Transition to the Current Expected Credit Loss Methodology
| Published date | 19 August 2020 |
| Citation | 85 FR 50963 |
| Record Number | 2020-16987 |
| Section | Proposed rules |
| Court | National Credit Union Administration |
Federal Register, Volume 85 Issue 161 (Wednesday, August 19, 2020)
[Federal Register Volume 85, Number 161 (Wednesday, August 19, 2020)]
[Proposed Rules]
[Pages 50963-50970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16987]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 85, No. 161 / Wednesday, August 19, 2020 /
Proposed Rules
[[Page 50963]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
[NCUA-2020-0074]
RIN 3133-AF03
Transition to the Current Expected Credit Loss Methodology
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board (Board) is seeking comment on a proposed rule
to address changes to the U.S. generally accepted accounting principles
(GAAP). Specifically, the proposed rule would provide that, for
purposes of determining a federally insured credit union's (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 the adoption of the current
expected credit losses (CECL) accounting methodology. Consistent with
regulations issued by the other federal banking agencies, the proposed
rule would 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 proposed rule would
also provide that FICUs with less than $10 million in assets are no
longer required to determine their charges for loan losses in
accordance with GAAP. The Board's regulations would provide that these
FICUs may instead use any reasonable reserve methodology (incurred
loss), provided that it adequately covers known and probable loan
losses.
DATES: Comments must be received on or before October 19, 2020.
ADDRESSES: You may submit comments, by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
The docket number for this proposed rule is NCUA-2020-0074 and is
available at https://www.regulations.gov/. Follow the instructions for
submitting comments.
Fax: (703) 518-6319. Include ``[Your name] Comments on
``Transition to the Current Expected Credit Loss Methodology'' in the
transmittal.
Mail: Address to Gerard Poliquin, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public inspection: All public comments are available on the Federal
eRulemaking Portal at: http://www.regulations.gov as submitted, except
as may not be possible for technical reasons. Public comments will not
be edited to remove any identifying or contact information. Due to
social distancing measures in effect, the usual opportunity to inspect
paper copies of comments in the NCUA's law library is not currently
available. After social distancing measures are relaxed, visitors may
make an appointment to review paper copies by calling (703) 518-6540 or
emailing [email protected].
FOR FURTHER INFORMATION CONTACT: Policy and Accounting: Alison L.
Clark, Chief Accountant, Office of Examinations and Insurance, at (703)
518-6360; Legal: Ariel Pereira, Staff Attorney, Office of General
Counsel, at (703) 548-2778; or by mail at National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314.
SUPPLEMENTARY INFORMATION:
I. Background
A. The NCUA's Minimum Capital Standards
B. Current Expected Loss (CECL) Methodology
C. February 14, 2019, and March 31, 2020, Banking Agency Rules
on CECL Implementation
D. Proposed Rule Overview
II. Legal Authority
A. The Board's Rulemaking Authority, Generally
B. CECL Transition
C. Small FICU Charges for Loan Losses
D. Alternatives to GAAP
III. Proposed Rule
A. Proposed 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
IV. 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
I. Background
A. The NCUA's Minimum Capital Standards
The NCUA's primary mission is to ensure the safety and soundness of
FICUs. The NCUA performs this function by examining and supervising
federally chartered credit unions, participating in the examination and
supervision of federally insured, state-chartered credit unions in
coordination with state regulators, and insuring members' accounts at
all FICUs. In its role as the administrator of the National Credit
Union Share Insurance Fund (NCUSIF), the NCUA is responsible for the
regulation and supervision of 5,196 FICUs with 121.3 million members
and $1.63 trillion in assets across all states and U.S. territories.\1\
---------------------------------------------------------------------------
\1\ Based on credit union data as of March 31, 2020. See
National Credit Union Administration, 2020 Annual Performance Plan,
1 (January 2020), https://www.ncua.gov/files/agenda-items/AG20200123Item1b.pdf
---------------------------------------------------------------------------
On August 7, 1998, Congress enacted the Credit Union Membership
Access Act.\2\ Section 301 of the statute added a new section 216 to
the Federal Credit Union Act (FCU Act).\3\ Section 216 directed the
Board to adopt by regulation a system of PCA to restore the net worth
of FICUs. For FICUs, other than those that meet the statutory
definition of a ``new'' FICU, section 216 requires a framework of
mandatory supervisory actions indexed to five statutory net worth
categories, ranging from ``well capitalized'' to ``critically
undercapitalized.'' The mandatory actions and conditions triggering
conservatorship and liquidation are expressly prescribed by statute.\4\
To supplement the mandatory actions, section 216 charged the NCUA with
developing discretionary actions which are ``comparable'' to the
``discretionary safeguards'' available under section 38
[[Page 50964]]
of the Federal Deposit Insurance Act--the statute that applies PCA to
other federally insured depository institutions.\5\
---------------------------------------------------------------------------
\2\ Public Law 105-219, 112 Stat. 913 (1998).
