Loan Zone: Gathering CECL-Required Data by the Effective Date
We all know it is coming whether we like it or not: New current expected credit loss standards are on the horizon.
Most of the talk about CECL is around the data. Compliance will require each credit union to have several years of historical loan data to execute an allowance for loan and lease losses calculation, which will forecast current and expected future credit losses. We believe that we have set our credit union up for a successful transition to CECL by acting early to have the data and the partners in place to limit the burden of this new rule.
Like many credit unions, we at ELGA Credit Union—with assets of $543 million in Burton, Mich.—currently do not have sufficient historical loan data at our fingertips to meet the demands that CECL will put on us, and that lack of data put us in the market for a solution. Before CECL, we were reviewing portfolio analytics software options to help us better monitor our loan portfolio. With CECL looming, our need for better analytics was heightened. Early last year, we chose Sageworks for our portfolio analytics and ALLL modeling solutions and have started to build the historical database needed to comply with the new rule.
By the CECL effective date—for credit unions, fiscal years beginning after Dec. 15, 2020—we will have over five years of historical data to aid in the calculation of a CECL-compliant ALLL funding. We considered building the model and means for storing historical data ourselves but realized very quickly that going down that road would have taken more resources and more time than we could afford to expend. Our goal is to not let CECL be a significant disruption to our strategic plan now or in the future.
Partnering with Sageworks is helping to minimize the burden of CECL as much as possible while also creating new efficiencies in the areas of commercial loan origination, troubled debt restructuring impairment calculations, ALLL funding and management reporting. We looked at several analytics, commercial loan origination and ALLL vendors before deciding to go with Sageworks for several reasons.
Sageworks has an intuitive end-user interface, knowledgeable support staff and significant expertise in the ALLL space. When we signed with Sageworks, the company was one of the few analytics vendors with a CECL allowance model developed and ready to use. The final deciding factor was that we were able to bundle all of the modules together to satisfy multiple needs in our credit union with one vendor at discounted multi-product pricing. When comparing costs, it was more beneficial to go with Sageworks than to contract with two or three separate vendors for the services we needed.
Since launching Sageworks, we have been able to recreate our current ALLL process and automate it, saving our accounting manager several hours each month. In 2018, we should have enough data in the solution to begin running parallel CECL calculations that we can refine over the next few years, so that by the CECL live date we will have the best model for our institution.
This is a process that will take time to perfect, but we feel the most time-consuming and labor-intensive pieces of the work are now complete. The biggest challenge was getting our data extract created to put into the Sageworks system. Our technology team did a great job programming the extract and now it is running automatically on a daily basis.
Credit unions that have not started preparing for CECL will have some catching up to do. Examiners will be interested in knowing what each credit union is doing to prepare. If your credit union is struggling with creating a compliance plan, many vendors in the marketplace now have software to aid in the process along with consulting services to guide you through implementation. Credit unions that already have the needed historical data in a data warehouse are in a good position to take advantage of a purchased ALLL software product or create their own model.
From talking to my peers, those credit unions with sufficient historical data seem to be in the minority. Beginning the collection and storage of historical loan data should be a top priority. If you have the data, that puts you in a great position to start running calculations to get a better idea of the financial impact CECL may have on your credit union. The more information you have now, the better prepared you will be for the CECL effective date.
Terry Katzur, CCE, is EVP/chief lending officer of $543 million ELGA CU, Burton, Mich., and a CUES member.