Transition to the Current Expected Credit Loss Methodology
Final rule.
CFR Part: "12 CFR Part 702"
RIN Number: "RIN 3133-AF03"
Citation: "86 FR 34924"
Page Number: "34924"
"Rules and Regulations"
Agency: "
SUMMARY: This final rule facilitates the transition of federally insured credit unions (FICUs) to the current expected credit loss (CECL) methodology required under Generally Accepted Accounting Principles (GAAP). The final rule provides that, for purposes of determining a FICU's net worth classification under the prompt corrective action (PCA) regulations, the Board will phase-in the day-one adverse effects on regulatory capital that may result from adoption of CECL. Consistent with regulations issued by the other federal banking agencies, the final rule will temporarily mitigate the adverse PCA consequences of the day-one capital adjustments, while requiring that FICUs account for CECL for other purposes, such as Call Reports. The final rule also provides that FICUs with less than
DATES:
Effective
FOR FURTHER INFORMATION CONTACT: Policy and Accounting:
SUPPLEMENTARY INFORMATION:
I. This Final Rule
II. Background
A. CECL Accounting Methodology
B. The Board's
III. Legal Authority
A. The Board's Rulemaking Authority, Generally
B. CECL Transition
C. Small FICU Charges for Loan Losses
D. Alternatives to GAAP
IV. Discussion of the Public Comments on the
A. The Comments, Generally
B. Comments Regarding Transition Phase-In
C. Comments Regarding GAAP Exemption for Smaller FICUs
V. Description of Final Rule
A. New Subpart G to Part 702
B. Eligibility for the Transition Provisions
C. NCUA Implementation of the Transition Provisions
D. Mechanics of the CECL Transition Provisions
E. Example of Transition Schedule
F. Statutory Limit on Amount of Net Worth Ratio Change
G. NCUA Oversight
H. Small FICU Determinations of Charges for Loan Losses
VI.
VII. Regulatory Procedures
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Executive Order 13132 on Federalism
D. Assessment of Federal Regulations and Policies on Families
E. Small Business Regulatory Enforcement Fairness Act
I. This Final Rule On
FOOTNOTE 1 85 FR 50964 (
1. The Board has made a technical change to the regulatory text for purposes of clarity. The Board has removed the references to specific calendar dates in the discussion of the transition period for the phase-in. The regulatory text now consistently refers to fiscal years.
2. The final rule also clarifies that state-chartered FICUs with less than
Section IV. of this preamble summarizes the significant issues raised by the public commenters on the proposed rule, as well as the Board's responses to these issues, including the Board's rationale for making the change listed above.
II. Background
A. CECL Accounting Methodology
The CECL standard applies to all banks, savings associations, credit unions, /2/ and financial institution holding companies, regardless of size, that file regulatory reports for which the reporting requirements conform to GAAP. Adoption of CECL is expected to result in greater transparency of expected losses at an earlier date during the life of a loan.
FOOTNOTE 2 CECL applies to all credit unions, irrespective of whether the credit union is federally insured or whether it is chartered federally or under state law. END FOOTNOTE
FOOTNOTE 3 FASB originally established the following three categories of entities subject to CECL: (1) PBE SEC filers; (2) PBEs that are not
FOOTNOTE 4 FASB ASU No. 2016-13, Financial Instruments--Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,
CECL differs from the incurred loss methodology currently used by FICUs in several key respects. Most significantly for purposes of this rulemaking, CECL requires the recognition of lifetime expected credit losses for financial assets measured at amortized cost, not just those credit losses that have been incurred as of the reporting date. CECL also requires the incorporation of reasonable and supportable forecasts in developing an estimate of lifetime expected credit losses, while maintaining the current requirement for consideration of past events and current conditions. Furthermore, the probable threshold for recognition of allowances in accordance with the incurred loss methodology is removed under CECL. Taken together, estimating expected credit losses over the life of an asset under CECL, including consideration of reasonable and supportable forecasts but without applying the probable threshold that exists under the incurred loss methodology, results in earlier recognition of credit losses. /5/
FOOTNOTE 5 See Frequently Asked Questions on the New Accounting Standard on Financial Instruments--Credit Losses, issued by the
Upon adoption of CECL, an institution will record a cumulative-effect adjustment to retained earnings (known as "the day-one adjustment"). The day-one adjustment will be equal to the difference, if any, between the amount of credit loss allowances required under the incurred loss methodology and the amount of credit loss allowances required under CECL. A critical consideration for institutions subject to the new accounting rules will be the impact of CECL on capital. Institutions could experience a sharp increase in expected credit losses on the effective date as a result of the day-one adjustment, which could lower their capital classification under relevant statutory and regulatory authorities (such, as for example, under the Board's PCA regulations for credit unions).