\3\ The FCU Act is codified at 12 U.S.C. 1751 et al. Section 216
of the act is codified at 12 U.S.C. 1790d.
\4\ 12 U.S.C. 1790d(e), (f), (g), (i); 12 U.S.C. 1786(h)(1)(F),
1787(a)(3)(A).
\5\ 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).
---------------------------------------------------------------------------
For FICUs that section 216 defines as ``new''--those that have been
in operation less than ten years and have $10 million or less in
assets--the statute directed the NCUA to develop an alternative system
of PCA to apply instead of the system of PCA for all other FICUs.\6\
Although section 216 does not prescribe specific attributes for this
component of PCA, it instructed the NCUA to recognize that ``new''
FICUs initially have no net worth, need reasonable time to accumulate
net worth, and need incentives to become ``adequately capitalized'' by
the time they reach either ten years in operation or exceed $10 million
in assets (i.e., no longer meet the definition of ``new'').\7\
---------------------------------------------------------------------------
\6\ 12 U.S.C. 1790d(b)(2)(A).
\7\ 12 U.S.C. 1790d(b)(2)(B).
---------------------------------------------------------------------------
The NCUA implemented the regulatory PCA system mandated by section
216 through a final rule published on February 18, 2000.\8\ The NCUA's
PCA regulations are codified in 12 CFR part 702, ``Capital Adequacy.''
As required by section 216, the NCUA regulations provide that a FICU's
capitalization classification is determined by calculating its ``net
worth ratio,'' which is defined as being the ratio of the FICU's net
worth to its total assets.\9\ Both section 216 and part 702 define
``net worth'' as including the retained earnings balance of the FICU as
determined under GAAP. Net worth also includes certain loans to, and
accounts in, a FICU established pursuant to section 208 of the FCU
Act.\10\ For low-income designated credit unions, net worth also
includes secondary capital accounts that are uninsured and subordinate
to all other claims, including claims of creditors, shareholders, and
the NCUSIF.\11\ 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.\12\
---------------------------------------------------------------------------
\8\ 65 FR 8560 (February 18, 2000).
\9\ 12 U.S.C. 1790d(o)(3); 12 CFR 702.2(g).
\10\ 12 U.S.C. 1790d(o)(2)(B); 12 CFR 702.2(f)(4). Section 208
of the FCU Act (12 U.S.C. 1788) regards special assistance to avoid
liquidation.
\11\ 12 U.S.C. 1790d(o)(2)(C); 12 CFR 702.2(f)(2).
\12\ 12 CFR 702.2(k).
---------------------------------------------------------------------------
With respect to the alternate PCA system for ``new'' FICUs, the
Board has implemented these requirements in subpart C of the part 702
regulations. In general, the regulations adopt relaxed net worth ratios
for new FICUs. However, the PCA system for new FICUs mirrors in most
important respects the system for all other FICUs. For example, the
regulations index the capital classification of new FICUs to the same
five net worth categories used for other FICUs. Further, the
definitions of ``net worth,'' ``total assets,'' and ``net worth ratio''
also apply to new FICUs.
B. Current Expected Credit Loss (CECL) Methodology
In response to the global economic crisis of 2007-2009, several
observers expressed concern that GAAP restricted the ability of
institutions to record credit losses that were expected, but that did
not yet meet the ``probable'' threshold under the current incurred loss
methodology. Credit loss reserves help mitigate the overstatement of
income on loans and other assets by accounting for future losses. In
response, in June 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2016-13, which revises the
accounting for credit losses under GAAP.\13\
---------------------------------------------------------------------------
\13\ FASB ASU No. 2016-13, Financial Instruments--Credit Losses
(Topic 326), Measurement of Credit Losses on Financial Instruments,
June 2016, available at: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176168232528.
