NCUA Chairman Debbie Matz has told the Financial Accounting Standards Board that the group’s proposed credit loss accounting standard present safety and soundness concerns for small and medium sized credit unions.
Matz expressed her concerns about the proposal, which industry leaders estimate could double or even triple current allowances for loan and lease losses, in a supplemental letter sent Friday following an interagency opinion that included the NCUA, FDIC, Federal Reserve Board and the Office of the Comptroller of the Currency.
“I urge the FASB to consider the unintended consequences of enacting financial reporting rules that may unduly impact the financial performance of small- and medium-sized credit unions and discourage these institutions from making loans to low-income borrowers, particularly during times of economic distress,” Matz wrote. “Since credit unions were the only federally insured financial institutions to increase lending throughout the recent economic downturn, discouraging credit union lending would negatively impact consumers going forward.”
The FASB proposal would require ALLL to be based upon a single expected loss model that includes estimated losses over the life of each loan, rather than historical data. Additionally, the exposure draft required losses be recognized before they are actually incurred.
Small and mid-sized credit unions don’t have the resources to perform complex economic analysis at the time of loan underwriting, Matz said. As a result, they would be forced to either hire a third-party consultant or cut back on lending.
“Either choice would result in lower net income and reduced services to consumers, which would threaten the viability of these institutions over the long term,” she wrote.
Instead, Matz suggested the standard include basic, scalable examples for credit unions that are not able to reasonably calculate expected credit losses. The chairman offered her assistance in understanding the implementation challenges of small and mid-sized credit unions as the FASB re-deliberates the proposal.