MBA Raises Concerns Over CECL Accounting Standard
The Mortgage Bankers Association, in a May 21 letter to the House Financial Services Committee, said new Current Expected Credit Loss accounting requirements to measure credit losses could adversely residential and commercial/multifamily lenders, particularly community lenders.
The letter to Committee Chair Maxine Waters, D-Calif., and Ranking Member Patrick McHenry, R-N.C., noted upcoming implementation of the CECL accounting standard for the measurement of credit losses (Accounting Standards Update 2016-13) issued by Financial Accounting Standards Board, effective for SEC registrants in 2020 and for all other companies in 2021, “will adversely impact the availability, structure and price of credit, with a larger proportion of such impact landing on longer-term loans, such as 30-year single-family residential mortgages, commercial and multifamily mortgages, student and business loans.”
MBA Senior Vice President of Legislative and Political Affairs Bill Killmer called on Waters and McHenry to authorize an independent quantitative study on the overall impact of CECL implementation on the financial services industry and engagement with FASB to request a delay in enactment pending completion of that study.
“For many MBA community bank members, more than 50% of their loan portfolios constitute residential mortgage products, and therefore, the unforeseen impact of CECL implementation on residential mortgage lending will have significant detrimental effects on these banks,” Killmer wrote. “In fact, according to a recent study on the impact of CECL on bank capital, it was noted that many community banks may need to raise additional capital in order to maintain their ‘well capitalized’ status and be in compliance under CECL on day one. This unforeseen impact of CECL, in addition to the fact that the heavy costs of implementation naturally hit smaller organizations the most, could result in costly and unintended adverse consequences for the community banking industry.”
The MBA letter said the analysis should not only focus on the overall potential impact of CECL–including potential reductions in economic activities and higher unemployment during economic downturns–but also assess how CECL would have affected regulatory capital leading up to and going through the recent recession.
“Furthermore, this examination should assess the capital and operational impact of the standard on smaller institutions, and especially how such impacts will affect their ability to compete and serve their communities,” MBA said. “Ideally the study should propose solutions for identified negative or adverse impacts, and such solutions should be within existing liquidity, capital and accounting regulatory frameworks.”
MBA noted CECL “probably represents one of the most significant rewrites of U.S. GAAP in the past 40 years,” and once implemented, will fundamentally change how banks and other financial companies recognize credit losses in their loan and held-to-maturity debt security portfolios. MBA pointed out in contrast to the traditional U.S. GAAP approach, which required companies to establish a reserve when a loan loss is probable and reasonably estimable, CECL requires day-one upfront recognition of credit losses using long-term economic forecasts over the contractual life of the loan but does not allow a similar upfront recognition of corresponding future revenues associated with the loan.