---------------------------------------------------------------------------
The new accounting standard applies to all banks, savings
associations, credit unions,\14\ 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. ASU No. 2016-13 emphasizes that
CECL does not change the economics of lending, but only the timing of
when losses are recorded. As ASU No. 2016-23 states:
---------------------------------------------------------------------------
\14\ 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.
---------------------------------------------------------------------------
In other words, the same loss ultimately will be recorded,
regardless of the accounting requirements. What changes is an
accounting threshold for the recognition of credit losses, which
affects only the timing of when to record credit losses, not the
ultimate amount realized on the financial assets.\15\
---------------------------------------------------------------------------
\15\ Supra note 13, at 244.
---------------------------------------------------------------------------
CECL differs from the incurred loss methodology in several key
respects. Most significantly for purposes of this proposed rule, 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.\16\
---------------------------------------------------------------------------
\16\ See Frequently Asked Questions on the New Accounting
Standard on Financial Instruments--Credit Losses, issued by the
Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National Credit Union
Administration, and the Office of the Comptroller of the Currency on
April 3, 2019, for a more comprehensive discussion of the changes
made by CECL to existing GAAP standards. The document is available
at: https://www.ncua.gov/files/letters-credit-unions/financial-instruments-credit-losses-faqs.pdf
---------------------------------------------------------------------------
FASB established a staggered effective date for CECL. In doing so,
it has recognized two classes of institutions subject to CECL: (1)
Public business entities (PBEs) that meet the definition of a U.S.
Securities and Exchange (SEC) filer, excluding entities eligible to be
smaller reporting companies (SRCs) as defined by the SEC, and (2) all
other entities, which includes FICUs. The effective date for SEC-filers
(other than SRCs) is fiscal years beginning after December 15, 2019.
All other entities (including all FICUs) are required to commence
implementation of the standard for fiscal years beginning after
December 15, 2022.\17\ All entities subject to CECL, however, may
voluntarily elect to adopt CECL earlier than the specified
implementation date, commencing as early as fiscal years beginning
after December 15, 2018,
[[Page 50965]]
including interim periods within those fiscal years.\18\
---------------------------------------------------------------------------
\17\ FASB originally established the following three categories
of entities subject to CECL: (1) PBE SEC filers; (2) PBEs that are
not SEC filers; and (3) non-PBEs (including FICUs). The original
implementation date for non-PBEs was December 15, 2020. FASB
subsequently delayed the implementation date for non-PBEs until
December 15, 2021. (https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168232528&acceptedDisclaimer=true) FASB issued
a second update consolidating the entities subject to CECL into two
categories (SEC filers (not including SRCs) and all other entities)
and further extending the implementation dates as described above.
(https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176173775344&acceptedDisclaimer=true).
\18\ Supra note 13, at 5. Section 4014 of the Coronavirus Aid,
Relief, and Economic Security (CARES) Act (Pub. L. 116-136)
suspended mandatory compliance with CECL between March 27, 2020 (the
date of enactment of the CARES Act) and the earlier of: (1) the date
on which the national emergency concerning the novel coronavirus
disease (COVID-19) outbreak declared by the President on March 13,
2020, under the National Emergencies Act (50 U.S.C. 1601 et seq.)
terminates; or (2) December 31, 2020. This provision is not
applicable to virtually any FICU because, as noted, they are not
required to begin compliance with CECL until December 15, 2022, and
a very small number have adopted it earlier voluntarily.
---------------------------------------------------------------------------
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).
C. February 14, 2019, and March 31, 2020, Banking Agency Rules on CECL
Implementation
On February 14, 2019,\19\ the Office of Comptroller of the
Currency, the Federal Reserve Board, and the Federal Deposit Insurance
Corporation (the ``other banking agencies'') issued a final rule to
temporarily mitigate the impacts of CECL implementation on institutions
subject to their supervision (``banking organizations''). The final
rule provides banking organizations with the option to phase-in over a
three-year period the adverse effects to capital ratios that may result
from the day-one adjustment. The rule uses the term ``electing banking
organizations'' to refer to banking organizations that opt to use the
phase-in. When calculating regulatory capital ratios during the first
year of an electing banking organization's adoption of CECL, the
organization must phase-in 25 percent of the transitional amounts. The
electing banking organization will phase-in an additional 25 percent of
the transitional amounts over each of the next two years. At the
beginning of the fourth year, the banking organization will have
completely reflected in regulatory capital the day-one effects of
CECL.\20\ Regardless of its election to use the phase-in, a banking
organization will be required to account for CECL for other purposes,
such as Call Reports.\21\
---------------------------------------------------------------------------
\19\ 84 FR 4222 (February 14, 2019).
