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, currently scheduled to be implemented in 2021, with a pending proposal to delay implementation for small non-publicly traded institutions until 2023.
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 McQueen Financial Advisors or 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.
Static Pool Analysis
While credit unions are continuing to do their homework and follow their instincts, CU*Answers developed a Static Loan Pool analysis tool. This is 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 from that pool are paid off, charged off, closed, etc. Phase 1 of this feature is available today; 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 loan pool statistics available include:
- Average Payments Remaining
- Average Payment Amount
- Average Loan Term
- Average Weighted Average Rate
- Total Disbursement Limit
- Average Credit Score
- …and so on.
For more information on the Static Pool Analysis toolkit please reference the resources linked below. We will continue to grow and enhance this Static Pool Analysis toolkit as this regulation continues to materialize.
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. We will continue to enhance our data availability throughout 2019 and into 2020 including tracking DTI and LTV at the time of origination and enhancements in the written-off / charged-off loan database.
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 2019 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
- Several credit unions have already signed up with McQueen Financial Advisors (www.m-f-a.com). McQueen’s CECL Solution offers a clear, understandable, regulatory-compliant, and easy-to-implement methodology tailored to each credit union. CU*Answers and McQueen have agreed on file formats and a seamless data transfer that will replicate the ease-of-use already in place for ALM reporting. McQueen offers a full range of services, policy development, internal training, data analysis and early adoption decision making. As soon as practical, McQueen will produce parallel runs in order to assess the overall CECL impact compared to current methods. McQueen’s service includes investment holdings, which are not provided by some other CECL vendors.
- Other 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. Ten credit unions are live with monthly data transfers to Visible Equity today and services are active. The remaining credit unions’ projects are in development.