Interagency Policy Statement on Allowances for Credit Losses, 55510-55522 [2019-22655]

Download as PDF 55510 Proposed Rules Federal Register Vol. 84, No. 201 Thursday, October 17, 2019 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 30 [Docket No. ID OCC–2019–0013] FEDERAL RESERVE SYSTEM 12 CFR Part 208 [Docket No. OP–1680] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 364 RIN 3064–ZA10 NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 741 RIN 3133–AF05 Interagency Policy Statement on Allowances for Credit Losses Office of the Comptroller of the Currency (OCC), Treasury; Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); and National Credit Union Administration (NCUA). ACTION: Proposed interagency policy statement; request for comment. AGENCY: The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (collectively, the banking agencies), and the National Credit Union Administration (collectively, the agencies) are inviting public comment on a proposed interagency policy statement on allowances for credit losses (ACLs). The agencies are issuing this proposed interagency policy statement in response to changes to U.S. generally accepted accounting principles (GAAP) as promulgated by SUMMARY: VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 the Financial Accounting Standards Board (FASB) in Accounting Standards Update (ASU) 2016–13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments issued since June 2016. These updates are codified in Accounting Standards Codification (ASC) Topic 326, Financial Instruments—Credit Losses (FASB ASC Topic 326). This proposed interagency policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology and the accounting for impairment on available-for-sale (AFS) debt securities in accordance with FASB ASC Topic 326; supervisory expectations for designing, documenting, and validating expected credit loss estimation processes, including the internal controls over these processes; maintaining appropriate ACLs; the responsibilities of boards of directors and management; and examiner reviews of ACLs. DATES: Comments must be received by December 16, 2019. ADDRESSES: Interested parties are invited to submit written comments to any or all of the agencies. All comments, which should refer to the ‘‘Proposed Interagency Policy Statement on Allowances for Credit Losses,’’ will be shared among the agencies. OCC: Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title ‘‘Proposed Interagency Policy Statement on Allowances for Credit Losses’’ to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: • Federal eRulemaking Portal— Regulations.gov Classic or Regulation.gov Beta Regulation.gov Classic: Go to https:// www.regulations.gov/. Enter ‘‘Docket ID OCC–2019–0013’’ in the Search Box and click ‘‘Search.’’ Click on ‘‘Comment Now’’ to submit public comments. For help with submitting effective comments please click on ‘‘View Commenter’s Checklist.’’ Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments. PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 Regulations.gov Beta: Go to https:// beta.regulations.gov/ or click ‘‘Visit New Regulations.gov Site’’ from the Regulations.gov classic homepage. Enter ‘‘Docket ID OCC–2019–0013’’ in the Search Box and click ‘‘Search.’’ Public comments can be submitted via the ‘‘Comment’’ box below the displayed document information or click on the document title and click the ‘‘Comment’’ box on the top-left side of the screen. For help with submitting effective comments please click on ‘‘Commenter’s Checklist.’’ For assistance with the Regulations.gov Beta site please call (877) 378–5457 (toll free) or (703) 454–9859 Monday–Friday, 9 a.m.–5 p.m. ET or email to regulations@ erulemakinghelpdesk.com. • Email: regs.comments@ occ.treas.gov. • Mail: Chief Counsel’s Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Hand Delivery/Courier: 400 7th Street SW, Suite 3E–218, Washington, DC 20219. • Fax: (571) 465–4326. Instructions: You must include ‘‘OCC’’ as the agency name and ‘‘Docket ID OCC–2019–0013’’ in your comment. In general, the OCC will enter all comments received into the docket and publish them on the Regulations.gov website without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this notice by any of the following methods: • Viewing Comments Electronically— Regulations.gov Classic or Regulations.gov Beta Regulations.gov Classic: Go to https:// www.regulations.gov/. Enter ‘‘Docket ID OCC–2019–0013’’ in the Search box and click ‘‘Search.’’ Click on ‘‘Open Docket Folder’’ on the right side of the screen. Comments and supporting materials can be viewed and filtered by clicking on ‘‘View all documents and comments in E:\FR\FM\17OCP1.SGM 17OCP1 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules this docket’’ and then using the filtering tools on the left side of the screen. Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov. The docket may be viewed after the close of the comment period in the same manner as during the comment period. Regulations.gov Beta: Go to https:// beta.regulations.gov/ or click ‘‘Visit New Regulations.gov Site’’ from the Regulations.gov classic homepage. Enter ‘‘Docket ID OCC–2019–2013’’ in the Search Box and click ‘‘Search.’’ Click on the ‘‘Comments’’ tab. Comments can be viewed and filtered by clicking on the ‘‘Sort By’’ drop-down on the right side of the screen or the ‘‘Refine Results’’ options on the left side of the screen. Supporting Materials can be viewed by clicking on the ‘‘Documents’’ tab and filtered by clicking on the ‘‘Sort By’’ drop-down on the right side of the screen or the ‘‘Refine Results’’ options on the left side of the screen.’’ For assistance with the Regulations.gov Beta site please call (877) 378–5457 (toll free) or (703) 454–9859 Monday–Friday, 9 a.m.–5 p.m. ET or email to regulations@ erulemakinghelpdesk.com. The docket may be viewed after the close of the comment period in the same manner as during the comment period. • Viewing Comments Personally: You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649–6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649–5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect comments. Board: You may submit written comments, identified by Docket No. OP–1680, by any of the following methods: • Agency Website: https:// www.federalreserve.gov. Follow the instructions for submitting comments at https://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm. • Email: regs.comments@ federalreserve.gov. Include docket number in the subject line of the message. • Fax: (202) 452–3819 or 202–452– 3102. • Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. All public comments will be made available on the Board’s website at https://www.federalreserve.gov/ VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or to remove personally identifiable information at the commenter’s request. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC 20006, between 9:00 a.m. and 5:00 p.m. on weekdays. FDIC: You may submit comments, which should refer to ‘‘Proposed Interagency Policy Statement on Allowances for Credit Losses,’’ by any of the following methods: • Agency Website: https:// www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the FDIC’s website. • Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments. • Email: Comments@fdic.gov. Include ‘‘Proposed Interagency Policy Statement on Allowances for Credit Losses’’ in the subject line of the message. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. • Hand Delivery: Comments may be hand delivered to the guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m. Public Inspection: All comments received will be posted without change to https://www.fdic.gov/regulations/ laws/federal/ including any personal information provided. Paper copies of public comments may be requested from the FDIC Public Information Center by telephone at (877) 275–3342 or (703) 562–2200. NCUA: You may submit comments by any one of the following methods (please send comments by one method only): • Federal Rulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • Email: Address to regcomments@ ncua.gov. Include ‘‘[Your name]— Comments on Proposed Interagency Policy Statement on Allowances for Credit Losses’’ in the email subject line. • Fax: (703) 518–6319. Use the subject line described above for email. • Mail: Address to Gerard Poliquin, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314– 3428. • Hand Delivery/Courier: Same as mail address. Public Inspection: You can view all public comments on NCUA’s website at PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 55511 https://www.ncua.gov/regulationsupervision/rules-regulations/proposedpending-and-recently-final-regulations as submitted, except for those we cannot post for technical reasons. NCUA will not edit or remove any identifying or contact information from the public comments submitted. You may inspect paper copies of comments in NCUA’s law library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an appointment, call (703) 518–6546 or send an email to OGCMail@ncua.gov. FOR FURTHER INFORMATION CONTACT: OCC: Amanda Freedle, Senior Accounting Policy Advisor, Office of the Chief Accountant, (202) 649–6280; or Kevin Korzeniewski, Counsel, Chief Counsel’s Office, (202) 649–5490; or for persons who are hearing impaired, TTY, (202) 649–5597. BOARD: Lara Lylozian, Assistant Chief Accountant—Supervision, (202) 475–6656; or Kevin Chiu, Accounting Policy Analyst, (202) 912–4608, Division of Supervision and Regulation; or David W. Alexander, Senior Counsel, (202) 452–2877; or Asad Kudiya, Senior Counsel, (202) 475–6358, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263–4869. FDIC: Shannon Beattie, Chief, Accounting and Securities Disclosure Section, (202) 898–3952; or John Rieger, Deputy Chief Accountant, (202) 898– 3602; or Andrew Overton, Examination Specialist (Bank Accounting), (202) 898–8922; Division of Risk Management Supervision; or Michael Phillips, Counsel, (202) 898–3581, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. NCUA: Technical information: Alison Clark, Chief Accountant, Office of Examination and Insurance, at the above address or telephone (703) 518–6611 or Legal information: Ariel Pereira, Staff Attorney, Office of General Counsel, at (703) 548–2778. SUPPLEMENTARY INFORMATION: I. Background FASB ASC Topic 326 introduces the CECL methodology, which replaces the incurred loss methodology for financial assets measured at amortized cost, net investments in leases, and certain offbalance-sheet credit exposures, and modifies the accounting for impairment on AFS debt securities. FASB ASC Topic 326 applies to all banks, savings E:\FR\FM\17OCP1.SGM 17OCP1 55512 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules associations, credit unions, and financial institution holding companies (collectively, institutions), regardless of size, that file regulatory reports for which the reporting requirements conform to GAAP.1 The agencies are maintaining conformance with GAAP and consistency with FASB ASC Topic 326 through their issuance of the proposed Interagency Policy Statement on Allowances for Credit Losses. For FDIC-insured institutions, the banking agencies have issued guidelines establishing standards for safety and soundness, including operational and managerial standards that address such matters as internal controls and information systems, an internal audit system, loan documentation, credit underwriting, asset quality, and earnings and should be appropriate for an institution’s size and the nature, scope, and risk of its activities.2 The principles described in the proposed interagency policy statement are consistent with these guidelines. The effective dates of FASB ASC Topic 326 vary for different institutions. Under GAAP as currently in effect, FASB ASC Topic 326 is effective for institutions that are public business entities (PBEs) and also are Securities and Exchange Commission (SEC) filers, as both terms are defined in GAAP, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For institutions that are PBEs but not SEC filers, FASB ASC Topic 326 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For institutions that are not PBEs (nonPBEs), FASB ASC Topic 326 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.3 Early 1 See section 37(a) of the Federal Deposit Insurance Act and section 202(a) of the Federal Credit Union Act. Under these statutory provisions, the accounting principles applicable to reports or statements required to be filed by all insured depository institutions with the federal banking agencies or by all insured credit unions with assets of $10 million or more with the NCUA Board must be uniform and consistent with GAAP. Furthermore, regardless of asset size, all federally insured credit unions must comply with GAAP for certain financial reporting requirements relating to charges for loan losses. See 12 U.S.C. 1831n(a)(2)(A), 12 U.S.C. 1782(a)(6)(C), and 12 CFR 702.402(d). 2 See Appendix A to 12 CFR part 30 (OCC), Appendix D to 12 CFR part 208 (Board), and Appendix A to 12 CFR part 364 (FDIC), which were adopted by the banking agencies pursuant to Section 39 of the Federal Deposit Insurance Act. See 12 U.S.C. 1831p–1. National credit unions should refer to Section 206(b)(1) of the Federal Credit Union Act (12 U.S.C. 1786) and 12 CFR 741.3. 