CECL, Crystal Clear
"Explain it to me like I'm a Kindergartner," says Tom Cruise in the movie A Few Good Men.
We’ve taken this reference and applied it to the CARES ACT as it relates to 2023 CECL adopters. As such, we’ve taken key sections related to CECL and highlighted them below.
- There is NO change to the CECL implementation timeline. SRC’s, PBE’s and privately held financial institutions are on track to “go live” in 2023. Given the expected challenges ahead with regards to lending, loan restructures & concessions, tracking, and reporting, it will become increasingly important to have the systems, knowledge base, and efficiencies in place to manage such activities.
- Loan modifications on and after March 13, 2020, and related to impacts from COVID-19 are not required to be classified according to ASC 310-40 guidance. This will remain in effect until federal regulating agencies determine otherwise. While the classification of such modifications may be resolved, the actual management responsibility will become increasingly difficult and in higher volume; further encouraging flexibility and management of such modification calculations as well as the evaluation and reporting. We are already getting early signs from our clients that they are modifying billions of dollars worth of loans related to COVID-19.
- Another noteworthy change within the CARES ACT is the reduction in the CBLR or Community Bank Leverage Ratio, which reduces the capital requirement to 8% leverage and gives room for a reasonable grace period should a bank fall below this level. The termination of this policy will be the sooner of December 31, 2020, or when the national emergency related to COVID-19 is terminated.
- Covered loans will carry a 0% risk rating, and there is no requirement to hold capital on these assets. Furthermore, if a covered loan is modified as a result of COVID-19, just as with other modifications, it will not be classified as a TDR until which time the federal regulators deem otherwise.
As many of us may remember from the Great Recession, a robust and efficient means of identifying, isolating, and evaluating loans will be necessary as volume increases. Process efficiency, increased analysis, and data integrity, much like back then, will soon surface again.
The Valuant Advisory team and the ValuCast SaaS platform will provide you the needed horsepower to ensure each of these tasks are successfully executed.