Transition to the Current Expected Credit Loss Methodology
| Published date | 01 July 2021 |
| Citation | 86 FR 34924 |
| Record Number | 2021-13907 |
| Section | Rules and Regulations |
| Court | National Credit Union Administration |
Federal Register, Volume 86 Issue 124 (Thursday, July 1, 2021)
[Federal Register Volume 86, Number 124 (Thursday, July 1, 2021)]
[Rules and Regulations]
[Pages 34924-34933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13907]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
RIN 3133-AF03
Transition to the Current Expected Credit Loss Methodology
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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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 $10 million in
assets are no longer required to determine their charges for loan
losses in accordance with GAAP. These FICUs may instead use any
reasonable reserve methodology (incurred loss), provided that it
adequately covers known and probable loan losses. The final rule
follows publication of an August 19, 2020, proposed rule and takes into
consideration the public comments received on the proposed rule.
DATES: Effective August 2, 2021.
[[Page 34925]]
FOR FURTHER INFORMATION CONTACT: Policy and Accounting: Alison L.
Clark, Chief Accountant, Office of Examinations and Insurance, at (703)
518-6360; Legal: Ariel Pereira, Senior 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. This Final Rule
II. Background
A. CECL Accounting Methodology
B. The Board's August 19, 2020, Proposed Rule
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 August 19, 2020,
Proposed Rule
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. Department of the Treasury Report
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 July 30, 2020, the NCUA Board (Board) proposed amending the
agency's regulations to facilitate the adoption by FICUs of the CECL
accounting methodology as mandated by GAAP. The proposed rule was
subsequently published in the Federal Register on August 19, 2020.\1\
This final rule follows publication of the August 19, 2020, proposed
rule and takes into consideration the public comments received on the
proposal. Following consideration of the comments, the Board has
decided to make the following changes to the proposed rule:
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\1\ 85 FR 50964 (Aug. 19, 2020). The proposed rule is available
from the Federal Register website at: https://www.govinfo.gov/content/pkg/FR-2020-08-19/pdf/2020-16987.pdf.
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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 $10 million in assets and that are required by state law to
comply with GAAP are eligible for the transition phase-in.
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.
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\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.
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The Federal Accounting Standards Board (FASB), which establishes
the GAAP standards, provided 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) was 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.\3\ 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, including interim periods within those fiscal
years.\4\
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\3\ 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).
\4\ FASB ASU No. 2016-13, Financial Instruments--Credit Losses
(Topic 326), Measurement of Credit Losses on Financial Instruments,
June 2016, page 5. FASB ASU No. 2016-13 is available at: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176168232528.
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.
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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\
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\5\ 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.
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Upon adoption of CECL, an institution will record a cumulative-
effect adjustment to retained earnings (known as ``the day-one
adjustment'').
[[Page 34926]]
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 August 19, 2020, Proposed Rule
The Board issued the August 19, 2020, proposed rule to mitigate the
adverse effects on a FICU's PCA classification that may result from the
day-one adjustment. Specifically, the proposed rule provides 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 proposed phase-in is consistent with the similar three-
year phase-in provided by the other banking agencies to alleviate the
impacts of adopting CECL on the banking organization subject to their
supervision.\6\
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\6\ See the February 14, 2019, proposed rule published by the
Office of Comptroller of the Currency, the Federal Reserve Board,
and the Federal Deposit Insurance Corporation, at 84 FR 4222
(February 14, 2019), and modified by interim-final rule published on
March 31, 2020, at 62 FR 17723 (March 31, 2020).
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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 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.
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 $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.
Interested readers should refer to the preamble of the Board's
August 19, 2020, proposed rule for additional background information
regarding the proposed regulatory changes.
III. Legal Authority
A. The Board's Rulemaking Authority, Generally
The Board is issuing this final rule pursuant to its authority
under the Federal Credit Union (FCU) Act.\7\ 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.\8\
Other provisions of the FCU Act, confer specific rulemaking authority
to address prescribed issues or circumstances. For example, section 216
of the FCU Act directs the Board to establish by regulation a system of
PCA to restore the net worth of FICUs.\9\ This final 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.
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\7\ 12 U.S.C. 1751 et seq.
\8\ 12 U.S.C. 1766(a).
\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.
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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 Federal
Deposit Insurance (FDI) Act.\10\ In addition, section 216 of the FCU
Act 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.'' \11\ In accordance with the
consultation requirements, the NCUA, at the proposed rule stage,
briefed relevant staff of the other banking agencies of the contents
and purposes of this rulemaking.
