Smaller banks and credit unions now have until 2023 to comply with the Financial Accounting Standards Board’s new credit loss accounting rule. The standard, called Current Expected Credit Losses — or CECL, for short — requires lenders to record expected future losses as soon as loans are originated.
The board voted yesterday to extend the CECL implementation deadline for small public banks, private lenders, credit unions, and other institutions deemed Small Reporting Companies (SRC). Securities and Exchange Commission-registered institutions must adopt the new standard by Jan. 1, 2020.
Some auto lenders have already started to test implementation of CECL accounting.
“We elected CECL for a few different reasons, one of which is because we wanted to minimize the volatility in our financial results that would occur under fair value in a period of changing interest rates,” said Doug Busk, treasurer of Credit Acceptance Corp., in the company’s second-quarter earnings call. “That volatility could have a material impact on our financial results and financial conditions. So CECL has less volatility relative to market-based interest rates.” Busk noted at the time that the company would have additional information to share in third-quarter earnings, which are slated for release later this month.
Meanwhile, Santander Consumer USA is running CECL in tandem with its current accounting methodology based on incurred losses. “In terms of CECL, we are running the parallels,” said Chief Financial Officer J.C. Alvarez in a second-quarter earnings call. “We expect to be able to come back with better guidance of the impact in the Q3 earnings call.” Santander will release third-quarter results on Oct. 30.
Consumer Portfolio Services, too, is experimenting with CECL implementation. “Because the traditional allowance is only really forecasting 12 months, in a pro forma CECL adoption environment, you’re looking at a significant additional supplement to the allowance,” CFO Jeff Fritz said in a July 25 earnings call. “And we’re probably not far enough along to estimate that, but it’s a material number. The ground is shifting below our feet on the CECL implementation timeline.”
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