\20\ Id. at 4227-4228.
\21\ Id. at 4230. See also the other banking agencies' Federal
Register notice soliciting comment on the revisions to the Call
Reports under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-
3521) published at 83 FR 49160 (Sept. 28, 2018).
---------------------------------------------------------------------------
On March 31, 2020, \22\ the other banking agencies issued an
interim final rule, effective upon publication, further delaying full
CECL implementation requirements to allow banking organizations to
better focus on supporting lending to creditworthy households and
businesses in light of recent strains on the U.S. economy as a result
of COVID-19, while also maintaining the quality of regulatory capital.
The March 31, 2020, interim final rule provides banking organizations
that adopt CECL during the 2020 calendar year with the option to delay
for two years the estimated impact of CECL on regulatory capital,
followed by a three-year transition period to phase out the aggregate
amount of the capital benefit provided during the initial two-year
delay (i.e., a five-year transition, in total). The interim final rule
does not replace the three-year transition option in the February 14,
2019, final rule, which remains available to any banking organization
at the time that it adopts CECL. Banking organizations that have
already adopted CECL have the option to elect the three-year transition
option contained in the February 14, 2019, final rule or the five-year
transition contained in the March 31, 2020, interim final rule.
---------------------------------------------------------------------------
\22\ 62 FR 17723 (March 31, 2020).
---------------------------------------------------------------------------
Further, as noted above, the CECL effective date is for fiscal
years beginning after December 15, 2022, including interim periods
within those fiscal years for smaller reporting companies and nonpublic
business entities (private companies) (a category that includes FICUs).
Unless banking organizations falling into these two categories are
early adopters of CECL in 2020, they will only receive the benefit of
the three-year transition provided in the February 14, 2019, final
rule. This places these banking organizations in a similar position to
FICUs eligible for the three-year transition provided under this
proposed rule.
D. Proposed Rule Overview
Consistent with the other banking agencies' February 14, 2019,
final rule, the NCUA Board is issuing this proposed rule to mitigate
the adverse effects on a FICU's net worth category that may result from
the day-one adjustment.\23\ Specifically, the proposed rule would
provide that, for purposes of the PCA regulations, the Board will
phase-in the day-one effects on a FICU's net worth ratio over a three-
year period (12 quarters). The phase-in would only be applied to those
FICUs that adopt the CECL methodology on or after December 15, 2022.
FICUs that elect to adopt CECL earlier than the deadline established by
FASB would not be eligible for the phase-in. Further, unlike banking
organizations subject to the rule issued by the other banking agencies,
eligible FICUs would not have the choice of opting into (or out of) the
phase-in. Rather, the Board will apply the phase-in for all FICUs that
meet the prescribed eligibility criteria.
---------------------------------------------------------------------------
\23\ The Senate Committee Report to the Financial Services and
General Government Appropriations Act, 2020 (Division C of the
Consolidated Appropriations Act, 2020; Pub. L. 116-93, approved
December 20, 2019), directs the Department of the Treasury, in
consultation with the other banking agencies and the NCUA to
``conduct a study on the need, if any, for changes to regulatory
capital requirements necessitated by CECL'' (Senate Report 116-111,
at page 11). The Board will take the results of this study into
consideration as this rulemaking progresses.
---------------------------------------------------------------------------
FICUs would continue to calculate their net worth in accordance
with GAAP as generally required by section 216, 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 $10
million in assets would no longer be required to determine their
charges for loan losses in accordance with GAAP. This provision would
eliminate the adverse PCA consequences for smaller FICUs resulting from
CECL. The Board's regulations would allow these FICUs to instead make
charges for loan losses in accordance with any reasonable reserve
methodology (incurred loss), provided that it adequately covers known
and probable loan losses. Accordingly, FICUs in this asset-size
category that choose to use the incurred loss methodology would not be
subject to the phase-in described in this proposed rule.\24\ The Board
also notes that, despite the language of the proposed rule, state-
chartered, federally insured
[[Page 50966]]
credit unions subject to State laws and regulations may be required to
comply with GAAP or other accounting standards under applicable State
requirements.
