NCUA updates on CUSOs and CECL implementation
By Cristina Deschaine
The National Credit Union Administration (NCUA) released two updates on January 30, 2023, and February 6, 2023. These new updates are aimed at providing clarification on the current expected credit loss (CECL) implementation date and permissable credit union service organization (CUSO) activities.
Clarification on CECL implementation
All federal and federally insured, state-chartered credit unions with total assets of $10 million or more are required to implement a CECL analysis for financial reporting years beginning after December 15, 2022. To assist with understanding and compliance, the NCUA has published FAQs on their website.
Here are a few notable releases on the published FAQs:
- Credit unions with supervisory committee audits performed as of a fiscal year, and not a calendar year, will most likely still be required to have CECL adopted on January 1, 2023.
- Precedents in establishing a fiscal year-end for CECL adoption include a financial statement audit on, or regularly producing, a full set of financial statements for a 12-month period other than a calendar year. Additionally, if the credit union adopted leases as of a fiscal year, then a precedent is set for aligning CECL with that fiscal year.
- December 31, 2022, balances should be used in estimating the day-one allowance for credit losses (ACL) on loans and leases, investments and off-balance sheet commitments. The change in the pre-CECL allowance to the post-CECL allowance will be recorded in the undivided earnings account.
- Held-to-maturity debt securities will be included in the allowance on a collective basis, like loans and available for sale debt securities. These must be evaluated individually for impairment if the fair value is less than the carrying amount and the credit union expects a loss on the security — whether by expected sale or expectation that the credit union will not recover amortized cost.
- Credit unions with assets under $10 million are expected to determine their allowance for losses using any reasonable reserve methodology that adequately covers known and probable loan losses. They can also use any other applicable standard under state law or regulation for federally insured, state-chartered credit unions.
The NCUA CECL tool is available to assist credit unions with estimating the ACL under the CECL standard. While the tool is intended to be used by credit unions with assets under $100 million, larger credit unions can use the tool if approved by management and the credit union’s auditor.
CUSO updates
On November 26, 2021, NCUA regulation part 712.5 was amended to expand on the list of permissible activities and services for CUSOs. With the expansion, federal credit unions now have the authority to invest in and lend to CUSOs engaged in auto loans, leases, payday alternative loans and other unsecured consumer loans. This is in addition to the previously approved business, consumer mortgage, student and credit card loans.
The NCUA published their guidance statement on February 6, 2023, to remind credit unions of the risk factors associated with CUSOs originating these loans. Depending on the credit union’s relationship with the CUSO, the risks can vary.
Below is a matrix summarizing some of the key risks highlighted in the updated guidance, based on the various relationships a credit union may have with a CUSO. For a more complete listing on CUSO risk, see the examiner’s guide.
| Lender | Investor/owner | Client/customer | |
|---|---|---|---|
| Credit risk |
Cash-flow disruptions |
Loss of investments |
Loan underwriting standards |
| Strategic risk |
Financial loss |
Fines, lawsuits and litigation |
Loss of business function and reputation risk |
| Compliance risk |
Enforcement action, litigation and reputation risk |
Enforcement action, litigation and reputation risk |
Enforcement action, litigation and reputation risk |
| Fair Lending |
Inequity in treatment of borrowers |
Inequity in treatment of borrowers |
Inequity in treatment of borrowers |
| Unfair, Deceptive, or Abusive Acts and Practices |
Negative public linkage between the CUSO and the credit union |
Negative public linkage between the CUSO and the credit union |
Negative public linkage between the CUSO and the credit union |
| Reputation risk |
Security of member information |
Member confusion in differentiating CUSO from the credit union |
Security of member information |
Credit unions are urged to conduct sufficient due diligence prior to engaging with CUSOs to fully understand the potential risk exposure.
Additional information and support surrounding CECL implementation and CUSO risk management are available on the NCUA’s website.
How Wipfli can help
Let Wipfli help you streamline your CECL implementation. Our experienced team provides you with the training, tools and knowledge you need to be confident in your credit union’s compliance. Contact us today for more on the solutions we can offer.
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