3 On July 17, 2019, the FASB Board decided to adopt a two-bucket approach to stagger effective VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 application of FASB ASC Topic 326 is permitted for all institutions for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. II. Overview of the Proposed Interagency Policy Statement on Allowances for Credit Losses The agencies are issuing this proposed interagency policy statement on allowances for credit losses (ACLs) in response to the changes in accounting for credit losses in accordance with FASB ASC Topic 326. The proposed interagency policy statement would be effective at the time of each institution’s adoption of FASB ASC Topic 326. The following policy statements would no longer be effective for an institution upon its adoption of FASB ASC Topic 326: The agencies’ December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses; the banking agencies’ July 2001 Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions; and the NCUA’s May 2002 Interpretive Ruling and Policy Statement 02–3, Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions (collectively, the ALLL policy statements). After FASB ASC Topic 326 is effective for all institutions, the agencies will rescind the ALLL policy statements. This proposed interagency policy statement describes the CECL methodology for determining ACLs applicable to financial assets measured at amortized cost, including loans heldfor-investment, net investments in leases, held-to-maturity (HTM) debt securities, and certain off-balance-sheet credit exposures in accordance with FASB ASC Topic 326. It also describes the estimation of an ACL for an impaired AFS debt security in accordance with FASB ASC Subtopic 326–30. The proposed interagency policy statement also includes and updates concepts and practices detailed in the existing ALLL policy statements that remain relevant under FASB ASC Topic 326. These concepts and practices relate to management’s responsibilities for the dates for major accounting standards including FASB ASC Topic 326. The FASB Board decided that FASB ASC Topic 326 will be effective for SEC filers, excluding smaller reporting companies (SRCs) as currently defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the FASB Board decided that FASB ASC Topic 326 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 allowance estimation process, including the need to appropriately support and document the institution’s allowance estimates; the board of directors’ responsibilities for overseeing management’s processes; and the role of examiners in reviewing the appropriateness of an institution’s ACLs as part of their supervisory activities. An attachment to the agencies’ December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses addresses concepts and practices related to loan review systems. Rather than updating the agencies’ guidance on loan review systems as part of the proposed interagency policy statement on ACLs, the agencies are currently developing separate standalone guidance on supervisory expectations for effective credit risk review. III. Request for Comment The agencies request comments on all aspects of the proposed interagency policy statement, including but, not limited to those set forth below. The agencies will revise the Statement, if needed and as appropriate, after reviewing the comments received on the proposal. (1) Does the proposed interagency policy statement clearly describe the measurement of expected credit losses under CECL in accordance with FASB ASC Topic 326? Why or why not? If not, what additional information is needed? What information should be omitted from the policy statement? (2) Does the proposed interagency policy statement clearly describe the measurement of credit losses on impaired AFS debt securities in accordance with FASB ASC Topic 326? Why or why not? If not, what additional information is needed? What information should be omitted from the policy statement? (3) Does the proposed interagency policy statement clearly communicate supervisory expectations for designing, documenting, and validating expected credit loss estimation processes, internal controls over ACLs, and maintaining appropriate ACLs? (4) Has the proposed interagency policy statement appropriately included concepts and practices detailed in the existing ALLL policy statements that also are relevant under FASB ASC Topic 326? If not, what additional information should also be included? IV. The Paperwork Reduction Act In accordance with the requirements of the Paperwork Reduction Act of 1995 E:\FR\FM\17OCP1.SGM 17OCP1 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules (PRA),4 the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The proposed interagency policy statement will not create any new or revise any existing collections of information under the PRA. Therefore, no information collection request will be submitted to the OMB for review. V. Proposed Interagency Policy Statement The text of the proposed interagency policy statement is as follows: Interagency Policy Statement on the Allowances for Credit Losses Purpose The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA) (collectively, the agencies) are issuing this Interagency Policy Statement on Allowances for Credit Losses (hereafter, the policy statement) to promote consistency in the interpretation and application of Financial Accounting Standards Board (FASB) Accounting Standards Update 2016–13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as well as the amendments issued since June 2016.5 These updates are codified in Accounting Standards Codification (ASC) Topic 326, Financial Instruments—Credit Losses (FASB ASC Topic 326). FASB ASC Topic 326 applies to all banks, savings associations, credit unions, and financial institution holding companies (collectively, institutions), regardless of size, that file regulatory reports for which the reporting requirements conform to U.S. generally accepted accounting principles (GAAP).6 This policy statement describes the measurement of expected credit losses in accordance with FASB ASC Topic 326; supervisory expectations for designing, documenting, and validating expected credit loss estimation processes, including the internal controls over these processes; maintaining appropriate allowances for credit losses (ACLs); the responsibilities of boards of directors and management; and examiner reviews of ACLs. This policy statement is effective at the time of each institution’s adoption of FASB ASC Topic 326.7 The following policy statements are no longer effective for an institution upon its adoption of 55513 FASB ASC Topic 326: The December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses; the July 2001 Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions; and the NCUA’s May 2002 Interpretive Ruling and Policy Statement 02–3, Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions (collectively, ALLL Policy Statements). After FASB ASC Topic 326 is effective for all institutions, the agencies will rescind the ALLL Policy Statements. The principles described in this policy statement are consistent with GAAP, applicable regulatory reporting requirements,8 safe and sound banking practices, and the agencies’ codified guidelines establishing standards for safety and soundness.9 The operational and managerial standards included in those guidelines, which address such matters as internal controls and information systems, an internal audit system, loan documentation, credit underwriting, asset quality, and earnings, should be appropriate for an institution’s size and the nature, scope, and risk of its activities. Contents Scope ................................................................................................................................................................................................................... Measurement of ACLs for Loans, Leases, Held-to-Maturity Debt Securities, and Off-Balance-Sheet Credit Exposures ............................. Overview of ACLs ....................................................................................................................................................................................... Collective Evaluation of Expected Losses .................................................................................................................................................. Estimation Methods for Expected Credit Losses ....................................................................................................................................... Contractual Term of a Financial Asset ...................................................................................................................................................... Historical Loss Information ........................................................................................................................................................................ Reasonable and Supportable Forecasts ...................................................................................................................................................... Reversion ..................................................................................................................................................................................................... Qualitative Factor Adjustments .................................................................................................................................................................. Collateral-Dependent Financial Assets ...................................................................................................................................................... Troubled Debt Restructurings ..................................................................................................................................................................... Purchased Credit-Deteriorated Assets ........................................................................................................................................................ Financial Assets Secured with Collateral Maintenance Agreements ....................................................................................................... 4 44 U.S.C. 3501–3521. FASB issued Accounting Standards Update (ASU) 2016–13 on June 16, 2016. The following updates were published after the issuance of ASU 2016–13: ASU 2018–19—Codification Improvements to Topic 326, Financial Instruments—Credit Losses; ASU 2019–04— Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; and ASU 2019–05—Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. Additionally, institutions may refer to FASB Staff Q&A-Topic 326, No. 1, Whether the Weighted-Average Remaining Maturity Method is an Acceptable Method to Estimate Expected Credit Losses, and FASB Staff Q&A-Topic 326, No. 2, Developing an Estimate of Expected Credit Losses on Financial Assets. 6 U.S. branches and agencies of foreign banking organizations may choose to, but are not required to, maintain ACLs on a branch or agency level. These institutions should refer to the instructions for the FFIEC 002, Report of Assets and Liabilities 5 The VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 of U. S. Branches and Agencies of Foreign Banks; Supervision and Regulation (SR) Letter 95–4, Allowance for Loan and Lease Losses for U. S. Branches and Agencies of Foreign Banking Organizations; and SR Letter 95–42, Allowance for Loan and Lease Losses for U.S. Branches and Agencies of Foreign Banking Organizations. 7 The effective date for FASB ASC Topic 326 is based on an institution’s characteristics, including an institution’s U.S. Securities and Exchange Commission (SEC) filing status, as described in Accounting Standards Codification (ASC) 326–10– 65–1, with early adoption permitted only as of the beginning of an institution’s fiscal year. 8 For FDIC-insured depository institutions, Section 37(a) of the Federal Deposit Insurance Act (12 U.SC. 1831n(a)) states that, in general, the accounting principles applicable to the Consolidated Reports of Condition and Income (Call Report) ‘‘shall be uniform and consistent with generally accepted accounting principles.’’ Section 202(a)(6)(C) of the Federal Credit Union Act (12 U.S.C. 1782(a)(6)(C)) establishes the same standard for federally insured credit unions with assets of PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 16 19 19 20 21 22 23 23 24 25 28 29 30 31 $10 million or greater, providing that, in general, the ‘‘[a]ccounting principles applicable to reports or statements required to be filed with the [NCUA] Board by each insured credit union shall be uniform and consistent with generally accepted accounting principles.’’ Furthermore, regardless of asset size, all federally insured credit unions must comply with GAAP for certain financial reporting requirements relating to charges for loan losses. See 12 CFR 702.402(d). 