NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 702 RIN Transition to ...

June 2021 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.

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 Date: [Insert date 30 days after date of publication in the FEDERAL REGISTER.]

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. This Final Rule II. Background

A. CECL Accounting Methodology B. The Board's August19, 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

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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

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

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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:

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.

1 85 FR 50964 (Aug. 19, 2020). The proposed rule is available from the Federal Register website at: 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

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

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. () 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. (). 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: . 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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