---------------------------------------------------------------------------
\24\ The GAAP exemption for smaller FICUs does not perfectly
overlap with the statutory definition of a ``new'' FICU. As
discussed above, section 216 defines ``new'' FICUs, in part, as
those with total assets of ``$10 million or less,'' while the GAAP
exception under section 202 applies to FICUs with total assets of
``less than $10 million.'' Accordingly, new FICUs with $10 million
in total assets are subject to GAAP; however, the majority of FICUs
that have existed for ten years or less have less than $10 million
in total assets and will therefore be exempt from GAAP pursuant to
section 202 and this proposed rule.
---------------------------------------------------------------------------
Section III of this preamble discusses the provisions of the
proposed rule in greater detail.
II. Legal Authority
A. The Board's Rulemaking Authority, Generally.
The Board is issuing this proposed rule pursuant to its authority
under the FCU Act. The FCU Act grants the Board a broad mandate to
issue regulations governing both federal credit unions and all FICUs.
For example, section 120 of the FCU Act is a general grant of
regulatory authority and authorizes the Board to prescribe rules and
regulations for the administration of the act.\25\ Other provisions of
the act, such as section 216, confer specific rulemaking authority to
address prescribed issues or circumstances.\26\ This proposed rule is
being issued under both the general rulemaking authority conferred by
section 120 of the FCU Act and also, as discussed below, the more
specific grant of authority under section 216.
---------------------------------------------------------------------------
\25\ 12 U.S.C. 1766(a).
\26\ 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.
---------------------------------------------------------------------------
B. CECL Transition
Section 216 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 Federal Deposit
Insurance Act.\27\ The quoted statutory language establishes two
conditions for Board rulemaking under this provision: (1) The other
banking agencies must revise the leverage limit; and (2) the revision
must be pursuant to section 38 of the Federal Deposit Insurance Act. In
addition, section 216 also requires that the Board determine--in
consultation with the other banking agencies--``the reason for the
increase or decrease in the required minimum level for the leverage
limit also justifies adjustment to the net worth ratios.'' \28\ In
accordance with the consultation requirements, the NCUA has briefed
relevant staff of the other banking agencies of the contents and
purposes of this proposed rule.
---------------------------------------------------------------------------
\27\ 12 U.S.C. 1790d(c)(2)(A).
\28\ 12 U.S.C. 1790d(c)(2)(B).
---------------------------------------------------------------------------
With regards to the two factors identified in the quoted statutory
language, the other banking agencies specify in the preamble to their
February 14, 2019, final rule, that they are issuing the regulatory
changes under the authority of section 38 of the Federal Deposit
Insurance Act.\29\ The 2019 final rule, however, does not directly
raise or lower the leverage limit,\30\ or any other of the capital
ratios applicable to banking organizations. For example, the leverage
limit (defined as the ratio of tier 1 capital to average total
consolidated assets) remains unchanged at 4 percent. Nevertheless, the
stated intent of the other banking agencies was to effectively modify
the capital ratios for purposes of PCA oversight. As the preamble to
the final rule provides:
---------------------------------------------------------------------------
\29\ See the Paperwork Reduction Act statement at 84 FR 4231-
42333, which provides: ``This information collection [contained in
this rule] is authorized by section 38(o) of the Federal Deposit
Insurance Act (12 U.S.C. 1831o(c)). . . .'' See also footnote 35 of
the Federal Reserve Board's Regulatory Flexibility Act statement on
page 4234.
\30\ 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).
For purposes of determining whether an electing banking
organization is in compliance with its regulatory capital
requirements (including capital buffer and prompt corrective action
(PCA) requirements), the agencies will use the electing banking
organization's regulatory capital ratios as adjusted by the CECL
transition provision.\31\
---------------------------------------------------------------------------
\31\ Supra note 19, at 4229.