B. The Board's
The Board issued the
FOOTNOTE 6 See the
Under the proposed rule, the phase-in would only be applied to those FICUs that adopt the CECL methodology for fiscal years beginning on or after
FICUs would continue to calculate their net worth in accordance with GAAP and would also continue to be required to account for CECL for all other purposes, such as Call Reports. Further, under the proposed rule, FICUs with less than
Interested readers should refer to the preamble of the Board's
III. Legal Authority
A. The Board's Rulemaking Authority, Generally
The Board is issuing this final rule pursuant to its authority under the
FOOTNOTE 7 12 U.S.C.
FOOTNOTE 8 12 U.S.C. 1766(a). END FOOTNOTE
FOOTNOTE 9 12 U.S.C. 1790d. Other provisions of the FCU Act providing the Board with specific rulemaking authority include section 207 (12 U.S.C. 1787), which is a specific grant of authority over share insurance coverage, conservatorships, and liquidations. Section 209 (12 U.S.C. 1789) grants the Board plenary regulatory authority to issue rules and regulations necessary or appropriate to carry out its role as share insurer for all FICUs. END FOOTNOTE
B. CECL Transition
Section 216 of the FCU Act authorizes the NCUA Board to issue regulations adjusting the net worth ratio requirements for FICUs if the other "banking agencies increase or decrease the required minimum level for the leverage limit" pursuant to section 38 of the
FOOTNOTE 10 12 U.S.C. 1790d(c)(2)(A). END FOOTNOTE
FOOTNOTE 11 12 U.S.C. 1790d(c)(2)(B). END FOOTNOTE
With regards to the other factor identified in the quoted statutory language, the
FOOTNOTE 12 Termed the "leverage ratio" in the banking agencies' regulations governing capital adequacy standards. See, 12 CFR 12 CFR 3.10 (OCC), 217.10 (FRB), and 324.10 (FDIC). END FOOTNOTE
FOOTNOTE 13 The Board also finds that the other banking agencies'
The effects of the proposed phase-in on a FICU's net worth calculations are consistent with section 216 of the FCU Act and closely modeled on the CECL transition provisions issued by the other banking agencies. Specifically, the final rule is narrowly tailored to temporarily mitigating the impacts of CECL adoption on the PCA classification of a FICUs net worth. This final rule does not adjust the numeric net worth ratios under the NCUA's PCA system. Further, the rule does not revise the definition of net worth, and FICUs will continue to calculate their net worth and net worth ratios in accordance with existing statutory and regulatory requirements. The sole purpose of the phase-in is to aid FICUs in adjusting to the new GAAP standards in a uniform manner and without disrupting their ability to serve their members.
The Board notes that while section 216 defines "net worth"--the numerator for determining the net worth ratio--it does not define the term "total assets," which comprises the denominator of the equation. The definition of the term is left to the regulatory discretion of the Board. The Board has elected to exercise this discretion and defined "total assets" in part 702. Specifically, the regulations provide that a FICU's total assets may be measured by either its (1) average quarterly balance; (2) average monthly balance; (3) average daily balance; or (4) quarter-end balance. /14/ As an alternative to the phase-in that would be provided by this final rule, the Board could have elected to revise the definition of "total assets" in a manner enabling FICUs to effect the CECL day-one adjustments without undue adverse consequences. The Board opted for the phase-in given its simplicity and ease of administration. Nonetheless, the Board acknowledges that an alternative legal basis exists for rulemaking to mitigate the consequences of CECL implementation.
FOOTNOTE 14 12 CFR 702.2(k). END FOOTNOTE
C. Small FICU Charges for Loan Losses
Section 202 of the FCU Act requires that, in general, "applicable reports and statements required to be filed with the Board shall be uniform and consistent with" GAAP. /15/ The statute, however, also provides an exception to GAAP compliance for FICUs with total assets of "less than
FOOTNOTE 15 12 U.S.C. 1782(b)(6)(C)(i). END FOOTNOTE
FOOTNOTE 16 12 U.S.C. 1782(b)(6)(C)(iii). END FOOTNOTE
The Board's regulations in
The Board also notes that section 202 of the FCU Act could also potentially, as an alternative to the provisions discussed above, authorize the Board to provide a transition of the day-one effects of CECL implementation. This provision authorizes the Board to prescribe an accounting principle for application to any FICU if the Board determines that the application of a GAAP principle is not appropriate. Because the Board has clear authority to effect the transition to CECL under section 216, it is not necessary to rely on section 202.
