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NCUA Chairman Rodney E. Hood Statement on the Proposed Rule to Address the Transition to the CECL Methodology

July 2020
NCUA Chairman Rodney E. Hood Statement on the Proposed Rule to Address the Transition to the CECL Methodology
Chairman Rodney E. Hood

NCUA Chairman Rodney E. Hood at the NCUA's Headquarters in Alexandria, Virginia.

As Prepared for Delivery on July 30, 2020

Thank you for your presentation.

Regulatory reform for credit unions has been among my top priorities from the beginning of my tenure as chairman NCUA. You have often heard me say that regulations should be effective, but not excessive. The need for such reforms has grown even more urgent with the advent of the COVID-19 pandemic and the associated economic slowdown. Relief from burdensome regulations is essential to ensure that credit unions can continue lending and providing other services to their members.

The proposed CECL change has raised serious questions in the credit union industry, as well as among other smaller financial services providers, as it would entail greater complexity, higher costs and a significantly heavier compliance burden, while bringing little additional benefit to the institutions. Numerous industry leaders have shared with me their concerns about the potential impact of the new standard on the industry, particularly on smaller institutions that work in under-served communities.

I have listened and shared those concerns with Financial Accounting Standards Board’s leaders. Initially, the NCUA determined that phasing-in the effects of the CECL standard, delaying full implementation in January 2023, would give credit unions more time to prepare. Our goal was to provide relief to credit unions that could see relatively large increases to their loan loss reserves when the new accounting standard became effective.

However, that was before the COVID-19 pandemic struck earlier this year. As such, it is unwise to impose a burdensome and costly new regulation on credit unions, particularly smaller institutions in underserved areas, at such a time of great challenge.

As I have noted previously, I believe the compliance costs associated with implementing CECL overwhelmingly exceed the benefits. Credit unions may experience a negative impact on their net worth as a result of CECL implementation. The CECL standard also ignores the continued resource constraints and data system challenges faced by many credit unions in relation to the rest of the financial sector. In our current environment, I am especially concerned that adopting CECL will have a chilling effect on lending, including loans to low-income borrowers.

Although FASB enabled credit unions to delay implementation of CECL until January 1, 2023, the additional time credit unions were afforded to collect data, review data systems, and analyze models is now critically needed to support the credit and depository needs of their members.

As a result, I have written to Chairman Golden respectfully urging that FASB provide a permanent exemption of CECL implementation for credit unions. I hope FASB will act. But if they do not, the proposed regulatory amendments will mitigate the adverse consequences of the capital adjustments resulting from CECL. The proposed rule will also exercise the Board’s statutory authority to exempt small credit unions with less than $10 million in assets from GAAP.

Under the current circumstances, imposing the new CECL standard during such a time of economic upheaval would create additional risk for credit unions that could negatively affect their ability to serve their members. Our focus now should be on crafting policy solutions that encourage lending; strengthening small business and entrepreneurship; and creating the conditions for an ultimate recovery from this economic shock. That is the prudent and appropriate course during this unprecedentedly difficult and challenging time.

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