9 FDIC-insured depository institutions should refer to the Interagency Guidelines Establishing Standards for Safety and Soundness adopted by their primary federal regulator pursuant to Section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1831p–1) as follows: For national banks and federal savings associations, Appendix A to 12 CFR part 30; for state member banks, Appendix D to 12 CFR part 208; and for state nonmember banks, state savings associations, and insured state-licensed branches of foreign banks, Appendix A to 12 CFR part 364. Federal credit unions should refer to Section 206(b)(1) of the Federal Credit Union Act (12 U.S.C. 1786) and 12 CFR 741.3. E:\FR\FM\17OCP1.SGM 17OCP1 55514 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules Accrued Interest Receivable ....................................................................................................................................................................... Financial Assets with Zero Credit Loss Expectations ............................................................................................................................... Estimated Credit Losses for Off-Balance-Sheet Credit Exposures ............................................................................................................ Measurement of the ACL for Available-for-Sale Debt Securities .................................................................................................................... Documentation Standards .................................................................................................................................................................................. Analyzing and Validating the Overall Measurement of ACLs ........................................................................................................................ Responsibilities of the Board of Directors ........................................................................................................................................................ Responsibilities of Management ........................................................................................................................................................................ Examiner Review of ACLs ................................................................................................................................................................................. Scope This policy statement describes the current expected credit losses (CECL) methodology for determining the ACLs applicable to loans held-for-investment, net investments in leases, and held-tomaturity debt securities accounted for at amortized cost.10 It also describes the estimation of the ACL for an availablefor-sale debt security in accordance with FASB ASC Subtopic 326–30. This policy statement does not address or supersede existing agency requirements or guidance regarding appropriate due diligence in connection with the purchase or sale of assets or determining whether assets are permissible to be purchased or held by institutions.11 The CECL methodology described in FASB ASC Topic 326 applies to financial assets measured at amortized cost, net investments in leases, and offbalance-sheet credit exposures (collectively, financial assets) including: • Financing receivables such as loans held-for-investment; • Overdrawn deposit accounts (i.e. overdrafts) that are reclassified as heldfor-investment loans; • Held-to-maturity debt securities; • Receivables that result from revenue transactions within the scope of Topic 606 on revenue from contracts with customers and Topic 610 on other income, which applies, for example, to the sale of foreclosed real estate; • Reinsurance recoverables that result from insurance transactions within the scope of Topic 944 on insurance; • Receivables related to repurchase agreements and securities lending 10 FASB ASC Topic 326 defines the amortized cost basis of an asset as the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion, or amortization of premium, discount, and net deferred fees or costs, collection of cash, write-offs, foreign exchange, and fair value hedge accounting. 11 See OCC Bulletin 2012–18, Guidance on Due Diligence Requirements in Determining Whether Securities are Eligible for Investment (for national banks and federal savings associations), 12 CFR part 1, Investment Securities (for national banks), and 12 CFR part 160, Lending and Investment (for federal savings associations). Federal credit unions should refer to 12 CFR part 703, Investment and Deposit Activities. Federally insured, state-chartered credit unions should refer to applicable state laws and regulations, as well as 12 CFR 741.219 (‘‘investment requirements’’). VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 agreements within the scope of Topic 860 on transfers and servicing; • Net investments in leases recognized by a lessor in accordance with Topic 842 on leases; and • Off-balance-sheet credit exposures including off-balance-sheet loan commitments, standby letters of credit, financial guarantees not accounted for as insurance, and other similar instruments except for those within the scope of Topic 815 on derivatives and hedging. The CECL methodology does not apply to the following financial assets: • Financial assets measured at fair value through net income, including those assets for which the fair value option has been elected; • Available-for-sale debt securities; 12 • Loans held-for-sale; • Policy loan receivables of an insurance entity; • Loans and receivables between entities under common control; and • Receivables arising from operating leases. Measurement of ACLs for Loans, Leases, Held-to-Maturity Debt Securities, and Off-Balance-Sheet Credit Exposures 32 33 35 36 37 42 44 45 48 requires management to use relevant forward-looking information and expectations drawn from reasonable and supportable forecasts when estimating expected credit losses. ACLs are evaluated as of the end of each reporting period. The methods used to determine ACLs generally should be applied consistently over time and reflect management’s current expectations of credit losses. Changes to ACLs resulting from these periodic evaluations are recorded through increases or decreases to the related provisions for credit losses (PCLs). When available information confirms that specific loans, securities, other assets, or portions thereof, are uncollectible, these amounts should be promptly written off 15 against the related ACLs. Estimating appropriate ACLs involves a high degree of management judgment and is inherently imprecise. An institution’s process for determining appropriate ACLs may result in a range of estimates for expected credit losses. An institution should support and record its best estimate within the range of expected credit losses. An ACL is a valuation account that is deducted from, or added to, the amortized cost basis of financial assets to present the net amount expected to be collected over the contractual term 13 of the assets. In estimating the net amount expected to be collected, management should consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectibility of the institution’s financial assets.14 FASB ASC Topic 326 Collective Evaluation of Expected Losses FASB ASC Topic 326 requires expected losses to be evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. Financial assets may be segmented based on one characteristic, or a combination of characteristics. Examples of risk characteristics relevant to this evaluation include, but are not limited to: • Internal or external credit scores or credit ratings; • Risk ratings or classifications; • Financial asset type; 12 Refer to FASB ASC Subtopic 326–30, Financial Instruments—Credit Losses—Available-for-Sale Debt Securities (FASB ASC Subtopic 326–30). 13 Consistent with FASB ASC Topic 326, an institution’s determination of the contractual term should reflect the financial asset’s contractual life adjusted for prepayments, renewal and extension options that are not unconditionally cancellable by the institution, and reasonably expected troubled debt restructurings. For more information, see the ‘‘Contractual Term of a Financial Asset’’ section in this policy statement. 14 Recoveries are a component of management’s estimation of the net amount expected to be collected for a financial asset. Expected recoveries of amounts previously written off or expected to be written off that are included in ACLs may not exceed the aggregate amounts previously written off or expected to be written off. In some circumstances, the ACL for a specific portfolio or loan may be negative because the amount expected to be collected, including expected recoveries, exceeds the financial asset’s amortized cost basis. 15 Consistent with FASB ASC Topic 326, this policy statement uses the verbs ‘‘write off’’ and ‘‘written off’’ and the noun ‘‘write-off.’’ These terms are used interchangeably with ‘‘charge off,’’ ‘‘charged off,’’ and ‘‘charge-off,’’ respectively, in the agencies’ regulations, guidance, and regulatory reporting instructions. Overview of ACLs PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 E:\FR\FM\17OCP1.SGM 17OCP1 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules • Collateral type; • Size; • Effective interest rate; • Term; • Geographical location; • Industry of the borrower; and • Vintage. Other risk characteristics that may be relevant for segmenting held-to-maturity debt securities include issuer, maturity, coupon rate, yield, payment frequency, source of repayment, bond payment structure, and embedded options. FASB ASC Topic 326 does not prescribe a process for segmenting financial assets for collective evaluation. Therefore, management should exercise judgment when establishing appropriate segments or pools. Management should evaluate financial asset segmentation on an ongoing basis to determine whether the financial assets in the pool continue to share similar risk characteristics. If a financial asset ceases to share risk characteristics with other assets in its segment, it should be moved to a different segment with assets sharing similar risk characteristics if such a segment exists. If a financial asset does not share similar risk characteristics with other assets, expected credit losses for that asset should be evaluated individually. Individually evaluated assets should not be included in a collective assessment of expected credit losses. Estimation Methods for Expected Credit Losses FASB ASC Topic 326 does not require the use of a specific loss estimation method for purposes of determining ACLs. Various methods may be used to estimate the expected collectibility of financial assets, with those methods generally applied consistently over time. The same loss estimation method does not need to be applied to all financial assets. Management is not precluded from selecting a different method when it determines the method will result in a better estimate of ACLs. Management may use a loss-rate method,16 probability of default/loss given default (PD/LGD) method, rollrate method, discounted cash flow method, a method that uses aging schedules, or another reasonable method to estimate expected credit losses. The selected method(s) should be appropriate for the financial assets being evaluated, consistent with the institution’s size and complexity. 16 Various loss-rate methods may be used to estimate expected credit losses under the CECL methodology. These include the weighted-average remaining maturity (WARM) method, vintage analysis, and the snapshot or open pool method. VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 Contractual Term of a Financial Asset FASB ASC Topic 326 requires an institution to measure estimated expected credit losses over the contractual term of its financial assets, considering expected prepayments. Renewals, extensions, and modifications are excluded from the contractual term of a financial asset for purposes of estimating the ACL unless there is a reasonable expectation of executing a troubled debt restructuring (TDR) or the renewal and extension options are part of the original or modified contract and are not unconditionally cancellable by the institution. If such renewal or extension options are present, management must evaluate the likelihood of a borrower exercising those options when determining the contractual term. Historical Loss Information Historical loss information generally provides a basis for an institution’s assessment of expected credit losses. Historical loss information may be based on internal information, external information, or a combination of both. Management should consider whether the historical loss information may need to be adjusted for differences in current asset specific characteristics such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the reporting date. Management should then consider whether further adjustments to historical loss information are needed to reflect the extent to which current conditions and reasonable and supportable forecasts differ from the conditions that existed during the historical loss period. Adjustments to historical loss information may be quantitative or qualitative in nature and should reflect changes to relevant data (such as changes in unemployment rates, delinquency, or other factors associated with the financial assets). Reasonable and Supportable Forecasts When estimating expected credit losses, FASB ASC Topic 326 requires management to consider forwardlooking information that is both reasonable and supportable and relevant to assessing the collectibility of cash flows. Reasonable and supportable forecasts may extend over the entire contractual term of a financial asset or a period shorter than the contractual term. FASB ASC Topic 326 does not prescribe a specific method for determining reasonable and supportable forecasts nor does it include bright lines PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 55515 for establishing a minimum or maximum length of time for reasonable and supportable forecast period(s). Judgment is necessary in determining an appropriate period(s) for each institution. Reasonable and supportable forecasts may vary by portfolio segment or individual forecast input. These forecasts may include data from internal sources, external sources, or a combination of both. Management is not required to search for all possible information nor incur undue cost and effort