The regulatory text of the final rule also provides that the
transition provision requires an electing banking organization to make
certain adjustments ``in its calculation of regulatory capital
ratios.'' \32\ Other regulatory text discusses adjustments to specific
capital ratios under the transition provision. For example, the
regulation provides that an electing banking organization will
``[i]ncrease average total consolidated assets as reported on the Call
Report for purposes of the leverage ratio.'' \33\
---------------------------------------------------------------------------
\32\ 12 CFR 3.301(c)(1) (OCC), 217.301(c)(1) (FRB), and
324.301(c)(1) (FDIC).
\33\ 12 CFR 3.301(c)(1)(iv) (OCC), 217.301(c)(1)(iv) (FRB), and
324.301(c)(1)(iv) (FDIC) (emphasis added).
---------------------------------------------------------------------------
The quoted preamble language and regulatory text make clear that,
while the other banking agencies did not expressly revise the numeric
capital thresholds, they issued the February 14, 2019, final rule for
purposes of effectively adjusting the leverage limit and other capital
ratios that would be used for PCA oversight. Accordingly, the NCUA has
determined that both conditions set forth in section 216 have been
satisfied for purposes of issuing this proposed rule.\34\
---------------------------------------------------------------------------
\34\ The Board also finds that the other banking agencies' March
31, 2020, interim final rule on this subject does not affect this
analysis because it affects only those banking organizations that
have adopted CECL as of 2020 and does not alter the three-year
phase-in for other banking organizations that are covered in the
same category of FASB's standards.
---------------------------------------------------------------------------
The Board is following the lead of the other banking agencies and
issuing this proposed rule to phase-in the possible adverse
consequences on a FICU's PCA classification resulting from the day-one
adjustment. The rule would not revise the definition of net worth,
which as discussed above is statutorily prescribed. FICUs would
continue to calculate their net worth and net worth ratios in
accordance with existing statutory and regulatory requirements. It is
true, however, that the effect of the phase-in could be to effectively,
albeit temporarily, increase a FICU's net worth. However, any such
deemed increases would be consistent with the authority conferred to
the NCUA under section 216 to adjust its PCA determinations in
conformity to similar action by the other banking agencies. The effects
of the proposed phase-in on a FICU's net worth calculations are
consistent with section 216 and closely modeled on the CECL transition
provisions issued by the other banking agencies. Specifically, the
proposed rule is narrowly tailored to temporarily mitigating the
impacts of CECL adoption on the PCA classification of a FICUs net
worth. Further, this proposed rule does not adjust the numeric net
worth ratios under the NCUA's PCA system. The sole purpose of the
proposed phase-in is to aid FICUs to adjust 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.\35\ As an alternative to the
phase-in that would be provided by this proposed rule, the Board could
have elected to revise the
[[Page 50967]]
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 proposed 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.
---------------------------------------------------------------------------
\35\ 12 CFR 702.2(k).
---------------------------------------------------------------------------
B. 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.\36\ The statute, however, also
provides an exception to GAAP compliance for FICUs with total assets of
``less than $10,000,000, unless prescribed by the Board or an
appropriate State credit union supervisor.'' \37\
---------------------------------------------------------------------------
\36\ 12 U.S.C. 1782(b)(6)(C)(i).
\37\ 12 U.S.C. 1782(b)(6)(C)(iii).
---------------------------------------------------------------------------
The Board's regulations in Sec. 702.402 require that charges for
loan losses be made in accordance with GAAP and does not distinguish
based on the asset size of FICUs. In effect, Sec. 702.402 exercises
the Board's discretion under section 202 of the FCU Act to override the
exception for smaller FICUs by prescribing regulations. For reasons
discussed more fully below, the Board has elected to once again
exercise its statutory discretion under section 202 of the FCU Act. The
Board's regulations will no longer require that FICUs with total assets
less than $10 million make charges for loan losses in accordance with
GAAP. Instead the regulations will allow these FICUs to make such
charges under any reasonable reserve methodology (incurred loss)
provided it adequately covers known and probable loan losses. The
transition provisions described above apply to FICUs adopting CECL.
Accordingly, smaller FICUs that elect to use a non-GAAP measure are not
eligible for the phase-in. The Board also notes that, despite the
language of the proposed rule, section 202 makes clear that 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.
