FDIC Chair Calls for FASB to Delay CECL Rule Amid Pandemic

Federal Deposit Insurance Corp. Chair Jelena McWilliams, in a Mar. 19 letter to the Financial Accounting Standards Board, urged FASB to delay or postpone implementation of its current expected credit losses accounting rules.

The letter (https://www.fdic.gov/news/news/press/2020/pr20036a.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery) asks FASB to permit financial institutions currently subject to the CECL methodology an option to postpone implementation of CECL given the current economic environment. It also asks FASB to impose a moratorium on the effective date for those institutions that are not currently required to implement CECL “to allow these financial institutions to focus on immediate business challenges relating to the impacts of the current pandemic and its effect on the financial system.”

“Today we are confronting new and uncertain challenges in view of the worldwide pandemic,” McWilliams wrote. “The nation’s banking industry is responding to rapidly evolving business conditions that are unprecedented in our history. To support the industry’s efforts to focus on their employees and customers, I encourage FASB to take these much-needed actions to allow banks to help their communities at this time of need.”

The CECL, which becomes effective this year for Securities and Exchange Commission registrants and for all other companies in 2021, changes accounting standard expected loss methodology and requires institutions to calculate and recognize the lifetime expected loss of a loan at origination. In contrast to the traditional U.S. Generally Accepted Accounting Principles (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.

The Mortgage Bankers Association and other industry trade groups have expressed concerns about the nature of the new CECL rules and the speed in which FASB has sought to implement them. MBA has long-recommended that CECL implementation be delayed pending a quantitative impact analysis to assess the macroeconomic and public policy implications, and to allow for the consideration of potential alternatives and post-issuance field testing.

In a Nov. 19, 2018 letter to Treasury Secretary Steven Mnuchin, MBA said the requirements of the CECL standard “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. 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.”

McWilliams also called for transitions to and exclusions from certain other accounting rules, including excluding COVID-19-related modifications from being considered a concession when determining a troubled debt restructuring classification.

CECLCoronavirusCurrent Expected Credit LossesFederal Deposit Insurance Corp.Financial Accounting Standards BoardGenerally Accepted Accounting PrinciplesJelena McWilliams