to collect data for its forecasts. However, reasonably available and relevant information should not be ignored in assessing the collectibility of cash flows. Management should evaluate the appropriateness of the reasonable and supportable forecast period(s) each reporting period, consistent with other inputs used in the estimation of expected credit losses. Institutions may develop reasonable and supportable forecasts by using one or more economic scenarios. FASB ASC Topic 326 does not require the use of multiple economic scenarios, however, institutions are not precluded from considering multiple economic scenarios when estimating expected credit losses. Reversion When the contractual term of a financial asset extends beyond the reasonable and supportable period, FASB ASC Topic 326 requires reverting to historical loss information, or an appropriate proxy, for those periods beyond the reasonable and supportable forecast period (often referred to as the reversion period). Management may revert to historical loss information for each individual forecast input or based on the entire estimate of loss. FASB ASC Topic 326 does not require the application of a specific reversion technique or use of a specific reversion period. Reversion to historical loss information may be immediate, occur on a straight-line basis, or use any systematic, rational method. Management may apply different reversion techniques depending on the economic environment or the financial asset portfolio. Reversion techniques are not accounting policy elections and should be evaluated for appropriateness each reporting period, consistent with other inputs used in the estimation of expected credit losses. FASB ASC Topic 326 does not specify the historical loss information that is used in the reversion period. This historical loss information may be based on long-term average losses or on losses that occurred during a particular historical period(s). Management may E:\FR\FM\17OCP1.SGM 17OCP1 55516 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules use multiple historical periods that are not sequential. Management should not adjust historical loss information for existing economic conditions or expectations of future economic conditions for periods beyond the reasonable and supportable period. However, management should consider whether the historical loss information may need to be adjusted for differences in current asset specific characteristics such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the reporting date. Qualitative Factor Adjustments The estimation of ACLs should reflect consideration of all significant factors relevant to the expected collectibility of the institution’s financial assets as of the reporting date. Management may begin the expected credit loss estimation process by determining its historical loss information or obtaining reliable and relevant historical loss proxy data for each segment of financial assets with similar risk characteristics. Historical credit losses (or even recent trends in losses) generally do not, by themselves, form a sufficient basis to determine the appropriate levels for ACLs. Management should consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments should not be made for information that has already been considered and included in the loss estimation process. Management should consider the qualitative factors that are relevant to the institution as of the reporting date, which may include, but are not limited to: • The nature and volume of the institution’s financial assets; • The existence, growth, and effect of any concentrations of credit; • The volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets; 17 17 For banks and savings associations, adversely classified or graded loans are loans rated ‘‘substandard’’ (or its equivalent) or worse under the institution’s loan classification system. For credit unions, adversely graded loans are loans included in the more severely graded categories under the institution’s credit grading system, i.e., those loans that tend to be included in the credit union’s ‘‘watch lists.’’ Criteria related to the classification of an investment security may be found in the interagency policy statement Uniform Agreement on the Classification and Appraisal of VerDate Sep<11>2014 17:48 Oct 16, 2019 Jkt 250001 • The value of the underlying collateral for loans that are not collateral-dependent; 18 • The institution’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries; • The quality of the institution’s credit review function; • The experience, ability, and depth of the institution’s lending, investment, collection, and other relevant management and staff; • The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters; and • Actual and expected changes in international, national, regional, and local economic and business conditions and developments 19 in which the institution operates that affect the collectibility of financial assets. Management may consider the following additional qualitative factors specific to debt securities as of the reporting date: 20 • The effect of recent changes in investment strategies and policies; • The existence and effect of loss allocation methods, the definition of default, the impact of performance and market value triggers, and credit and liquidity enhancements associated with debt securities; • The effect of structural subordination and collateral deterioration on tranche performance of debt securities; • The quality of underwriting for any collateral backing debt securities; and • The effect of legal covenants associated with debt securities. Changes in the level of an institution’s ACLs may not always be directionally consistent with changes in the level of qualitative factor adjustments due to the incorporation of reasonable and Securities Held by Depository Institutions issued by the FDIC, Board, and OCC in October 2013. 18 See the ‘‘Collateral-Dependent Financial Assets’’ section of this policy statement for more information on collateral-dependent loans. 19 Changes in economic and business conditions and developments included in qualitative factor adjustments are limited to those that affect the collectibility of an institution’s financial assets and are relevant to the institution’s financial asset portfolios. For example, an economic factor for current or forecasted unemployment at the national or state level may indicate a strong job market based on low national or state unemployment rates, but a local unemployment rate, which may be significantly higher, for example, because of the actual or forecasted loss of a major local employer may be more relevant to the collectibility of an institution’s financial assets. 20 This list is not all-inclusive and all of the factors listed may not be relevant to all institutions. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 supportable forecasts in estimating expected losses. For example, if improving credit quality trends are evident throughout an institution’s portfolio in recent years, but management’s evaluation of reasonable and supportable forecasts indicates expected deterioration in credit quality of the institution’s financial assets during the forecast period, the ACL as a percentage of the portfolio may increase. Collateral-Dependent Financial Assets FASB ASC Topic 326 describes a collateral-dependent asset as a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower, based on management’s assessment, is experiencing financial difficulty as of the reporting date. For regulatory reporting purposes, the ACL for a collateral-dependent loan is measured using the fair value of collateral, regardless of whether foreclosure is probable.21 When estimating the ACL for a collateral-dependent loan, FASB ASC Topic 326 requires the fair value of collateral to be adjusted to consider estimated costs to sell if repayment or satisfaction of the loan depends on the sale of the collateral. ACL adjustments for estimated costs to sell are not appropriate when the repayment of a collateral-dependent loan is expected from the operation of the collateral. The fair value of collateral securing a collateral-dependent loan may change over time. If the fair value of the collateral as of the ACL evaluation date has decreased since the previous ACL evaluation date, the ACL should be increased to reflect the additional deterioration in the fair value of the collateral. Likewise, if the fair value of the collateral has increased as of the ACL evaluation date, the increase in the fair value of the collateral is reflected through a reduction in the ACL. Any negative ACL that results is capped at 21 The agencies, at times, prescribe specific regulatory reporting requirements that fall within a range of acceptable practice under GAAP. These specific reporting requirements, such as the requirement for institutions to apply the practical expedient in ASC 326–20–35–5 for collateraldependent loans, regardless of whether foreclosure is probable, have been adopted to achieve safety and soundness and other public policy objectives and to ensure comparability among institutions. The regulatory reporting requirement to apply the practical expedient for collateral-dependent financial assets is consistent with the agencies’ longstanding practice for collateral-dependent loans, and it continues to be limited to collateraldependent loans. It does not apply to other financial assets such as held-to-maturity debt securities that are collateral-dependent. E:\FR\FM\17OCP1.SGM 17OCP1 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules Purchased Credit-Deteriorated Assets the amount previously written off. Changes in the fair value of collateral described herein should be supported and documented through recent appraisals or evaluations.22 Troubled Debt Restructurings 23 Expected credit losses on financial assets modified in TDRs or reasonably expected to be modified in TDRs (collectively, TDRs) are estimated under the same CECL methodology that is applied to other financial assets measured at amortized cost. Expected credit losses are evaluated on a collective basis, or, if a TDR does not share similar risk characteristics with other financial assets, on an individual basis. FASB ASC Topic 326 allows an institution to use any appropriate loss estimation method to estimate ACLs for TDRs. However, there are circumstances when specific measurement methods are required. If a TDR, or a financial asset for which a TDR is reasonably expected, is collateral-dependent, the ACL is estimated using the fair value of collateral. In addition, when management has a reasonable expectation of executing a TDR or if a TDR has been executed, the expected effect of the modification (e.g., term extension or interest rate concession) is included in the estimate of the ACLs. Management should determine, support, and document how it identifies and estimates the effect of a reasonably expected TDR and estimates the related ACL. The estimated effect of reasonably expected TDRs may be included in an institution’s qualitative factor adjustments. 22 For more information on regulatory expectations related to the use of appraisals and evaluations, see the Interagency Appraisal and Evaluation Guidelines published on December 10, 2010. Insured depository institutions should also refer to the interagency regulations on appraisals adopted by their primary federal regulator as follows: For national banks and federal savings associations, Subpart C of 12 CFR part 34; for state member banks, 12 CFR parts 208 and 225; for state nonmember banks, state savings associations, and insured state-licensed branches of foreign banks, 12 CFR part 323; and for national credit unions, 12 CFR part 722. 