IV. Discussion of the Public Comments on the
A. The Comments, Generally
The public comment period on the proposed rule closed on
Thirteen of the commenters objected to FASB's application of CECL to FICUs, largely due to the anticipated negative impact of the day-one adjustment. The commenters wrote that FICUs building reserves to meet the CECL benchmark will be diverting funds that could otherwise be used to provide credit to members and communities during the ongoing COVID-19 event. They urged the NCUA to continue exploring all avenues, including working with FASB, to exempt FICUs from the CECL requirements.
While believing CECL should not apply to FICUs at all, the commenters unanimously supported the proposed rule. The commenters commended the Board's efforts to assist FICUs with the transition to the CECL methodology. Several of these commenters, however, also offered suggested changes to the proposed rule.
NCUA Response: The Board appreciates the support expressed by the commenters, as well as the specific questions and concerns raised in their individual comments. The Board has addressed these specific comments below. The Board reiterates its belief that, given the unique characteristics of the credit union industry, the CECL accounting standards should not apply to FICUs. The Board will continue to work with FASB, the other banking agencies, and appropriate stakeholders to exempt FICU from these standards.
B. Comments Regarding Transition Phase-In
Comment: Mandatory opt-in for transition phase-in. Under the proposed rule, FICUs would not have the option of electing whether to opt into (or out of) the transition provisions. Several commenters urged the NCUA to reconsider this automatic approach and provide a FICU with the ability to opt into or out of the transition provisions based on its financial condition. The commenters wrote that, for strategic reasons, some FICUs may wish to recognize the full cost and adverse effect on their capital of CECL in one year rather than phasing in the adverse effects over a prolonged period. The commenters wrote that if the NCUA decides it must determine eligibility, the agency should expand the factors upon which the determination is made beyond a reduction in earnings caused by the application of CECL. For example, the NCUA might consider additional factors, such as asset quality and overall risk in the loan portfolio, current financial condition of the credit union, and the current state of the economy at the time of the determination. Alternatively, the NCUA could limit the mandatory opt-in for FICUs with a lower CAMEL rating.
NCUA Response: The Board has declined to adopt these comments. As the commenters note, it is true that some FICUs will have a business rationale for recognizing the day-one effects of CECL on their capital ratios. This final rule does not compel any FICU to make use of the transition phase-in. A FICU that determines adoption of CECL is in its best interests has the option to do so, and is free to make this decision at any time until the effective date established by FASB for CECL implementation (fiscal years beginning after
Comment: Option for longer phase-in. Two commenters suggested that the NCUA consider granting longer phase-in requests when a FICU's projected capital level after three years is expected to remain below normal. According to the commenters, such flexibility would allow FICUs to focus on restoring capital levels during an appropriately tailored phase-in timeframe rather than bracing for adverse supervisory consequences or the administrative burden of heightened examiner scrutiny.
NCUA Response: The Board believes that the three-year period will suffice to alleviate the most detrimental impacts on a FICU's capital ratios resulting from adoption of CECL. Further, and as noted above, the Board is promulgating this rule pursuant to the legal authority conferred by section 216 of the FCU Act. In general, section 216 charges the NCUA with establishing PCA regulations that are "comparable" to section 38 of the FDI Act--the statute that applies PCA to other federally insured depository institutions. /17/ More specifically with regards to this rulemaking, section 216 authorizes the Board to "correspondingly" revise its regulations in response to changes made by the other banking agencies to the leverage limit under section 38 of the FDI Act. /18/ In accordance with these statutory directives, the phase-in provided by this final rule is modelled on the transition provisions adopted by the other banking agencies, and provides a similar three- year phase-in period. /19/ The Board therefore declines to make the suggested change in order to maintain consistency with the CECL transition provisions issued by the other banking agencies.
FOOTNOTE 17 12 U.S.C. 1790d(b)(1)(A). Section 38 of the FDI Act, 12 U.S.C. 1831o, was added by section 131 of the Federal Deposit Insurance Corporation Improvement Act, Public Law 102-242, 105 Stat. 2236 (1991). END FOOTNOTE
FOOTNOTE 18 Supra, note 10. END FOOTNOTE
FOOTNOTE 19 Supra, note 6. END FOOTNOTE
Comment: Redefining "total assets" in the net worth calculation. Related to the preceding comment, one commenter noted the preamble language stating that "[a]s an alternative to the to the phase-in . . . the Board could have elected to revise the definition of 'total assets' in a manner enabling FICUs to effect the CECL day-one adjustments without undue adverse consequences." /20/ The commenter wrote that, while the NCUA's reliance on the authority provided by section 216 of the FCU Act is understandable from an administrative standpoint, the agency should consider issuing using the alternative "total assets" framework to grant FICUs more options, such as the ability to choose a longer phase-in period.
