defined as SEC filers, CECL still takes effect in the fiscal year and interim periods starting after December 15, 2019.

However, the FASB is delaying implementation by:

  • Three years for small, public lenders
  • Two years for all non-SEC-filing public lenders
  • One year for private and nonprofit lenders

Community bank and credit union leaders who take advantage of the delay will need to implement CECL for fiscal year and interim periods starting after Dec. 15, 2022. Early CECL adopters have been able to do so since last December.

In an interview, FASB Chairman Russell Golden stated, “Additional time would give the stakeholders more ability to learn from larger lenders, more ability to have resource providers available, and more ability to look at best practices for disclosures and controls.”

CECL compliance is considered the most sweeping change in banking possibly ever. There is widespread concern that CECL would oblige some banks to increase loan-loss reserves, which could reduce earnings and regulatory capital. Others claim that the need to record losses upfront would discourage lending.

Despite concern, there is nothing coming from the FASB that indicates CECL compliance deadlines will be further extended. Many community banks and credit unions will have until 2023 at the latest to become compliant or risk serious criticism from their examiners and external audit firms, as well as steep financial penalties.

Yet, there is always the possibility that CECL will be scrapped or pushed farther down the road. The lack of guidance from the FASB, industry and congressional concerns, and already extended CECL compliance deadlines have paralyzed community bank and credit union leaders who do not have the level of resources to invest in becoming compliant with CECL that big banks do. Several polls put the number of community banks that have done nothing thus far to move toward CECL compliance upwards of 50 percent.

CECL Community Bank and Credit Union Implementation Planning

 For the roughly half of community banks and credit unions that have not started planning for CECL implementation, it is not too late. Regardless of which side of the CECL compliance debate you fall, now is the time to start. You are behind in the CECL implementation planning process if you are not in one of the following stages:

Phase 1: Collecting loan and lease data in one place.
Phase 2: Sorting and classifying loans based on their risk


Phase 3: Comparing parallel models of categorized loans against the current Allowance for Loan and Lease Losses (ALLL) model to determine the best-expected loss approach to use and measure the effect on required capital reserves.

Getting started and moving to the next phase toward CECL compliance requires data. The quality and type of data you have will determine the best method for predicting losses at the time of a loan issuance. The three most used methods are:

  1. A vintage model that tracks the performance of accounts originated within a particular quarter or year over time
  2. A Vintage-Cohort model that examines portfolio composition, grouping loans by similar characteristics and tracking the performance of each group over time from origination
  3. A Loan-level model that conducts a loan-by-loan analysis to determine a borrower’s probability of default, payoff or making payments

The ability to automate generating the data required for any of these models is imperative to successfully become CECL compliant. That is where loan management software comes in.

Loan Management Software Extracts Data For CECL Analysis

Loan management software can help community banks and credit unions prepare for CECL implementation from data collecting to helping determine which model is best suited to forecasting losses, which will ultimately change how banks and credit unions determine credit loss reserves and manage risk.

The Square 1 Credit Suite’s Loan Management System (LMS) houses a majority of the data needed for CECL calculations. The CECL Data Extract product will extract the data from the LMS to be used in conjunction with any CECL vendor. With the Square 1 Credit Suite and the CECL Data Extract working in concert with your CECL Vendor, you will 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.

Learn more about our CECL data extract solutions.

Contact a Software Solutions Expert | Schedule a Live Demo | Download CECL Product Overview

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