23 A troubled debt restructuring is defined in ASC Subtopic 310–40, Receivables—Troubled Debt Restructurings by Creditors. The October 24, 2013, Interagency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings provides more information on TDRs including, but not limited to, accrual status, regulatory credit risk grade, classification and writeoff treatment, and capitalized costs. This interagency supervisory guidance remains applicable, unless affected by FASB ASC Topic 326. Information on the reporting of a subsequent restructuring of a TDR may be found in the instructions for the Call Report. VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 FASB ASC Topic 326 introduces the concept of purchased credit-deteriorated (PCD) assets. PCD assets are acquired financial assets that, at acquisition, have experienced more-than-insignificant deterioration in credit quality since origination. FASB ASC Topic 326 does not provide a prescriptive definition of more-than-insignificant credit deterioration. The acquiring institution’s management should establish and document a reasonable process to consistently determine what constitutes a more-than-insignificant deterioration in credit quality. When recording the acquisition of PCD assets, the amount of expected credit losses as of the acquisition date is added to the purchase price of the financial assets rather than recording these losses through PCLs. This establishes the amortized cost basis of the PCD assets. Any difference between the unpaid principal balance of the PCD assets and the amortized cost basis of the assets as of the acquisition date is the non-credit discount or premium. The initial ACL and non-credit discount or premium determined on a collective basis at that acquisition date are allocated to the individual PCD assets. After acquisition, ACLs for PCD assets should be adjusted at each reporting date with a corresponding debit or credit to the PCLs to reflect management’s current estimate of expected credit losses. The non-credit discount recorded at acquisition will be accreted into interest income over the remaining life of the PCD assets on a level-yield basis. Financial Assets With Collateral Maintenance Agreements Institutions may have financial assets that are secured by collateral (such as debt securities) and are subject to collateral maintenance agreements requiring the borrower to continuously replenish the amount of collateral securing the asset. If the fair value of the collateral declines, the borrower is required to provide additional collateral as specified by the agreement. FASB ASC Topic 326 includes a practical expedient for financial assets with collateral maintenance agreements where the borrower is required to provide collateral greater than or equal to the amortized cost basis of the asset and is expected to continuously replenish the collateral. In those cases, management may elect the collateral maintenance practical expedient and measure expected credit losses for these qualifying assets based on the fair value PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 55517 of the collateral.24 If the fair value of the collateral is greater than the amortized cost of the financial asset and management expects the borrower to replenish collateral as needed, management may record an ACL of zero for the financial asset when the collateral maintenance practical expedient is applied. Similarly, if the fair value of the collateral is less than the amortized cost basis of the financial asset and management expects the borrower to replenish collateral as needed, the ACL is limited to the difference between the fair value of the collateral and the amortized cost basis of the asset as of the reporting date when applying the collateral maintenance practical expedient. Accrued Interest Receivable FASB ASC Topic 326 includes accrued interest receivable in the amortized cost basis of a financial asset. As a result, accrued interest receivable is included in the amounts for which ACLs are estimated. Generally, any accrued interest receivable that is not collectible is written off against the related ACL. FASB ASC Topic 326 permits a series of independent accounting policy elections related to accrued interest receivable that alter the accounting treatment described in the preceding paragraph. These elections are made upon adoption of FASB ASC Topic 326 and may differ by financial asset portfolio. The available accounting policy elections 25 are: • Management may elect not to measure ACLs for accrued interest receivable if uncollectible accrued interest is written off in a timely manner. Management should define and document its definition of a timely write-off. • Management may elect to write off accrued interest receivable by either reversing interest income, recognizing the loss through PCLs, or through a combination of both methods. • Management may elect to separately present accrued interest receivable from the associated financial asset in its 24 For example, an institution enters into a reverse repurchase agreement with a collateral maintenance agreement. Management may not need to record the expected credit losses at each reporting date as long as the fair value of the security collateral is greater than the amortized cost basis of the reverse repurchase agreement. Refer to ASC 326–20–55–46 for more information. 25 The accounting policy elections related to accrued interest receivable that are described in this paragraph also apply to accrued interest receivable for an available-for-sale debt security that, for purposes of identifying and measuring an impairment, exclude the applicable accrued interest from both the fair value and amortized cost basis of the securities. E:\FR\FM\17OCP1.SGM 17OCP1 55518 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules regulatory reports and financial statements, if applicable. The accrued interest receivable is presented net of ACLs (if any). Financial Assets With Zero Credit Loss Expectations There may be certain financial assets for which the expectation of credit loss is zero after evaluating historical loss information, making necessary adjustments for current conditions and reasonable and supportable forecasts, and considering any collateral or guarantee arrangements that are not free-standing contracts. Factors to consider when evaluating whether expectations of zero credit loss are appropriate may include, but are not limited to: • A long history of zero credit loss; • A financial asset that is fully secured by cash or cash equivalents; • High credit ratings from rating agencies with no expected future downgrade; 26 • Principal and interest payments that are guaranteed by the U.S. government; • The issuer, guarantor, or sponsor can print its own currency and the currency is held by other central banks as reserve currency; and • The interest rate on the security is recognized as a risk-free rate. A loan that is fully secured by cash or cash equivalents, such as certificates of deposit issued by the lending institution, would likely have zero credit loss expectations. Similarly, the guaranteed portion of a U.S. Small Business Administration (SBA) loan or security purchased on the secondary market through the SBA’s fiscal and transfer agent would likely have zero credit loss expectations because these financial assets are unconditionally guaranteed by the U.S. government. Examples of held-to-maturity debt securities that may result in expectations of zero credit loss include U.S. Treasury securities as well as mortgage-backed securities issued and guaranteed by the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association. Assumptions related to zero credit loss expectations should be included in the institution’s ACL documentation. 26 Management should not rely solely on credit rating agencies but should also make its own assessment based on third party research, default statistics, and other data that may indicate a decline in credit rating. VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 Estimated Credit Losses for Off-BalanceSheet Credit Exposures FASB ASC Topic 326 requires that an institution estimate expected credit losses for off-balance-sheet credit exposures within the scope of FASB ASC Topic 326 over the contractual period during which the institution is exposed to credit risk. The estimate of expected credit losses should take into consideration the likelihood that funding will occur as well as the amount expected to be funded over the estimated remaining contractual term of the off-balance-sheet credit exposures. Management should not record an estimate of expected credit losses for off-balance-sheet exposures that are unconditionally cancellable by the issuer. Management must evaluate expected credit losses for off-balance-sheet credit exposures as of each reporting date. While the process for estimating expected credit losses for these exposures is similar to the one used for on-balance-sheet financial assets, these estimated credit losses are not recorded as part of the ACLs because cash has not yet been disbursed to fund the contractual obligation to extend credit. Instead, these loss estimates are recorded as a liability, separate and distinct from the ACLs.27 The amount needed to adjust the liability for expected credit losses on off-balancesheet credit exposures is reported as an other noninterest expense rather than being reported as part of the PCLs.28 Measurement of the ACL for Availablefor-Sale Debt Securities FASB ASC Subtopic 326–30, Financial Instruments—Credit Losses— Available-for-Sale Debt Securities (FASB ASC Subtopic 326–30) describes the accounting for expected credit losses associated with available-for-sale debt securities. Credit losses for available-forsale debt securities are evaluated as of each reporting date when the fair value is less than amortized cost. FASB ASC Subtopic 326–30 requires credit losses to be calculated individually, rather than collectively, using a discounted cash flow method, through which management compares the present value 27 The ACL associated with off-balance-sheet credit exposures is included in the ‘‘Allowance for credit losses on off-balance-sheet credit exposures’’ in Schedule RC–G—Other Liabilities in the Call Report and in the Liabilities schedule in NCUA Call Report Form 5300. 28 Provisions for credit losses on off-balance-sheet credit exposures are included as part of ‘‘Other noninterest expense’’ in Schedule RI—Income Statement in the Call Report and in ‘‘Credit Loss Expense—Off-Balance-Sheet Credit Exposures’’ in the Statement of Income and Expense in NCUA Call Report Form 5300. PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 of expected cash flows with the amortized cost basis of the security. An ACL is established, with a charge to the PCL, to reflect the credit loss component of the decline in fair value below amortized cost. If the fair value of the security increases over time, any ACL that has not been written off may be reversed through a credit to the PCL. The ACL for an available-for-sale debt security is limited by the amount that the fair value is less than the amortized cost, which is referred to as the fair value floor. If management intends to sell an available-for-sale debt security or will more likely than not be required to sell the security before recovery of the amortized cost basis, the security’s ACL should be written off and the amortized cost basis of the security should be written down to its fair value at the reporting date with any incremental impairment reported in income. A change during the reporting period in the non-credit component of any decline in fair value below amortized cost on an available-for-sale debt security is reported in other comprehensive income, net of applicable income taxes.29 When evaluating impairment for available-for-sale debt securities, management may evaluate the amortized cost basis including accrued interest receivable, or may evaluate the accrued interest receivable separately from the remaining amortized cost basis. If evaluated separately, accrued interest receivable is excluded from both the fair value of the available-for-sale debt security and its amortized cost basis.30 Documentation Standards For financial and regulatory reporting purposes, ACLs and PCLs must be determined in accordance with GAAP. ACLs and PCLs should be well documented, with clear explanations of the supporting analyses and rationale. Sound policies, procedures, and control systems should be appropriately tailored to an institution’s size and complexity, organizational structure, business environment and strategy, risk appetite, financial asset characteristics, loan administration procedures, 29 Non-credit impairment on an available-for-sale debt security that is not required to be recorded through the ACL should be reported in other comprehensive income as described in ASC 326– 30–35–2. 30 The accounting policy elections described in the ‘‘Accrued Interest Receivable’’ section of this policy statement apply to accrued interest receivable recorded for an available-for-sale debt security if an institution excludes applicable accrued interest receivable from both the fair value and amortized cost basis of the security for purposes of identifying and measuring impairment. E:\FR\FM\17OCP1.SGM 17OCP1 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules investment strategy, and management information systems.31 Maintaining, analyzing, supporting, and documenting appropriate ACLs and PCLs in accordance with GAAP is consistent with safe and sound banking practices. The policies and procedures governing an institution’s ACL processes and the controls over these processes should be designed, implemented, and maintained to reasonably estimate expected credit losses for financial assets and offbalance-sheet credit exposures as of the reporting date. The policies and procedures should describe management’s processes for evaluating the credit quality and collectibility of financial asset portfolios, including reasonable and supportable forecasts about changes in the credit quality of these portfolios, through a disciplined and consistently applied process that results in an appropriate estimate of the ACLs. Management should review and, as needed, revise the institution’s ACL policies and procedures at least annually, or more frequently if necessary. An institution’s policies and procedures for the systems, processes, and controls necessary to maintain appropriate ACLs should address, but not be limited to: • Processes that support the determination and maintenance of appropriate levels for ACLs that are based on a comprehensive, welldocumented, and consistently applied analysis of an institution’s financial asset portfolios and off-balance-sheet credit exposures. The analyses and loss estimation processes used should consider all significant factors that affect the credit risk and collectibility of the financial asset portfolios; • The roles, responsibilities, and segregation of duties of the institution’s senior management and other personnel who provide input into ACL processes, determine ACLs, or review ACLs. These departments and individuals may include accounting, financial reporting, treasury, investment management, lending, special asset or problem loan workout teams, retail collections and foreclosure groups, credit review, model risk management, internal audit, and others, as applicable. Individuals with responsibilities related