FOOTNOTE 20 Supra note 1 at 50966-50967. END FOOTNOTE
NCUA Response: The commenter is correct that the Board, in large measure, opted for the phase-in due to its ease of administration. Ensuring the administrative simplicity of its regulations is a significant consideration for the Board, especially during this pandemic period and the resulting economic fallout. Ease of administration, however, was only one of several considerations that factored into the Board's decision. In making note of the statutory authority to re-define "total assets" in the preamble to the
Comment: Non-calendar fiscal years. One commenter objected that the proposed regulatory text measures the phase-in benefit by calendar dates and fails to account for FICUs that have non-calendar fiscal years. Specifically, the commenter wrote that the regulatory text refers to specific calendar date in the provisions for measuring the CECL transition amount. The commenter wrote that the calendar dates fail to capture the impact for FICUs with non-calendar fiscal years. The commenter wrote that this is inconsistent with the preamble, which references a credit union's fiscal year and, in Section III.E., refers to a hypothetical FICU with a calendar fiscal year, impliedly acknowledging that FICUs may have a fiscal year other than a calendar fiscal year. /21/ The commenter also noted that the regulation issued by the other banking agencies defines the CECL transition amount based on the regulated entity's fiscal year without referencing specific dates. /22/ The commenter suggested that to remedy this problem, the NCUA should follow the approach of the other banking agencies and define the CECL transitional amount by reference to a credit union's fiscal year rather than set calendar dates.
FOOTNOTE 21 Id. at 50968. END FOOTNOTE
FOOTNOTE 22 12 CFR 3.301(b)(2). END FOOTNOTE
NCUA Response: As the commenter notes, the preamble to the proposed rule correctly provides that the transition period is based on the credit union's fiscal year (which may be a non-calendar year in the case of state-chartered credit unions) and not on specific dates. The commenter notes preamble language referencing the possibility of a non-calendar year fiscal year. Another example is the preamble language providing that "[t]he difference in retained earnings constitutes the transitional amount that would be phased-in to the net worth ratio calculation over the proposed transition period, which would be the three-year period (twelve quarters) beginning the first day of the fiscal year in which the FICU adopts CECL" (emphasis added). /23/ The Board agrees that the references to specific dates were potentially confusing. The Board has therefore removed the references to specific calendar dates, and the regulatory text now consistently refers to fiscal years.
FOOTNOTE 23 Supra note 1, at 50967. END FOOTNOTE
Comment: Calculation of transitional amount. One commenter noted that proposed
NCUA Response: As noted in the preceding response, the NCUA has removed the references to specific calendar dates in the regulatory text. For purposes of calculating the fourth through twelfth quarters of the transition period, the regulatory text now provides that the CECL transitional amount is equal to the difference between the credit union's retained earnings as of the end of the fiscal year in which the credit union adopts CECL and the credit union's retained earnings as of the beginning of its next fiscal year.
Comment: Examinations and stress testing. Several comments, while generally supportive of the proposed rule, had questions regarding the NCUA examination and stress testing protocols resulting from its implementation. One of these commenters suggested that the NCUA should consider implementing streamlined procedures for evaluating capital plans (including net worth restoration plans) when a FICU is expected to encounter capital stresses related to CECL adoption that persist after any applicable phase-in period. Another commenter warned that incorporating CECL into the stress testing regimen will increase capital volatility within the modelling and complicate stress testing estimations. The commenter urged the NCUA to continue discussions with covered FICUs and state regulators to ensure the regulatory stress testing framework can incorporate CECL when appropriate.
NCUA Response: The NCUA will monitor and periodically assess the efficacy of the CECL transition phase-in provisions. The Board will take these comments regarding capital plans and stress testing under advisement and, should it be deemed necessary, issue supplemental guidance or implement revised procedures to assist FICUs in their implementation of the rule.
Comment: Need for Call Report guidance. One of the commenters requested clarification on how the phased-in retained earnings would be reported on a FICU's Call Report. For example, the commenter asked whether the Call Report will reflect the phase-in adjustment through the addition of a new field.
NCUA Response: The Board notes that a new field has been provided in the Call Report for purposes of the phase-in. The NCUA will issue additional guidance and Call Report revisions as deemed necessary to assist FICUs in implementing this final rule.
