Why Data is Such a Large Concern for Credit Unions Preparing for CECL

As many credit unions begin to brace for the impact that the current expected credit loss (CECL) model may have on their institution, several are faced with key data challenges. CECL is a change in the FASB’s Accounting Standards, and all credit unions will be required to transition by the end of 2021. Credit unions should be knowledgeable about what types of data will be needed under CECL, what systems will need to be in place and how much of that data needs to be collected and analyzed.

Interagency guidance on CECL issued in 2016 and 2017 specified that “an institution should collect and maintain relevant data to support its estimates of lifetime expected credit losses in a way that aligns with the method or methods it will use to estimate its allowances for credit losses. As such, the agencies encourage institutions to discuss the availability of historical loss data internally and with their core loan service providers because system changes related to the collection and retention of data may be warranted.”

Data is a material CECL complexity that is challenging for credit unions. Currently, it is common for credit unions to use multiple data warehouses for different portfolios. Having data spread across multiple places can create unnecessary time and complexity when conducting CECL calculations, thus becoming unmanageable.  By utilizing a vendor to prepare for the transition, data can be stored in a single source, improving reportability.

In fact, during a webinar of more than 100 credit union executives and managers, 30 percent said they see data retrieval as their biggest challenge with CECL implementation planning.

Loan-level data concerns
CECL is going to cause credit unions to need and manage a lot of data because of the necessity to have sufficient information for each individual loan in the portfolio.

“Credit unions can have anywhere from 6-20 pools in their portfolios. Just providing info for the number of pools multiplied by a lookback period (avg. 12 months) is going require a lot of data” said Danny Sharman, Risk Management Consultant at Abrigo. “Needing balances on a loan by loan basis is an increase in not only the sheer mass of data but also the management complexity associated with this. Under CECL, it will be difficult for credit unions to store data it in a way that can be managed down the line.”

Terry Katzur, CCE, EVP/chief lending officer of ELGA CU in Burton, Mich., has explained how the credit union plans to prepare for the CECL transition but had insufficient historical loan data to meet the demands it expected CECL would generate. That lack of data put ELGA Credit Union—with assets of $543 million in Burton, Mich.—in the market for a solution, so it partnered with Abrigo using Sageworks ALLL.

“Since launching Sageworks [ALLL], we have been able to recreate our current ALLL process and automate it, saving our accounting manager several hours each month,” he wrote on CUES.org. “In 2018, we should have enough data in the solution to begin running parallel CECL calculations that we can refine over the next few years so that by the CECL live date we will have the best model for our institution.”

Katzur noted that in talking with his peers, he has learned that credit unions with sufficient historical data seem to be in the minority. “Beginning the collection and storage of historical loan data should be a top priority,” he wrote. “If you have the data, that puts you in a great position to start running calculations to get a better idea of the financial impact CECL may have on your credit union. The more information you have now, the better prepared you will be for the CECL effective date.”

Another CECL-related challenge credit unions are running into has to do with complex data problems associated with the application of specific loss rate methodologies. This often leads to unnecessary qualitative adjustments to estimate and justify loss allocation. Jared Mills, the former assistant director of accounting at South Carolina State Credit Union, will walk credit union employees on how to avoid these complexities in an upcoming webinar. Watch the webinar, CECL: The Hidden Complexities to Simple Approaches For Credit Unions, where Mills provides additional advice on preparing for CECL.