C. Alternatives to GAAP
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. As the
statute provides, the alternative principle would need to be as
stringent as the GAAP principle it replaces, which would bear further
study to determine whether a phase-in of CECL would be deemed no less
stringent than CECL. Furthermore, the Board might need to engage in a
fuller analysis of the appropriateness of CECL as applied to all
insured credit unions with $10 million or greater in assets, which
would likely be time-consuming as compared to the more direct, across-
the-board approach proposed above. The transition analyzed and proposed
above would provide relief to all insured credit unions subject to CECL
beginning with fiscal years commencing after December 15, 2022, in a
streamlined, prompt fashion.
III. Proposed Rule
A. Proposed New Subpart G to Part 702
The NCUA proposes to add a new subpart G to part 702, captioned
``CECL Transition Provisions,'' which would apply to FICUs that meet
the eligibility criteria specified in the proposed rule.
Notwithstanding the CECL transition provisions, all other aspects of
part 702 would continue to apply.
B. Eligibility for the Transition Provisions
As discussed above, the proposed 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. An early-adopter FICU
is presumed to have undertaken the necessary analysis to determine the
impact of the day-one adjustment and to have made its early adoption
decision accordingly. As a result, the Board does not believe that the
phase-in is either necessary or appropriate for such FICUs. FICUs that
have not adopted CECL prior to the December 15, 2022, implementation
date established by FASB are eligible for the phase-in. The NCUA will
use the phase-in to determine the FICU's net worth category under Sec.
702.102 or Sec. 702.202 (for FICUs statutorily defined as ``new''). To
be eligible for the transition provision, the FICU must record a
reduction in retained earnings due to the adoption of CECL.
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.
Moreover, some FICUs eligible for the phase-in may inadvertently fail
to make the election in the Call Report, thereby reducing the benefit
of the transition provision. 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 would 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.
Under the proposed rule, the NCUA would phase-in the FICU's CECL
transitional amount. The NCUA would
[[Page 50968]]
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 December 15, 2022. In
determining the net worth ratio of a FICU, the NCUA would deem retained
earnings and total assets as reported on the Call Report to be
increased by 100 percent of the FICU's CECL transitional amount during
the first three quarters of calendar year 2023. The FICU may use this
period to build capital and to make resulting material adjustments to
its CECL transitional amount until December 30, 2023. The NCUA would
base its subsequent calculations regarding the phase-in based on the
CECL transitional amount reported by the FICU as of December 31, 2023
(the due date for the fourth quarterly report of calendar year 2023),
and further adjustments to the amount are not permitted.
Beginning with the fourth quarterly Call Report of calendar 2023,
the NCUA would deem retained earnings and total assets to be increased
by 67 percent of the FICU's CECL transitional amount. This percentage
would be decreased to 33 percent beginning with the fourth quarterly
Call Report in calendar year 2024. Commencing with the fourth quarterly
Call Report in calendar year 2025, 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 $10 million in
retained earnings and $1 million of Allowance for Loan and Lease Losses
(ALLL) (i.e., credit loss). On the opening balance sheet date of
January 1, 2023, immediately after adopting CECL, the FICU determined
it needs $1.2 million of allowance for credit losses. The FICU would
recognize the adoption of CECL by recording a reduction in beginning
retained earnings of $200,000. For each of the first three quarterly
reporting periods in 2023, the NCUA would deem both the FICU's retained
earnings and total assets to be increased by the full $200,000.
Commencing with the fourth quarterly Call Report submitted in 2023 the
FICU's retained earnings and total assets would be deemed increased by
$134,000 ($200,000 x 67 percent), for purposes of calculating the
FICU's net worth ratio. The $134,000 increase would remain constant for
the first three quarters in 2024. Starting with the fourth quarterly
Call Report in 2024, retained earnings and total assets would be deemed
increased by $66,000 ($200,000 x 33 percent). Using the same
mathematical equation, the $66,000 increase would remain constant for
the first three quarters in 2025. Upon the FICU's submission of its
fourth quarterly report in 2025, there would be zero increase in
retained earnings and total assets, thus the FICU's net worth ratio
will completely reflect the day-one effects of CECL.
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
---------------------------------------------------------------
Transitional Full
In thousands amount Four quarters Four quarters recognition
First three at 67% (4th at 33% (4th of day-one
quarters of quarter of quarter of adjustment
2023 2023 and first 2024 and first (commencing
three quarters three quarters 4th quarter of
of 2024) of 2025) 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 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).'' \38\ The limitation is not applicable to this proposed
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.