C. Comments Regarding GAAP Exemption for Small FICUs
Comment: Future ability to phase-in CECL. Five commenters encouraged the NCUA to authorize a FICU accumulating
NCUA Response: The Board has not revised the rule in response to these commenters. The final rule is designed to facilitate a FICU's transition to CECL without disrupting its ability to serve its members as a result of a PCA re-classification. Unlike FICUs that already (or soon will) exceed the
Comment: Transition phase-in for small federally insured state-chartered credit unions subject to GAAP. As provided in the preamble to the proposed rule, the exemption from the GAAP standards does not extend to smaller State-chartered FICUS that are required to comply with GAAP under State law. /24/ One commenter inquired about the ability of these state-chartered FICUs to use the transition phase-in. The commenter noted that the regulatory text does not specify if these credit union are eligible for the transition provision. The commenter recommended the NCUA's final rule should make the proposed three-year phase-in available to FICUs that must follow GAAP, regardless of the size of the FICU.
FOOTNOTE 24 Id. END FOOTNOTE
NCUA Response: The transition provisions were designed to apply to all FICUs that adopt CECL, irrespective of their asset size. As the preamble to the proposed rule makes clear, the only FICUs "not eligible for the phase in" are "smaller FICUs that elect to use a non-GAAP measure." /25/ State-chartered FICUs that are required by state law to follow GAAP are prohibited from making such election. Accordingly, the Board intended them to be eligible for the transition relief provided by this rulemaking. The Board has revised the regulatory text to clarify the eligibility of these credit unions. The final rule clarifies that state-chartered FICUs with less than
FOOTNOTE 25 Id. END FOOTNOTE
Alternative GAAP structure for FICUs. The preamble to the proposed rule notes that "section 202 of the FCU Act could also potentially, as an alternative to the provisions [of the proposed rule], authorize the Board to provide a transition of the day-one effects of CECL implementation." /26/ This provision authorizes the Board to prescribe an alternative accounting principle to GAAP, so long as it is "no less stringent" than the GAAP principle it replaces. /27/
FOOTNOTE 26 Id. END FOOTNOTE
FOOTNOTE 27 12 U.S.C. 1782(b)(6)(C)(ii). END FOOTNOTE
Four commenters wrote that the NCUA should consider the question of what constitutes an accounting standard that "is no less stringent" than GAAP for the purpose of expanding the scope of CECL relief. In doing so, commenters suggested that the NCUA might explore the possibility of a revised incurred loss methodology that allows more flexible evaluation of qualitative and environmental factors. The commenters also suggested that the NCUA should work directly with the FASB to advance an interpretation of the "no less stringent" requirement that recognizes the unique burden that CECL poses for FICUs. One of these commenters wrote that the NCUA should request that FASB recognize the incurred loss methodology as an appropriate alternative accounting principle under section 202 of the FCU Act.
NCUA Response: The development of an alternate set of accounting standards that are "no less stringent" than GAAP would be a complex and time-consuming endeavor necessitating consultations with FASB and other stakeholders. At this time, the Board believes that GAAP compliance is the most effective way to help ensure that financial reporting is transparent and consistent between FICUs. The Board, however, will continue to explore ways to alleviate the compliance burdens imposed by GAAP. As noted, the Board is committed to working with FASB, the other banking agencies, and appropriate stakeholders on a possible exemption for FICUs from the CECL accounting standards.
Comment: Transition phase-in for small federally insured state-chartered credit unions subject to GAAP. As provided in the preamble to the proposed rule, the exemption from the GAAP standards does not extend to smaller state-chartered FICUS that are required to comply with GAAP under state law. /28/ One commenter inquired about the ability of these state-chartered FICUs to use the transition phase-in. The commenter noted that the regulatory text does not specify if these credit union are eligible for the transition provision. The commenter recommended the NCUA's final rule should make the proposed three-year phase-in available to FICUs that must follow GAAP, regardless of the size of the FICU.
FOOTNOTE 28 Id. END FOOTNOTE
NCUA Response: The transition provisions were designed to apply to all FICUs that adopt CECL, irrespective of their asset size. As the preamble to the proposed rule makes clear, the only FICUs "not eligible for the phase in" are "smaller FICUs that elect to use a non-GAAP measure." /29/ State-chartered FICUs that are required by state law to follow GAAP are prohibited from making such election. Accordingly, the Board intended them to be eligible for the transition relief provided by this rulemaking. The Board has revised the regulatory text to clarify the eligibility of these credit unions. The final rule clarifies that state-chartered FICUs with less than
FOOTNOTE 29 Id. END FOOTNOTE
Comment: GAAP relief for federally insured state-chartered credit unions. As noted above, the preamble to the proposed rule provides that state-chartered FICUs subject to state laws and regulations may be required to comply with GAAP or other accounting standards under applicable state requirements. /30/ One commenter wrote that approximately half the states either have explicit statutory or regulatory requirements for all FISCUs to comply with GAAP, or it is unclear whether such an express requirement exists. Two commenters suggested that the NCUA should work with the appropriate supervisory authorities to promote regulatory relief in states where the impediments are regulatory in nature. For those states with statutory mandates regarding GAAP adherence, the commenter asked that the NCUA pursue potential legislative fixes and to notify state legislative leaders of the exemption and the advantage federal credit unions would have over similarly sized FISCUs if not provided legislative relief.