to the estimation of ACLs should be competent and welltrained, with the ability to escalate material issues; • Processes for determining the appropriate historical period(s) to use as 31 Management often documents policies, procedures, and controls related to ACLs in accounting or credit risk management policies, or a combination thereof. VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 the basis for estimating expected credit losses and approaches for adjusting historical credit loss information to reflect differences in asset specific characteristics, as well as current conditions and reasonable and supportable forecasts that are different from conditions existing in the historical period(s); • Processes for determining and revising the appropriate techniques and periods to revert to historical credit loss information when the contractual term of a financial asset or off-balance-sheet credit exposure extends beyond the reasonable and supportable forecast period(s); • Processes for segmenting financial assets for estimating expected credit losses and periodically evaluating the segments to determine whether the assets continue to share similar risk characteristics; • Data capture and reporting systems that supply the quality and breadth of relevant and reliable information necessary, whether obtained internally or externally, to support and document the estimates of appropriate ACLs for regulatory reporting requirements and, if applicable, financial statement and disclosure requirements; • The description of the institution’s systematic and logical loss estimation process(es) for determining and consolidating expected credit losses to ensure that the ACLs are recorded in accordance with GAAP and regulatory reporting requirements. This may include, but is not limited to: Æ Management’s judgments, accounting policy elections, and application of practical expedients in determining the amount of expected credit losses; Æ The process for determining when a loan is collateral-dependent; Æ The process for determining the fair value of collateral, if any, used as an input when estimating the ACL, including the basis for making any adjustments to the market value conclusion and how costs to sell, if applicable, are calculated; Æ The process for determining when a financial asset has zero credit loss expectations; Æ The process for determining expected credit losses when a financial asset has a collateral maintenance provision; and Æ A description of and support for qualitative factors that affect collectibility of financial assets; • Procedures for validating and independently reviewing the loss estimation process as well as any changes to the process from prior periods; PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 55519 • Policies and procedures for the prompt write-off of financial assets, or portions of financial assets, when available information confirms the assets to be uncollectible, consistent with regulatory reporting requirements; and • The systems of internal controls used to confirm that the ACL processes are maintained and periodically adjusted in accordance with GAAP and interagency guidelines establishing standards for safety and soundness. Internal control systems for the ACL estimation processes should: • Provide reasonable assurance regarding the relevance, reliability, and integrity of data and other information used in estimating expected credit losses; • Provide reasonable assurance of compliance with laws, regulations, and the institution’s policies and procedures; • Provide reasonable assurance that the institution’s financial statements are prepared in accordance with GAAP, and the institution’s regulatory reports are prepared in accordance with the applicable instructions; • Include a well-defined and effective loan review and grading process that is consistently applied and identifies, measures, monitors, and addresses asset quality problems in an accurate, sound and timely manner. The loan review process should respond to changes in internal and external factors affecting the level of credit risk in the portfolio; and • Include a well-defined and effective process for monitoring credit quality in the debt securities portfolio. Analyzing and Validating the Overall Measurement of ACLs To ensure that ACLs are presented fairly, in accordance with GAAP and regulatory reporting requirements, and are transparent for regulatory examinations, management should document its measurements of the amounts of ACLs reported in regulatory reports and financial statements, if applicable, for each type of financial asset (e.g., loans, held-to-maturity debt securities, and available-for-sale debt securities) and for off-balance-sheet credit exposures. This documentation should include ACL calculations, qualitative adjustments, and any adjustments to the ACLs that are required as part of the internal review and challenge process. The board of directors, or a committee thereof, should review management’s assessments of and justifications for the reported amounts of ACLs. E:\FR\FM\17OCP1.SGM 17OCP1 55520 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules Various techniques are available to assist management in analyzing and evaluating the ACLs. For example, comparing estimates of expected credit losses to actual write-offs in aggregate, and by portfolio, may enable management to assess whether the institution’s loss estimation process is sufficiently designed.32 Further, comparing the estimate of ACLs to actual write-offs at the financial asset portfolio level allows management to analyze changing portfolio characteristics, such as the volume of assets or increases in write-off rates, which may affect future forecast adjustments. Techniques applied in these instances do not have to be complex to be effective, but, if used, should be commensurate with the institution’s size and complexity. Ratio analysis may also be useful for evaluating the overall reasonableness of ACLs. Ratio analysis assists in identifying divergent or emerging trends in the relationship of ACLs to other factors such as adversely classified or graded loans, past due and nonaccrual loans, total loans, historical gross writeoffs, net write-offs, and historic delinquency and default trends for securities. Comparing the institution’s ACLs to those of peer institutions may provide management with limited insight into management’s own ACL estimates. Management should apply caution when performing peer comparisons as there may be significant differences among peer institutions in the mix of financial asset portfolios, reasonable and supportable forecast period assumptions, reversion techniques, the data used for historical loss information, and other factors. When used prudently, comparisons of estimated expected losses to actual write-offs, ratio analysis, and peer comparisons can be helpful as a supplemental check on the reasonableness of management’s assumptions and analyses. Because appropriate ACLs are institutionspecific estimates, the use of comparisons does not eliminate the need for a comprehensive analysis of financial asset portfolios and the factors affecting their collectibility. When an appropriate expected credit loss framework has been used to 32 Institutions using models in the loss estimation process may incorporate a qualitative factor adjustment in the estimate of expected credit losses to capture the variance between modeled credit loss expectations and actual historical losses when the model is still considered predictive and fit for use. Institutions should monitor this variance, as well as changes to the variance, to determine if the variance is significant or material enough to warrant further changes to the model. VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 estimate expected credit losses, it is inappropriate for the board of directors or management to make further adjustments to ACLs for the sole purpose of reporting ACLs that correspond to a peer group median, a target ratio, or a budgeted amount. After analyzing ACLs, management should periodically validate the loss estimation process, and any changes to the process, to confirm that the process remains appropriate for the institution’s size, complexity, and risk profile. The validation process should include procedures for review by a party with appropriate knowledge, technical expertise, and experience who is independent of the institution’s credit approval and ACL estimation processes. A party who is independent of these processes could be from internal audit staff, a risk management unit of the institution independent of management supervising these processes, or a contracted third-party. One party need not perform the entire analysis as the validation may be divided among various independent parties.33 • Requiring management to periodically validate, and, when appropriate, revise loss estimation methods; • Approving the internal and external audit plans for the ACLs, as applicable; and • Reviewing any identified audit findings and monitoring resolution of those items. Responsibilities of Management Management is responsible for maintaining ACLs at appropriate levels and for documenting its analyses in accordance with the concepts and requirements set forth in GAAP, regulatory reporting requirements, and this policy statement. Management should evaluate the ACLs reported on the balance sheet as of the end of each period (and for credit unions, prior to paying dividends), and debit or credit the related PCLs to bring the ACLs to an appropriate level as of each reporting date. The determination of the amounts of the ACLs and the PCLs should be based on management’s current judgments about the credit quality of the Responsibilities of the Board of institution’s financial assets and should Directors consider known and expected relevant The board of directors, or a committee internal and external factors that significantly affect collectibility over thereof, is responsible for overseeing reasonable and supportable forecast management’s significant judgments periods for the institution’s financial and estimates used in determining appropriate ACLs. Evidence of the board assets as well as appropriate reversion techniques applied to periods beyond of directors’ oversight activities is the reasonable and supportable forecast subject to review by examiners. These periods. Management’s evaluations are activities should include, but are not subject to review by examiners. limited to: In carrying out its responsibility for • Retaining experienced and qualified management to oversee all ACL and PCL maintaining appropriate ACLs, management should adopt and adhere activities; to written policies and procedures that • Reviewing and approving the are appropriate to the institution’s size institution’s written loss estimation and the nature, scope, and risk of its policies, including any revisions lending and investing activities. These thereto, at least annually; policies and procedures should address • Reviewing management’s the processes and activities described in assessment of the loan review system the ‘‘Documentation Standards’’ section and management’s conclusion and support for whether the system is sound of this policy statement. Management fulfills other and appropriate for the institution’s size responsibilities that aid in the and complexity; maintenance of appropriate ACLs. • Reviewing management’s These activities include, but are not assessment of the effectiveness of limited to: processes and controls for monitoring • Establishing and maintaining the credit quality of the investment appropriate governance activities for the portfolio; loss estimation process(es). These • Reviewing management’s assessments of and justifications for the activities may include reviewing and estimated amounts reported each period challenging the assumptions used in estimating expected credit losses and for the ACLs and the PCLs; designing and executing effective 33 Engaging the institution’s external auditor to internal controls over the credit loss perform the validation process described in this estimation method(s); paragraph may impair the auditor’s independence • Periodically performing procedures under applicable auditor independence standards that compare credit loss estimates to and prevent the auditor from performing an actual write-offs, at the portfolio level independent audit of the institution’s financial and in aggregate, to confirm that statements. PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 E:\FR\FM\17OCP1.SGM 17OCP1 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules amounts recorded in the ACLs were sufficient to cover actual credit losses. This analysis supports that appropriate ACLs were recorded and provides insight into the loss estimation process’s ability to estimate expected credit losses. This analysis is not intended to reflect the accuracy of management’s economic forecasts; • Periodically validating the loss estimation process(es), including changes, if any, to confirm it is appropriate for the institution; and • Engaging in sound risk management of third-parties involved 34 in ACL estimation process(es), if applicable, to ensure that the loss estimation processes are commensurate with the level of risk, the complexity of the third-party relationship and the institution’s organizational structure. Additionally, if an institution uses loss estimation models in determining expected credit losses, management should evaluate the models before they are employed and modify the model logic and assumptions, as needed, to help ensure that the resulting loss estimates are consistent with GAAP and regulatory reporting requirements.35 To demonstrate such consistency, management should document its evaluations and conclusions regarding the appropriateness of estimating credit losses with models. When used for multiple purposes within an institution, models should be specifically adjusted and validated for use in ACL loss estimation processes. Management should document and support any adjustments made to the models, the outputs of the models, and compensating controls applied in determining the estimated expected credit losses. 