---------------------------------------------------------------------------
\38\ 12 U.S.C. 1790d(c)(2)(A).
---------------------------------------------------------------------------
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 $10 million in total assets to the general
requirements that reports and statements filed with the Board
[[Page 50969]]
comply with GAAP. As also noted above, the Board's regulations in Sec.
702.402 require that charges for loan losses be made in accordance with
GAAP and does not distinguish between the asset size of FICUs. The
Board, however, is aware that compliance with GAAP may be burdensome
for smaller FICUs. This difficulty is likely to be exacerbated with the
adoption of CECL. Accordingly, the proposed rule provides that FICUs
with total assets of less than $10 million may make charges for loan
losses either in accordance with GAAP or with any reasonable reserve
methodology (incurred loss) provided it adequately covers known and
probable loan losses. This provision would eliminate the adverse PCA
consequences for smaller FICUs resulting from CECL, and those FICUs
would not be subject to the phase-in procedure detailed in this
proposed rule. 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.
IV. 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 $100 million in assets.\40\ The Board fully considered the
potential economic impacts of the proposed phase-in on small credit
unions during the development of the proposed rule. For example, the
proposed rule would, to the extents authorized by statute, completely
exempt some of the smallest FICUs (i.e., those with total assets less
than $10 million) from the adverse effects of CECL. Accordingly, NCUA
certifies that it would not have a significant economic impact on a
substantial number of small credit unions.
---------------------------------------------------------------------------
\39\ 5 U.S.C. 603(a).
\40\ 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------
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 proposed 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
Federal Register notice. The revisions to the Call Report will be
submitted for approval by the Office of Information and Regulatory
Affairs at the Office of Management and Budget prior to their effective
date.
---------------------------------------------------------------------------
\41\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------
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 proposed 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.
---------------------------------------------------------------------------
\42\ Executive Order 13132 on Federalism, was signed by former
President Clinton on August 4, 1999, and subsequently published in
the Federal Register on August 10, 1999 (64 FR 43255).
---------------------------------------------------------------------------
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule would not affect
family well-being within the meaning of Section 654 of the Treasury and
General Government Appropriations Act, 1999.\43\
---------------------------------------------------------------------------
\43\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------
List of Subjects in 12 CFR Part 702
Credit unions, Investments, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board, this 30th day
of July, 2020.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the NCUA proposes to amend part
702 as follows:
PART 702--CAPITAL ADEQUACY
0
1. The authority citation for part 702 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1790d.
0
2. Revise Sec. 702.402(d)(1) to read as follows:
Sec. 702.402 Full and Fair disclosure of financial condition.
* * * * *
(d) * * *
(1)(i) Federally insured credit unions with total assets of $10
million or greater shall make charges for loan losses in accordance
with generally accepted accounting principles (GAAP);
(ii) Federally insured credit unions with total assets of less than
$10 million shall make charges for loan losses in accordance either
with either:
(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;
* * * * *
0
3. Add subpart G to read as follows:
Subpart G--CECL Transition Provisions
Sec.
702.701 Authority, purpose, and scope.
702.702 Definitions.
702.704 CECL transition provisions.
Sec. 702.701 Authority, purpose, and scope.
(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, Pub. L. 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. 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) with total assets of at least $10 million.
Sec. 702.702 Definitions.
In addition to the definitions set forth in Sec. 702.2, the
following definitions apply to this subpart:
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 Sec. 702.703(b).
Transition period means the 12-quarter reporting period beginning
with
[[Page 50970]]
the quarterly Call Report for the quarter ending March 31, 2023 and
ending with the quarterly Call Report for the quarter ending December
31, 2025.
Sec. 702.703 CECL transition provisions.
(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 December 15, 2022;
and
(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 on December 15, 2022, and the credit union's retained earnings
on January 1, 2023.
(2) For purposes of calculating the fourth through twelfth quarters
of the transition period, as described in paragraphs (c)(2) and (3) of
this section, the CECL transitional amount is equal to the difference
between the credit union's retained earnings on December 31, 2023, and
the credit union's retained earnings on December 30, 2024.
(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 2023);
(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 2023 and first three
reporting quarters of 2024); 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 (fourth reporting quarter of 2024 and first three
reporting quarters of 2025).
[FR Doc. 2020-16987 Filed 8-18-20; 8:45 am]
BILLING CODE P