FOOTNOTE 30 Supra note 1, at 50965. END FOOTNOTE
NCUA Response: The Board will continue to work with FASB and other stakeholders, including appropriate State regulators, to minimize the detrimental impacts of GAAP compliance on FICUs. The Board also notes that, as discussed in the preceding comment response, state-chartered FICUs with less than
V. Description of Final Rule
A. New Subpart G to Part 702
The final rule adds a new subpart G to the PCA regulations in 12 CFR part 702, captioned "CECL Transition Provisions." New subpart G applies to FICUs that meet the eligibility criteria specified in the final rule. Notwithstanding the CECL transition provisions, all other aspects of part 702 would continue to apply.
B. Eligibility for Transition Provisions
FICUs that have not adopted CECL prior to their first fiscal year beginning after
C. NCUA Implementation of the Transition Provisions
Eligible FICUs would not have the option of electing whether to opt-into (or out of) the transition provisions. Although this differs from the other banking agencies' rule, it is consistent with the goal of this rulemaking to mitigate disruptions caused by CECL adoption. As noted, eligibility for the transition provision is limited to those FICUs for which the phase-in is truly necessary--that is, they will experience a reduction in retained earnings as a result of CECL. The Board believes that requiring these FICUs to affirmatively opt-into the transition provisions would constitute an unnecessary administrative exercise to confirm their already obvious need for the phase-in. Automatic implementation of the phase-in by the NCUA will help to ensure its uniform application and that its benefits are provided to the greatest possible number of eligible FICUs.
The final rule issued by the other banking agencies relies on banking organizations to calculate the phase-in amounts. In contrast, the NCUA will make the required phase-in calculations. As above, the Board has determined that this will help ensure the uniform implementation of the phase-in, as well as facilitate the accurate calculation of the transition amounts.
D. Mechanics of the CECL Transition Provisions
To calculate the transitional amount under the CECL transition provision, the NCUA will compare the differences in a FICU's retained earnings between: (1) The FICU's closing balance sheet amount for the fiscal year-end immediately prior to its adoption of CECL (pre-CECL amount); and (2) the FICU's balance sheet amount as of the beginning of the fiscal year in which the FICU adopts CECL (post-CECL amount). The difference in retained earnings constitutes the transitional amount that would be phased-in to the net worth ratio calculation over the proposed transition period, which would be the three-year period (twelve quarters) beginning the first day of the fiscal year in which the FICU adopts CECL. Specifically, a FICU's CECL transitional amount would be the difference between the pre-CECL and post-CECL amounts of retained earnings.
The NCUA will phase-in the FICU's CECL transitional amount. The NCUA would also phase-in the CECL transitional amount to the FICU's total assets for purposes of the net worth ratio. Both the FICU's retained earnings and total assets would be deemed increased by the CECL transitional amount. The CECL transitional amount would be phased-in over the transition period on a straight-line basis automatically as part of the Call Report.
As noted, FICUs are currently required to commence implementation of the standard for fiscal years beginning after
Beginning with the fourth reporting quarter of the fiscal year in which the FICU adopts CECL, the NCUA will deem retained earnings and total assets to be increased by 67 percent of the FICU's CECL transitional amount. This percentage will be decreased to 33 percent beginning with the fourth quarterly Call Report of the following fiscal year (the eighth reporting quarter of the FICU's CECL implementation). Commencing with the twelfth reporting quarter of the FICU's CECL implementation, the FICU's net worth ratio will completely reflect the day-one effects of CECL. All other items remaining equal, this computation will result in a gradual phase-in of the CECL day-one effects.
