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Opinion

Plenty of work for credit unions to do despite CECL delay

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Following the news that the Financial Accounting Standards Board has delayed implementation of its current expected credit loss standard, many credit unions – large and small – will soon need to assess the impact of the new regulation and update processes accordingly. But even with the expanded time frame for compliance, credit unions need to uncover the most efficient and effective course of action.

While it may seem like a herculean task to update systems and procedures that have been in place for decades, the process doesn’t have to be as painstaking as it appears. And it begins with a complete review of operational strategies. That includes:

  • An analysis of existing data gaps
  • Determining important milestones and preparing a detailed roadmap and executable plan
  • Testing different credit loss models and selecting the methodology that best meets the needs of the portfolio.

1. Find the gaps
For many credit unions, part of compliance with the new CECL standard means gathering and assessing more data than before – after all quality data will be a core component to a more accurate credit loss forecast. Unfortunately, many credit unions may lack adequate and quality data to make appropriate forecasts. A more accurate estimation of credit losses relies on historical information and current credit conditions. Oftentimes traditional lenders do not store historical data in easily accessible formats, and newer portfolios such as fintechs simply do not have the historical data, which can make CECL compliance difficult to achieve.

Keep in mind, data is only part – albeit an important part – of an accurate credit loss forecast. Credit unions also need to incorporate impactful macroeconomic indicators and scenarios, as well as uncover the right statistical methodology to account for lifetime losses.

2. Develop a plan
The road to CECL compliance can be long and arduous. The complexity of the new guidelines and the back-end work required to update processes and procedures can take up to 12 months. Factor in the data gaps and most credit unions will need to build in additional time and resources to gather and assess the new data assets.

With multiple deadlines and milestones to achieve, credit unions need to develop a work-back schedule that opens them up for success. While working toward a specific deadline, it’s important to keep in mind that CECL compliance is a journey, not a destination. That means lenders should continually test and refine their data-driven approach, including credit models and data assets, as well as assess the impact that the new reserves have on profit margins.

3. Identify the models and technology with accurate output
Most credit unions will need to address the never-ending question, “To build or to buy?” And with so much at stake and milestones to reach, it’s the right question to ask. However even with the delay, each institution must consider the time, cost and additional resources required to build an effective forecasting model. An ineffective model can lead to reserving more allowances for credit losses than needed, leading to lower profit margins. For those that have more time to prepare, it’s important to learn lessons from organizations that partake in the first phase of compliance.

On the other hand, there are credit loss models that leverage advanced technology, such as artificial intelligence and machine learning to enable financial institutions to save time testing portfolios under different economic factors. In any event, regardless of the decision to build or buy, it’s important for credit unions to back test the models to ensure accuracy and run them under various economic scenarios to measure the model’s sensitivity. Additionally, it’s important for credit unions to run parallel books that compares the forecasted loss reserves using current methodology against the forecasts using CECL methodology. This allows them to properly measure the impact of the new accounting standards prior to implementation.

Additionally, while preparing the new accounting standards, many CUs will likely turn to third-party vendors to assist with compliance. While third-parties can be a recipe for success, it’s important to ensure these organizations take the necessary steps to help achieve objectives. For example, third-party vendors should deliver an integrated framework that empowers credit unions to optimize data, enhance credit loss models and ensure compliance with the upcoming policies.

While some credit unions are well on their way to CECL compliance, others are just beginning the process. The road to meet the new guidelines may take some time, but there are immediate next steps organizations may want to prioritize. This includes ensuring key stakeholders such as board members are aware of the operational requirements, potential costs and revenue impacts CECL can have on the bottom line.

At the end of the day, the CECL standards will impact all credit unions’ processes and procedures, however those that are best prepared will be the most successful in the long run. Take the necessary steps now to begin the trek toward compliance, but keep in mind that it’s important to continually test models and data sets. It’s those that maximize the power of advanced data and technology that will move forward without a hitch.

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