Increased loss reserves from Current Expected Credit Losses (CECL) requirements, and the resulting transparency required from auto lenders, could ease investor concerns over the coronavirus’ impact on credit losses said Mark Zandi, chief economist at Moody’s Analytics, during a webinar presentation on Monday.
“CECL will lead to better transparency across the financial system and make it less likely that we get in the type of environment where [investors] just bail because they didn’t have enough information to make an assessment,” Zandi said.
Many auto lenders rely on investor confidence to help them secure funding through capital markets.
The Financial Accounting Standards Board’s CECL rule requires lenders to reserve for the lifetime of a loan’s losses upon origination, which could double loss provisions for some auto financiers. Lenders who file with the Securities and Exchange Commission were required to adopt the accounting standard Jan. 1, while smaller banks and credit unions have until 2023 to implement the rule, thanks to a previous extension.
As big banks adopted CECL in January, the increase in the allowance for credit losses ranged from $1.5 billion to $4.3 billion, according to fourth-quarter earnings reports from Bank of America, JPMorgan Chase & Co. and Wells Fargo Co.
In light of the COVID-19 crisis, there have been concerns voiced around the implementation of CECL as the negative impacts of the pandemic are likely to result in “higher than anticipated” increases credit loss allowances for banks, Federal Deposit Insurance Corp. Chairman Jelena McWilliams wrote in a March 19 letter to FASB.
The Federal Reserve will also grant an optional extension for banks that were required to adopt CECL this year, the central bank noted March 27. Banks opting for the extension can “mitigate the estimated regulatory capital effects for up to two years,” the Fed noted.
While some lenders would rather postpone implementation of CECL, Credit Acceptance Corp., for one, has already elected to use CECL in its accounting, Treasurer Doug Busk said during a second-quarter earnings call last year. Santander Consumer USA was also running CECL in tandem with its current accounting as of Oct. 30, 2019. And Consumer Portfolio Services was experimenting with CECL as of July 25, 2019, Chief Financial Officer Jeff Fritz said during an earnings call.