E. Example of Transition Schedule
As an example of the proposed phase-in, consider a hypothetical FICU that has a calendar fiscal year. On the closing balance sheet date immediately prior to adopting CECL, the FICU has
Table 1 presents the example above in tabular format:
Table 1-Example of a CECL Transition Provision Schedule Transitional amounts applicable during each quarter of the transition period (12 quarters total) Quarters 1-3 Quarters 4-7 Quarters 8-11 Quarter 12 In thousands Transitional amount First three Four quarters at 67% Four quarters Full quarters (4th quarter of at 33% recognition of 2023 2023 and first (4th quarter of of day-one three quarters 2024 and first adjustment of 2024) three quarters (commencing of 2025) 4th quarter of 2025) Increase retained earnings and$ 200 $ 200 $ 134 $ 66 0 total assets by the CECL transitional amount
F. Statutory Limit on Amount of Net Worth Ratio Change
Section 216 of the FCU Act limits any change to the net worth ratio thresholds for each of the five net worth categories to "an amount that is equal to not more than the difference between the required minimum level most recently established by the Federal banking agencies and 4 percent of total assets (with respect to institutions regulated by those agencies)." /31/ The limitation is not applicable to this final rule because, as noted above, the Board is following the lead of the other banking agencies and not modifying any specific net worth ratio threshold amount. Therefore, applying this element would be impracticable and would frustrate the purpose of the statutory provision. While the effect of the proposed regulatory amendments will be to adjust the calculation of the net worth ratios and, in some instances, the resultant net worth classifications, the actual numeric threshold amounts will remain the same. For example, a FICU will continue to be "well capitalized" if its net worth ratio is 7 percent or higher and it meets any applicable risk-based net worth requirement.
FOOTNOTE 31 12 U.S.C. 1790d(c)(2)(A). END FOOTNOTE
G. NCUA Oversight
For purposes of determining whether a FICU is in compliance with its PCA requirements, the NCUA will use the FICU's net worth ratio as adjusted by the CECL transition provision. Through the supervisory process, the NCUA will continue to examine credit loss estimates and allowance balances regardless of whether the FICU is subject to the CECL transition provision. In addition, the NCUA may examine whether FICUs will have adequate amounts of capital at the expiration of their CECL transition provision period.
H. Small FICU Determination of Charges for Loan Losses
As discussed, section 202 of the FCU Act provides an exception for FICUs with less than
The Board does note, however, that pursuant to section 202 state-chartered, federally insured credit unions subject to state laws and regulations may be required to comply with GAAP or other accounting standards under applicable State requirements. These credit unions are eligible for the phase-in.
VI.
The Senate Committee Report to the Financial Services and General Government Appropriations Act, 2020, /32/ directs the
FOOTNOTE 32 Division C of the Consolidated Appropriations Act, 2020; Public Law 116-93, approved
FOOTNOTE 33 Senate Report 116-111, at page 11. END FOOTNOTE
FOOTNOTE 34
While the report affirms the
FOOTNOTE 35 Id., at page 5. END FOOTNOTE
FOOTNOTE 36 Id. END FOOTNOTE
FOOTNOTE 37 Id. END FOOTNOTE
FOOTNOTE 38 Id., at pages 28-29. END FOOTNOTE
This final rule is consistent with the
VII. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small entities. /39/ For purposes of this analysis, the NCUA considers small credit unions to be those having under
FOOTNOTE 39 5 U.S.C. 603(a). END FOOTNOTE
FOOTNOTE 40 80 FR 57512 (
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in which an agency by rule creates a new paperwork burden on regulated entities or increases an existing burden. /41/ For purposes of the PRA, a paperwork burden may take the form of a reporting, disclosure or recordkeeping requirement, each referred to as an information collection. The changes to part 702 may revise existing information collection requirements to the Call Report. Should changes be made to the Call Report, they will be addressed in a separate
FOOTNOTE 41 44 U.S.C. 3501-3520. END FOOTNOTE
C. Executive Order 13132, on Federalism
Executive Order 13132 /42/ encourages independent regulatory agencies to consider the impact of their actions on state and local interests. The NCUA, an independent regulatory agency, as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order to adhere to fundamental federalism principles. The final rule would not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. The Board has therefore determined that this rule does not constitute a policy that has federalism implications for purposes of the executive order.
FOOTNOTE 42 Executive Order 13132 on Federalism was signed by former
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule will not affect family well-being within the meaning of Section 654 of the
FOOTNOTE 43 Public Law 105-277, 112 Stat. 2681 (1998). END FOOTNOTE
E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) /44/ generally provides for congressional review of agency rules. A reporting requirement is triggered in instances where the NCUA issues a final rule as defined by section 551 of the Administrative Procedure Act. /45/ An agency rule, in addition to being subject to congressional oversight, may also be subject to a delayed effective date if the rule is a "major rule." The NCUA does not believe this rule is a "major rule" within the meaning of the relevant sections of SBREFA. As required by SBREFA, the NCUA has submitted this final rule to the
FOOTNOTE 44 Public Law 104-121, 110 Stat. 147 (1996). END FOOTNOTE
FOOTNOTE 45 5 U.S.C. 551. END FOOTNOTE
List of Subjects in 12 CFR Part 702 Credit unions, Investments, Reporting and recordkeeping requirements.
