The Financial Accounting Standards Board has proposed the Current Expected Credit Loss (CECL) standard, which has caused widespread concern among financial institutions in the US. Leading bankers have fired off fresh salvos against the new standard. Many fear that CECL will be another bothersome compliance mandate and further hike the costs of loan origination and mortgage.
The CECL model is expected to cause serious turmoil with loss of reserves for all financial instruments and stress on the existing mortgage technology. Banks expect that CECL will necessitate the increase of reserves up to 50%. To be a part of the final CECL model, there are severe data implications as banks need to archive all their core data for easy access and usage.
Why is CECL important?
Banks estimate losses in allowance for loan and lease losses (ALLL) calculations as per the impairment model. Going by it, the investments are considered to be non-viable or loss-making when future cash flows cannot be collected as per original contracted terms. Under the new CECL model, banks need to compute the estimated losses over the entire life of the loan. Significant data needs to be utilized like current conditions, forecasts, and historical data, to compute the expected losses under the new parameters. FASB is expected to pass the CECL model by the first quarter of 2016.
The daunting CECL challenge
It is a highly data-intensive model and requires complex calculations and analytics. Lenders need to track their data minutely and need intensive documentation and visibility.
Banks need to look at archived historical data and include predictive data in their calculations. Usually, allowances only reflect the losses that had already occurred, but under CECL, the future forecasts will also bring in the changes.
Automation is very much important, as reserves are under higher scrutiny. Manual processes are error prone and can be amplified, as future forecasts are taken into account. Banks that rely on manual processes and operate in silos cannot afford to cope with CECL. It is important to integrate accounting and credit departments to access consolidated data from one place.
FASB makes it mandatory that granular loan-level data should be used for ALLL and it involves a complex formula. Data is the key and this development requires historical data that dates back to the life of the loan. If the bank has not been able to capture this data, it will have to rely on peer or industry data, which will leave lenders at the mercy of examiners’ scrutiny. Insufficient data libraries will make collecting and analyzing information necessary for the ALLL calculations. Mortgage solutions help in keeping data that can be pulled through multiple queries for future complex calculations.
Spreadsheets as a primary tool of data management can pose serious concern and regulatory issues. A cloud-based architecture and SaaS platform help bring in data from different sources for effective reporting. Accounting platforms are scalable and agile and can meet new business requirements. Therefore, as the accounting rules change with CECL coming into force, SaaS can still be useful. The costs of building or migrating to a new platform can be avoided. SaaS platforms are licensed and centrally managed by service providers who can deliver upgrades as and when compliance is necessitated. CECL is a new opportunity for lenders to start using mortgage technology, and with it they can alleviate distress regarding new compliance. Cloud applications help to perform tasks faster and cheaper with better accuracy. SaaS mortgage technology is all set to improve the way lenders approach compliance and perform their tasks.