34 Guidance on third party service providers may be found in SR Letter 13–19/Consumer Affairs Letter 13–21, Guidance on Managing Outsourcing Risk (FRB); Financial Institution Letter (FIL) 44– 2008, Guidance for Managing Third Party Risk (FDIC); Supervisory Letter No. 07–01, Evaluating Third Party Relationships (NCUA); and OCC Bulletin 2013–29, Third Party Relationships: Risk Management Guidance, OCC Bulletin 2017–7, Third Party Relationships: Supplemental Examination Procedures, and OCC Bulletin 2017– 21, Third Party Relationships: Frequently Asked Questions to Supplement OCC Bulletin 2013–29. 35 See the interagency statement titled, Supervisory Guidance on Model Risk Management, published by the Board in SR Letter 11–7 and OCC Bulletin 2011–12 on April 4, 2011. The statement also addresses the incorporation of vendor products into an institution’s model risk management framework following the same principles relevant to in-house models. The FDIC adopted the interagency statement on June 7, 2017. Institutions supervised by the FDIC should refer to FIL 22–2017, Adoption of Supervisory Guidance on Model Risk Management, including the statement of applicability in the FIL. VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 Examiner Review of ACLs Examiners are expected to assess the appropriateness of management’s loss estimation processes and the appropriateness of the institution’s ACL balances as part of their supervisory activities. The review of ACLs, including the depth of the examiner’s assessment, should be commensurate with the institution’s size, complexity, and risk profile. As part of their supervisory activities, examiners generally assess the credit quality and credit risk of an institution’s financial asset portfolios, the adequacy of the institution’s credit loss estimation processes, the adequacy of supporting documentation, and the appropriateness of the reported ACLs and PCLs in the institution’s regulatory reports and financial statements, if applicable. Examiners may consider the significant factors that affect collectibility, including the value of collateral securing financial assets and any other repayment sources. Supervisory activities may include evaluating management’s effectiveness in assessing credit risk for debt securities (both prior to purchase and on an on-going basis). In reviewing the appropriateness of an institution’s ACLs, examiners may: • Evaluate the institution’s ACL policies and procedures and assess the loss estimation method(s) used to arrive at overall estimates of ACLs, including the documentation supporting the reasonableness of management’s assumptions, valuations, and judgments. Supporting activities may include, but, are not limited to: Æ Evaluating whether management has appropriately considered historical loss information, current conditions, and reasonable and supportable forecasts, including significant qualitative factors that affect the collectibility of the financial asset portfolios; Æ Assessing loss estimation techniques, including loss estimation models, if applicable, as well as the incorporation of qualitative adjustments to determine whether the resulting estimates of expected credit losses are in conformity with GAAP and regulatory reporting requirements; and Æ Evaluating the adequacy of the documentation and the effectiveness of the controls used to support the measurement of the ACLs; • Assess the effectiveness of board oversight as well as management’s effectiveness in identifying, measuring, monitoring, and controlling credit risk. This may include, but is not limited to, a review of underwriting standards and practices, portfolio composition and PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 55521 trends, credit risk review functions, risk rating systems, credit administration practices, investment securities management practices, and related management information systems and reports; • Review the appropriateness and reasonableness of the overall level of the ACLs relative to the level of credit risk, the complexity of the institution’s financial asset portfolios, and available information relevant to assessing collectibility, including consideration of current conditions and reasonable and supportable forecasts. Examiners may include a quantitative analysis (e.g., using management’s results comparing expected write-offs to actual write-offs as well as ratio analysis) to assess the appropriateness of the ACLs. This quantitative analysis may be used to determine the reasonableness of management’s assumptions, valuations, and judgments and understand variances between actual and estimated credit losses. Loss estimates that are consistently and materially over or under predicting actual losses may indicate a weakness in the loss forecasting process; • Review the ACLs reported in the institution’s regulatory reports and in any financial statements and other key financial reports to determine whether the reported amounts reconcile to the institution’s estimate of the ACLs. The consolidated loss estimates determined by the institution’s loss estimation method(s) should be consistent with the final ACLs reported in its regulatory reports and financial statements, if applicable; • Verify that models used in the loss estimation process, if any, are subject to initial and ongoing validation activities. Validation activities include evaluating and concluding on the conceptual soundness of the model, including developmental evidence, performing ongoing monitoring activities, including process verification and benchmarking, and analyzing model output.36 Examiners may review model validation findings, management’s response to those findings, and applicable action plans to remediate any concerns, if applicable. Examiners may also assess the adequacy of the institution’s processes to implement changes in a timely manner; and • Review the effectiveness of the institution’s third-party risk management framework associated with the estimation of ACLs, if applicable, to assess whether the processes are commensurate with the level of risk, the complexity and nature of the 36 See E:\FR\FM\17OCP1.SGM footnote 35. 17OCP1 55522 Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / Proposed Rules relationship, and the institution’s organizational structure. Examiners may determine whether management monitors material risks and deficiencies in third-party relationships, and takes appropriate action as needed.37 When assessing the appropriateness of ACLs, examiners should recognize that the processes, loss estimation methods, and underlying assumptions an institution uses to calculate ACLs require the exercise of a substantial degree of management judgment. Even when an institution maintains sound procedures, controls, and monitoring activities, an estimate of expected credit losses is not a single precise amount and may result in a range of acceptable outcomes for these estimates. This is a result of the flexibility FASB ASC Topic 326 provides institutions in selecting loss estimation methods and the wide range of qualitative and forecasting factors that are considered. Management’s ability to estimate expected credit losses should improve over the contractual term of financial assets as substantive information accumulates regarding the factors affecting repayment prospects. Examiners generally should accept an institution’s ACL estimates and not seek adjustments to the ACLs, when management has provided adequate support for the loss estimation process employed, and the ACL balances and the assumptions used in the ACL estimates are in accordance with GAAP and regulatory reporting requirements. It is inappropriate for examiners to seek adjustments to ACLs for the sole purpose of achieving ACL levels that correspond to a peer group median, a target ratio, or a benchmark amount when management has used an appropriate expected credit loss framework to estimate expected credit losses. If the examiner concludes that an institution’s reported ACLs are not appropriate or determines that its ACL evaluation processes or loss estimation method(s) are otherwise deficient, these concerns should be noted in the report of examination and communicated to the board of directors and senior management.38 Additional supervisory action may be taken based on the magnitude of the shortcomings in ACLs, 37 See footnote 34. agency has formal and informal communication channels for sharing supervisory information with the board of directors and management depending on agency practices and the nature of the information being shared. These channels may include, but are not limited to, institution specific supervisory letters, letters to the industry, transmittal letters, visitation findings summary letters, targeted review conclusion letters, or official examination or inspection reports. 38 Each VerDate Sep<11>2014 17:00 Oct 16, 2019 Jkt 250001 including the materiality of any errors in the reported amounts of ACLs. Dated: October 1, 2019. Joseph M. Otting, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, October 9, 2019. Ann E. Misback, Secretary of the Board. Federal Deposit Insurance Corporation. By order of the Board of Directors. Dated at Washington, DC, on August 20, 2019. Valerie J. Best, Assistant Executive Secretary. By the National Credit Union Administration Board on September 3, 2019. Gerard Poliquin, Secretary of the Board. [FR Doc. 2019–22655 Filed 10–16–19; 8:45 am] BILLING CODE 4810–33–P; 7590–01 P; 6741–01–P; 6210–01–P Comments may be submitted electronically to www.fs.usda.gov/project/ ?project=54511. Written comments can be sent hard copy to: Alaska Roadless Rule, USDA Forest Service, P.O. Box 21628, Juneau, Alaska 99802–1628. All comments, including names and addresses, are placed in the record and are available for public inspection and copying. The public may inspect comments received at www.fs.usda.gov/ project/?project=54511. FOR FURTHER INFORMATION CONTACT: Ken Tu, Interdisciplinary Team Leader, at 202–403–8991 or akroadlessrule@ usda.gov. Individuals using telecommunication devices for the deaf (TDD) may call the Federal Information Relay Services at 1–800–877–8339 between 8 a.m. and 8 p.m. Eastern Time, Monday through Friday. SUPPLEMENTARY INFORMATION: ADDRESSES: Background DEPARTMENT OF AGRICULTURE Forest Service 36 CFR Part 294 RIN 0596–AD37 Special Areas; Roadless Area Conservation; National Forest System Lands in Alaska Forest Service, USDA. Notice of proposed rulemaking; request for comment. AGENCY: ACTION: The United States Department of Agriculture (USDA) is proposing to exempt the Tongass National Forest from the 2001 Roadless Area Conservation Rule, which prohibits tree harvest and road construction/ reconstruction within inventoried roadless areas with certain limited exceptions. In addition, the proposed rule would provide an administrative procedure for correcting and modifying inventoried roadless area boundaries on the Chugach National Forest. The USDA invites written comments on the proposed rule and the draft environmental impact statement (DEIS). The proposed rule would not directly authorize any ground-disturbing activities. Substantive comments received during the comment period will be considered in developing the final rule and final environmental impact statement (FEIS). The final rule will be published in the Federal Register. SUMMARY: Comments must be received in writing by December 16, 2019. DATES: PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 The USDA Forest Service (hereafter Forest Service) manages National Forest System (NFS) lands to maintain and enhance the quality of the environment to meet the Nation’s current and future needs. Forest Service land management supports recreation, water, timber, fish, wildlife, wilderness, aesthetic values and a variety of resource development activities for current and future generations. As a leader in natural resource conservation, the Forest Service provides direction for the management and use of the Nation’s forests, rangeland, and aquatic ecosystems under its jurisdiction. On January 12, 2001, the USDA promulgated the Roadless Area Conservation Rule (hereafter 2001 Roadless Rule) (66 FR 3244), establishing nationwide prohibitions on timber harvest, road construction, and road reconstruction within inventoried roadless areas with certain limited exceptions. The intent of the 2001 Roadless Rule is to provide lasting protection for inventoried roadless areas within the National Forest System in the context of multiple-use land management. Based on the State of Alaska’s Roadless Rule Petition (described below) and a review of public comment, USDA analyzed rulemaking alternatives addressing whether and how the national prohibitions on timber harvesting, road construction, and road reconstruction should apply on the Tongass National Forest. In 2001, the State of Alaska filed a complaint challenging the USDA’s promulgation of the 2001 Roadless Rule and its application in Alaska. State of E:\FR\FM\17OCP1.SGM 17OCP1