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\10\ 12 U.S.C. 1790d(c)(2)(A).
\11\ 12 U.S.C. 1790d(c)(2)(B).
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With regards to the other factor identified in the quoted statutory
language, the February 14, 2019, final rule does not directly raise or
lower the leverage limit,\12\ 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. Accordingly, the NCUA has
determined that both conditions set forth in section 216 have been
satisfied for purposes of issuing this proposed rule.\13\
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\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).
\13\ 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.
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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
[[Page 34927]]
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.
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\14\ 12 CFR 702.2(k).
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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 $10,000,000, unless prescribed by the Board or an
appropriate State credit union supervisor.'' \16\
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\15\ 12 U.S.C. 1782(b)(6)(C)(i).
\16\ 12 U.S.C. 1782(b)(6)(C)(iii).
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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. 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 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 August 19, 2020, Proposed
Rule
A. The Comments, Generally
The public comment period on the proposed rule closed on October
19, 2020. The NCUA received 18 public comments on the proposal.
Comments were received from individual FICUs, as well as from national,
state, and regional organizations representing FICUs.
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 December 15, 2022).
The Board continues to believe, however, that requiring an affirmative
opt-in from the majority of FICUs that require the phase-in would
constitute an unnecessary administrative exercise. 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.
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
[[Page 34928]]
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.
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\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).
\18\ Supra, note 10.
\19\ Supra, note 6.
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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.
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\20\ Supra note 1 at 50966-50967.
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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 August
19, 2020, proposed rule, the Board simply wished to acknowledge the
existence of an alternative legal basis for this rulemaking. A rule
implementing this alternate statutory authority would have almost
surely been more time-consuming and complex than the phase-in. The re-
definition of ``total assets'' might have possible effects beyond CECL
implementation to include the NCUA's PCA system as a whole. Moreover,
and as noted previously, the NCUA is statutorily charged to maintain
PCA regulations that are ``comparable'' with section 38 of the FDI Act.
A change to the definition of ``total assets'' would require careful
analysis to ensure compliance with the statutory comparability
requirement. Given these considerations, the Board continues to believe
that a phase-in issued on the authority provided by section 216 of the
FCU Act is the most effective, administratively simple, and quickest
manner to mitigate the day-one impacts of CECL implementation on FICUs.
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.
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\21\ Id. at 50968.
\22\ 12 CFR 3.301(b)(2).
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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.
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\23\ Supra note 1, at 50967.
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Comment: Calculation of transitional amount. One commenter noted
that proposed Sec. 702.703(b)(2) defines the transition amount for the
fourth through twelfth quarters as the difference between a FICU's
retained earnings on December 31, 2023 and December 30, 2024. The
commenter wrote that the NCUA may have intended to refer to years 2022
and 2023 in this provision, since this measurement of the CECL
transitional amount applies to Call Reports filed beginning on the
first day in 2024, and it does not seem feasible to calculate the
amount by reference to a figure that cannot be determined until the
last day in 2024.
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
[[Page 34929]]
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 $10 million, or
greater, in assets after CECL has been implemented to phase-in the day-
one negative impact. These commenters wrote that the one-time
adjustment will be equally injurious to FICUs adopting CECL in the
future and compensating for that is as important as doing so now.
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 $10 million asset threshold for GAAP compliance,
other FICUs will have more time and be better positioned to adjust
their asset growth. The Board expects that smaller FICUs will undertake
the necessary analysis to determine the possible impact of coming into
GAAP compliance in developing their business plans. As a result, the
Board does not believe that the phase-in is necessary or appropriate
for such FICUs.
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.
---------------------------------------------------------------------------
\24\ Id.
---------------------------------------------------------------------------
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 $10
million in assets and that are required by state law to comply with
GAAP are eligible for the transition phase-in.
---------------------------------------------------------------------------
\25\ Id.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\26\ Id.
\27\ 12 U.S.C. 1782(b)(6)(C)(ii).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
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
[[Page 34930]]
these credit unions. The final rule clarifies that state-chartered
FICUs with less than $10 million in assets and that are required by
state law to comply with GAAP are eligible for the transition phase-in.
---------------------------------------------------------------------------
\29\ Id.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\30\ Supra note 1, at 50965.
---------------------------------------------------------------------------
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 $10 million in assets and that are required by
state law to comply with GAAP are eligible for the transition phase-in.
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 December 15, 2022 (the 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.
