Financial institutions need to be able to explain and show how they developed Q factors for their allowance for credit losses. Modifications to the CECL calculation should be reasonable, supportable, and audit-ready.
Key topics covered in this post:
If you’ve been tasked with completing a CECL calculation, you know that qualitative factors (Q factors) can be one of the most challenging parts of the process. They require a mix of judgment, data, and defensibility—without clear instructions from regulators on exactly how to apply them.
But documenting and defending Q factors doesn’t have to be a guessing game. With the right approach, you can ensure your adjustments are well supported, transparent, and easy to explain to auditors and examiners. Let’s walk through the key steps to identifying, documenting, and defending CECL Q factors.
CECL qualitative factors are adjustments made to credit loss estimates to account for risks that historical loss data and quantitative models alone don’t fully capture. These CECL adjustments could encompass economic shifts, changes in your loan portfolio, or even adjustments in underwriting standards. Essentially, Q factors help ensure your reserve levels reflect not just past performance but also what’s happening now and what’s expected in the future.
The CECL standard (ASC 326) gives financial institutions significant latitude in how they apply qualitative factors. But that latitude makes it even more critical to document and justify their approach.
A well-structured framework for qualitative adjustments to the allowance for credit losses (ACL) under CECL enhances transparency, consistency, and defensibility. It ensures that modifications are reasonable, supportable, and audit ready.
Proper documentation is key for:
Taking the time to understand how to identify CECL qualitative factors makes it easier to document and defend them later on.
Step 1: Start with your historical loss data
Your financial institution’s historical loss experience forms the foundation of your CECL estimate. Before making adjustments, understand what your baseline numbers look like and what trends they show.
Step 2: Consider current and expected conditions
This is where Q factors come into play. Ask yourself:
Step 3: Align Q factors with risk categories
To keep things structured, organize your qualitative factors into key categories:
Step 4: Develop a structured framework for Q factor adjustments
One of the most effective ways to ensure consistency and defensibility in your qualitative factor adjustments is to implement a structured Q factor framework, such as Abrigo’s Qualitative Adjustment Scorecard. The scorecard includes identification of high-water economic scenarios to define appropriate risk brackets and enables tailoring to each allowance pool.
This approach provides a reliable mechanism for measuring and benchmarking qualitative factors across your institution. Benefits of a structured CECL qualitative framework include:
Once you’ve identified your Q factors, documentation is the next step. A good approach includes:
Consider adding a similar checklist to any CECL procedures your financial institution develops.
This blog was written with the assistance of ChatGPT, an AI large language model, and was reviewed and revised by Abrigo's subject-matter expert.
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