The Current Expected Credit Loss (CECL) standard, which came into effect for credit unions at the start of 2023, has now been part of your operational landscape for over a year.
By now, you’ve implemented CECL compliance, but ongoing refinement and optimization are crucial for long-term success. Whether you’re still adjusting or looking to improve, here are the best practices your credit union can adopt to master CECL in today’s environment.
7 Best Practices for CECL
1. Strengthen Your Data Collection and Management
Your credit union’s data is the foundation of CECL compliance. To produce accurate credit loss estimates, focus on gathering historical loan performance data, including charge-offs, recoveries, and prepayments, across different economic cycles.
Incorporate relevant economic variables, such as unemployment rates and housing trends, to improve the reliability of your projections. Regularly audit your data to ensure its accuracy and consistency.
By investing in data management tools that integrate with your core processor, you can streamline data collection and reporting efforts.
2. Choose the Right CECL Model
CECL gives you the flexibility to choose a model that fits your credit union’s size and portfolio complexity.
Source: NCUA
Experiment with multiple models to find the one that delivers the most actionable results for your team. You can also partner with consultants to validate your choice and ensure it aligns with regulatory expectations.
3. Leverage Technology for Efficiency
CECL requires you to incorporate forward-looking estimates of credit losses, combining historical trends with anticipated economic conditions.
- Create multiple economic scenarios to test how resilient your loan portfolio is under different circumstances.
- Use forecasts from trusted financial analysts to refine your projections and update them regularly to reflect changing conditions.
Collaborating with experts, such as economists or data scientists, can help you fine-tune your assumptions and methods for greater accuracy.
4. Engage Key Stakeholders
CECL impacts various departments within your credit union, making collaboration crucial. Establish a CECL task force with members from accounting, risk management, IT, and lending to manage the implementation process.
Keep your board informed about progress and challenges to ensure they comprehend the financial impacts.
Offering CECL training to your staff will help them understand the methodologies, data needs, and reporting procedures, ensuring everyone stays coordinated and knowledgeable.
5. Monitor and Refine Your CECL Processes
Compliance with CECL doesn’t stop at implementation—it’s an ongoing process. Regularly validate your models to ensure they remain effective and perform internal audits to identify areas for improvement.
Stay informed about regulatory changes and economic shifts that might impact your credit loss estimates. By scheduling periodic reviews and recalibrations, your credit union can maintain accuracy and regulatory compliance over the long term.
6. Focus on Economic Forecasting
CECL requires you to incorporate forward-looking estimates of credit losses, combining historical trends with anticipated economic conditions.
Create multiple economic scenarios to test how resilient your loan portfolio is under different circumstances.
Use forecasts from trusted financial analysts to refine your projections and update them regularly to reflect changing conditions. Collaborating with experts, such as economists or data scientists, can help you fine-tune your assumptions and methods for greater accuracy.
7. Plan for Financial Impact
CECL’s forward-looking nature may lead to higher initial reserves, which can impact your credit union’s financial position. Conduct an impact analysis to determine how CECL will affect your reserves and capital.
Prepare for potential volatility by building financial cushions to absorb fluctuations.
Stay Compliant with FLEX Technology
Navigating CECL compliance might seem overwhelming, but with the right technology partner, your credit union can manage it with ease.
FLEX has established a CECL committee to help credit unions identify necessary data for loan processes like origination, modification, and payoff. FLEX enables precise trend-based adjustments using CECL data stored in the FLEX System.
Tap the button below to discover how FLEX can assist your credit union with CECL and overall compliance.
