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January/February 2018 Issue: Front Page > Operations

The Top 10 Mile Markers on the Road to CECL Implementation
1. Assemble a CECL Implementation Committee
road with mile markers If you haven't already taken this first step, the time is NOW! This cross-functional group of professionals should include representatives from all the specialized areas that constitute your credit union, namely accounting, lending, investments, internal audit and IT. You'll want to make sure the loan underwriting function is well represented given that's where the credit risk management function usually resides. You should consider engaging external experts with whom you may be doing business already, such as your external auditors. Seek out specialist consultants who can help put you on the right track and keep you out of the ditches.

2. Establish a Topical Knowledge Base
Your CECL implementation committee must become, in essence, a functional brain trust. The committee members must gather and assimilate a wide-ranging knowledge base of the "nuts & bolts" of the practices, methodologies, processes and analyses that must be applied to your loan and investment assets in order to assess the likelihood and quantify the amounts of prospective credit losses. Attend seminars and webinars to understand the issues and become aware of potential solutions. Determine the appropriate criteria by which to segment your loan portfolio into defined loan pools. Understand the mathematics of processes such as discounting and regression analysis. Scope out your data to identify what you do and do not have. Test-drive prospective software programs. Again, the time to do this is NOW.

3. Scrutinize the Current Loan & Investment Portfolios
Ideally, you should seek to maximize data visibility over each member loan record and each investment instrument you carry on your balance sheet. For each unique loan, this includes data points such as payment and delinquency history even if the loan is current and performing at present.

4. Evaluate the Loan Loss/Charge-Off History & the Loss Recovery History
Do a deep-dive of the loss history of each unique loan account, and aggregate those loan histories by loan type and/or pool. Gather up all historical data available pertaining to real-world credit losses you've incurred, and do the same regarding the charged-off loan assets you've been able to recover that have reduced your gross loss history retrospectively.

5. Rectify Current-Day Data Shortfalls
As you go, identify and document precisely what data you find to be missing due to how your current processes and systems are configured. Waste no time in seeking out avenues to fill data gaps, and be prepared for having to expand the scope of data you capture going forward.

6. Rectify Historical Data Shortfalls
As you identify your current-day data shortfalls, it will likely make it obvious what historical data is absent as well. Research the potential of how to source historical data internally or externally to back-fill the data gaps and produce a robust database of loan portfolio history.

7. Examine "Special Case" Accounts for Appropriate Treatment under CECL
Any loan that has been modified by a unique accommodation (such as a TDR account) and any investment that requires exception accounting (such as OTTI treatment) will likely require individual examination with regard to how your accounting processes might change under CECL.

8. Compile Historical Loan & Investment Data at the Instrument Level
To drive this point home . . . in order to amass the qualitatively best database in terms of historical data stored and current data captured going forward, you'll want to drill all the way down to the individual account/record level if at all possible.

9. Beware of Complications linked to Operational Changes of a Structural Nature
Implementing new software systems, especially if associated with structural changes to the credit union as an entity (such as a merger), will likely cause CECL implementation complications and disruptions by reshuffling the deck and causing significant ripple effects. While such disruptions may be unavoidable, they need not be unanticipated and you need not be unprepared. Dedicate as many resources as tenable toward scoping out and managing such disruptions to the maximum extent possible ahead of time.

10. Update Internal Policies & Procedures to Reflect CECL Implementation/Compliance
By the time you've passed all the above mile markers, you'll surely have compiled an extensive list of specific items and issues that need to be addressed/codified in terms of policy language and procedural steps. You'll need to do this in order to cover all aspects of credit risk using CECL-specific terminology and phraseology. In fact, it is recommended you make language edits as you go, and you should expect to go through more than a couple rounds of editing by the time all the requisite process changes have been road-tested and the kinks ironed out.

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