By the National Credit Union Administration Board, this 24th day of
Secretary of the Board.
For the reasons discussed above, the NCUA amends 12 CFR part 702 as follows:
PART 702--CAPITAL ADEQUACY
1. The authority citation for part 702 continues to read as follows:
Authority:12 U.S.C. 1766(a), 1790d.
2. Revise
*****
(d) * * *
(1)(i) Federally insured credit unions with total assets of
(ii) Federally insured credit unions with total assets of less than
(A) Any reasonable reserve methodology (incurred loss) provided it adequately covers known and probable loan losses; or
(B) In the case of Federally insured, State-chartered credit unions, any other applicable standard under State law or regulation;
*****
3. Add subpart G, consisting of [Sec.]
Subpart G--CECL Transition Provisions
Sec. 702.701Authority, purpose, and scope.
702.702Definitions.
702.703CECL transition provisions.
(a) Authority. This subpart is issued by the National Credit Union Administration Board pursuant to section 216 of the Federal Credit Union Act, 12 U.S.C. 1790d, as added by section 301 of the Credit Union Membership Access Act, Public Law 105-219, 112 Stat. 913 (1998).
(b) Purpose. This subpart provides for the phase in of the adverse effects on the regulatory capital of federally insured credit unions that may result from the adoption of the current expected credit losses (CECL) accounting methodology.
(c) Scope. (1) The transition provisions of this subpart apply to Federally insured credit unions, whether Federally or State-chartered, including credit unions defined as "new" pursuant to section 1790d(b)(2) that make charges for loan losses in accordance with:
(i) Generally accepted accounting principles (GAAP) under
(ii) In the case of Federally-insured, State-chartered credit unions, any other applicable standard under State law or regulation under
(2) The transition provisions of this subpart do not apply to Federally-insured credit unions, whether Federally or State-chartered, including credit unions defined as "new" pursuant to section 1790d(b)(2), that make charges for loan losses using a reasonable reserve methodology under
In addition to the definitions set forth in
Current Expected Credit Losses (CECL) means the current expected credit losses methodology under GAAP.
CECL transitional amount means the decrease of a credit union's retained earnings resulting from its adoption of CECL, as determined pursuant to
Transition period means the 12-quarter reporting period beginning the first day of the fiscal year in which the credit union adopts CECL.
(a) Eligibility--The NCUA shall use the transition provisions of this subpart in determining a credit union's net worth category under this part, as applicable, if:
(1) The credit union has not adopted CECL before its first fiscal year beginning after
(2) The credit union records a reduction in retained earnings due to the adoption of CECL.
(b) Determination of CECL transition amount. (1) For purposes of calculating the first three quarters of the transition period, as described in paragraph (c)(1) of this section, the CECL transitional amount is equal to the difference between the credit union's retained earnings as of the beginning of the fiscal year in which the credit union adopts CECL and the credit union's retained earnings as of the closing of the fiscal year immediately prior to the credit union's adoption of CECL.
(2) For purposes of calculating the fourth through twelfth quarters of the transition period, as described in paragraphs (c)(2) and (c)(3) of this section, the CECL transitional amount is equal to the difference between the credit union's retained earnings as of the end of the fiscal year in which the credit union adopts CECL and the credit union's retained earnings as of the beginning of its next fiscal year.
(c) Calculation of CECL transition provision. In determining the net worth category of a credit union as provided in paragraph (a) of this section, the NCUA shall:
(1) Increase retained earnings and total assets as reported on the Call Report for purposes of the net worth ratio by 100 percent of its CECL transitional amount during the first three quarters of the transition period (first three reporting quarters of the fiscal year in which the credit union adopts CECL);
(2) Increase retained earnings and total assets as reported on the Call Report for purposes of the net worth ratio by sixty-seven percent of its CECL transitional amount during the second four quarters of the transition period (fourth reporting quarter of the fiscal year in which the credit union adopts CECL and first three reporting quarters of the next fiscal year); and
(3) Increase retained earnings and total assets as reported on the Call Report for purposes of the net worth ratio by thirty-three percent of its CECL transitional amount during the final four quarters of the transition period.
[FR Doc. 2021-13907 Filed 6-30-21;
BILLING CODE 7535-01-P



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