If our industry had its own Loch Ness monster, we could call it CECL, and we’d be waiting with bated breath for official sightings. Until then we’re moving forward with credit unions and vendors who are trying to figure out a strategy for responding to the FASB Current Expected Credit Loss (CECL) standard, scheduled to be implemented in 2020.
This recipe is about the work we’ve done far and the approach our CUSO will be taking.
Where We Are Today
To date credit unions seem to be settling out into one of the following camps:
- CUs who are partnering with a vendor (such as Visible Equity) and working with CU*Answers to develop a custom file exchange process
- CUs who are partnering with a consultant (such as Plante Moran) and developing internal routines, procedures, and calculations to collect data
- CUs who are developing their own routines, procedures, and calculations internally
- CUs who are doing nothing
What we’ve seen so far is that the majority (90%+) are in the camp where they have done absolutely nothing. This is because most credit unions are waiting to see what happens before making any moves with a vendor or on their own. There may also be situations where credit unions have chosen to partner with other vendors where no data exchanges are required (or the data exchanges they do require are minimal and they are processing them internally without our assistance). Therefore we have been instructing clients to follow their instinct with what they feel is the best decision for their credit union.
We do not currently have any projects underway for a “standardized” database file for CECL, as to date there has been no consensus as to what that might actually be.
What We’re Working On Now
While credit unions are continuing to do their homework and follow their instincts, CU*Answers has been working on and designing a Static Loan Pools analysis tool. This will be a web-based analysis tool where credit unions can choose to review all loans opened in a specific year (the pool) and that pool will remain open until all loans form that pool are paid off, written off, closed, etc. We are continuing development on this tool and we see it as being helpful to credit unions whom are studying their loan portfolio. Some of the stats we’ll be calculating include:
- Average Payments Remaining
- Average Payment Amount
- Average Loan Term
- Average Weighted Average Rate
- Total Disbursement Limit
- Average Credit Score
- …and so on.
See a prototype of the new Static Pools Analysis web-based dashboard we’re designing for Analytics Booth, as introduced at the 2018 Leadership Conference.
Original Research and Evaluation
Starting in mid-2017, CU*Answers began evaluating CECL solutions offered by 3rd party vendors. We collected their requested file layouts, read their white papers, and analyzed their CECL calculation methodologies. The variations we found between vendors confirmed that the best approach to CECL is very much in the eye of the beholder.
Our original hope was to establish one consistent file layout which was compatible with many vendors’ CECL solutions, keeping our costs low and your options open. However, the variations in data requirements across vendors, both in terms of history as well as the fields required, was diverse enough to rule out a one-size-fits-all approach.
Loan Pooling, Historical Losses, and Additional Fields
CECL is based on the concept of grouping your loan portfolio into pools of similarly characterized loans and then analyzing your losses per pool. Although the existing Concentration Risk tools are valuable, CU*BASE does not currently support the custom pooling of your loan portfolio, complicating the tracking of pool performance over time and the allocation your historical losses.
But what CU*BASE does have is a great deal of data about previously closed loans, going back to when you first converted to the CU*BASE platform. Therefore, our Asterisk Intelligence development team will be designing a new pool generator and analysis toolkit. Our goal for 2018 will be to develop the logic for generating pools, trending concepts (compare to archived data), presenting and transferring pool data to vendors, and append pools for missing and new data. We’ll need your help to identify the data points that are going to be significant for you and your CECL vendor.
Additionally, as you explore your CECL options you may encounter the need to begin tracking additional data points on your loans for use in future CECL calculations or pooling. This need aligns perfectly with our new Unique Data Management tool, which is a credit union-managed database of user-defined fields capable of holding data at either the member or the account level. As these needs arise in your unique approach to pooling, please consider this enhancement as a free solution which avoids the need to turn to custom programming projects.
CU*Answers is committed to being one of your valued CECL partners. However, until a unified voice emerges from the marketplace we have little option but to build vendor-specific solutions as they are brought to us.
Therefore, by the end of the 2018 calendar year, our goal is to become an expert at:
- Collecting data from CU*BASE tables, including gathering loan-related data and generating pool analyses per vendor requirements,
- Warehousing data archived for CECL analyses, whether natively in CU*BASE or via a data warehouse strategy, and
- Moving data to your chosen CECL vendors to do the calculations.
We will give evidence of this expertise via our documentation of available services for the DIY player (the finance departments of our credit unions), as well as by the number of marketplace vendors for whom we support data transfers.
Don’t wait to plan your CECL strategy! The vendor integrations require a custom programming request and project lead times will vary. Please contact the Asterisk Intelligence team to discuss your project.
Projects in the Works
To date, twelve credit unions have committed to a joint partnership with CU*Answers and Visible Equity to fulfill their CECL requirements including the calculation of their expected credit loss. A final file layout has been agreed upon between CU*Answers and Visible Equity. Three credit unions are live with monthly data transfers to Visible Equity today and services are active. The remaining nine credit union’s projects are in development.
Read an update on the CECL partnership with Visible Equity (prepared for the 2018 CFO Roundtable event, March 21, 2018)