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 December 15, 2022. In
determining the net worth ratio of a FICU, the NCUA will 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 reporting quarters of the fiscal year in which the FICU
adopts CECL. The FICU may use this period to build capital and to make
resulting material adjustments to its CECL transitional amount. The
NCUA will base its subsequent calculations regarding the phase-in based
on the CECL transitional amount reported by the FICU as of the fourth
reporting quarter of the fiscal year in which the FICU adopts CECL, and
further adjustments to the amount are not permitted.
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 $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
[[Page 34931]]
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
[Calendar fiscal year]
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 of
First three at 67% (4th at 33% (4th day-one
quarters of quarter of 2023 quarter of 2024 adjustment
2023 and first three and first three (commencing 4th
quarters of quarters of quarter of
2024) 2025) 2025)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increase retained earnings and total assets by the CECL $200 $200 $134 $66 0
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.
---------------------------------------------------------------------------
\31\ 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 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 final 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 will eliminate the adverse PCA
consequences for smaller FICUs resulting from CECL, and these FICUs
will not be subject to the phase-in procedure detailed above.
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. Department of the Treasury Report
The Senate Committee Report to the Financial Services and General
Government Appropriations Act, 2020,\32\ 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.'' \33\ The Department of the
Treasury issued its report on September 15, 2020.\34\
---------------------------------------------------------------------------
\32\ Division C of the Consolidated Appropriations Act, 2020;
Public Law 116-93, approved December 20, 2019.
\33\ Senate Report 116-111, at page 11.
\34\ U.S. Department of the Treasury, ``The Current Expected
Credit Loss Accounting Standard and Financial Institution Regulatory
Capital'' (2020). The report is available at: https://home.treasury.gov/system/files/216/The-CECL-Accounting-Standard-and-Financial-Institution-Regulatory-Capital-Study-9-15-20.pdf.
---------------------------------------------------------------------------
While the report affirms the Department of the Treasury's support
for the goals of CECL, it also acknowledged that a ``definitive
assessment of the impact of CECL on regulatory capital is not currently
feasible, in light of the state of CECL implementation across financial
institutions and current market dynamics.'' \35\ Accordingly, the
report provides that the Department of the Treasury ``will continue to
actively monitor CECL implementation and
[[Page 34932]]
consult with relevant stakeholders, including the prudential
regulators, FASB, and the SEC.'' \36\ Among other recommendations, the
report suggests that the prudential regulators ``monitor the use and
impact of transitional relief granted, and extend or amend the relief,
as necessary.'' \37\ Further, the report provides that ``FASB, together
with the prudential regulators, should examine the application of CECL
to smaller lenders.'' The report highlights FICUs and community banks
in this regard, noting that the NCUA and the FDIC have separately asked
for relief from FASB.\38\
---------------------------------------------------------------------------
\35\ Id., at page 5.
\36\ Id.
\37\ Id.
\38\ Id., at pages 28-29.
---------------------------------------------------------------------------
This final rule is consistent with the Department of the Treasury's
report, particularly with respect to the recommendation regarding
transitional relief. The Board will continue to assess the impacts of
CECL on regulatory capital and will consider these-- and any other
future recommendations made by the Department of the Treasury--in
taking further action to address the impacts of CECL implementation on
the credit union industry.
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 $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 final rule. For example, the 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 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 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.
---------------------------------------------------------------------------
\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 final rule will 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).
---------------------------------------------------------------------------
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 Office of Management and Budget (OMB) for it to determine if the
final rule is a ``major rule'' for purposes of SBREFA. The NCUA also
will file appropriate reports with Congress and the Government
Accountability Office so this rule may be reviewed.
---------------------------------------------------------------------------
\44\ Public Law 104-121, 110 Stat. 147 (1996).
\45\ 5 U.S.C. 551.
---------------------------------------------------------------------------
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 June 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed above, the NCUA amends 12 CFR 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, consisting of Sec. Sec. 702.701 through 702.703. to
read as follows:
Subpart G--CECL Transition Provisions
Sec.
702.701 Authority, purpose, and scope.
702.702 Definitions.
702.703 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
[[Page 34933]]
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 Sec.
702.402(d)(1)(i); or
(ii) In the case of Federally-insured, State-chartered credit
unions, any other applicable standard under State law or regulation
under Sec. 702.402(d)(1)(ii)(B).
(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 Sec. 702.402(d)(1)(ii)(A).
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
the first day of the fiscal year in which the credit union adopts CECL.
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 its first fiscal
year beginning after 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 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; 8:45 am]
BILLING CODE 7535-01-P