Agencies

[Federal Register Volume 84, Number 201 (Thursday, October 17, 2019)]
[Proposed Rules]
[Pages 55510-55522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22655]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 84, No. 201 / Thursday, October 17, 2019 / 
Proposed Rules

[[Page 55510]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 30

[Docket No. ID OCC-2019-0013]

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. OP-1680]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 364

RIN 3064-ZA10

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741

RIN 3133-AF05


Interagency Policy Statement on Allowances for Credit Losses

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury; 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); and National Credit Union 
Administration (NCUA).

ACTION: Proposed interagency policy statement; request for comment.

-----------------------------------------------------------------------

SUMMARY: The Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, the Federal Deposit Insurance 
Corporation (collectively, the banking agencies), and the National 
Credit Union Administration (collectively, the agencies) are inviting 
public comment on a proposed interagency policy statement on allowances 
for credit losses (ACLs). The agencies are issuing this proposed 
interagency policy statement in response to changes to U.S. generally 
accepted accounting principles (GAAP) as promulgated by the Financial 
Accounting Standards Board (FASB) in Accounting Standards Update (ASU) 
2016-13, Financial Instruments--Credit Losses (Topic 326): Measurement 
of Credit Losses on Financial Instruments and subsequent amendments 
issued since June 2016. These updates are codified in Accounting 
Standards Codification (ASC) Topic 326, Financial Instruments--Credit 
Losses (FASB ASC Topic 326).
    This proposed interagency policy statement describes the 
measurement of expected credit losses under the current expected credit 
losses (CECL) methodology and the accounting for impairment on 
available-for-sale (AFS) debt securities in accordance with FASB ASC 
Topic 326; supervisory expectations for designing, documenting, and 
validating expected credit loss estimation processes, including the 
internal controls over these processes; maintaining appropriate ACLs; 
the responsibilities of boards of directors and management; and 
examiner reviews of ACLs.

DATES: Comments must be received by December 16, 2019.

ADDRESSES: Interested parties are invited to submit written comments to 
any or all of the agencies. All comments, which should refer to the 
``Proposed Interagency Policy Statement on Allowances for Credit 
Losses,'' will be shared among the agencies.
    OCC: Commenters are encouraged to submit comments through the 
Federal eRulemaking Portal or email, if possible. Please use the title 
``Proposed Interagency Policy Statement on Allowances for Credit 
Losses'' to facilitate the organization and distribution of the 
comments. You may submit comments by any of the following methods:

 Federal eRulemaking Portal--Regulations.gov Classic or 
Regulation.gov Beta

    Regulation.gov Classic: Go to https://www.regulations.gov/. Enter 
``Docket ID OCC-2019-0013'' in the Search Box and click ``Search.'' 
Click on ``Comment Now'' to submit public comments. For help with 
submitting effective comments please click on ``View Commenter's 
Checklist.'' Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click 
``Visit New Regulations.gov Site'' from the Regulations.gov classic 
homepage. Enter ``Docket ID OCC-2019-0013'' in the Search Box and click 
``Search.'' Public comments can be submitted via the ``Comment'' box 
below the displayed document information or click on the document title 
and click the ``Comment'' box on the top-left side of the screen. For 
help with submitting effective comments please click on ``Commenter's 
Checklist.'' For assistance with the Regulations.gov Beta site please 
call (877) 378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9 
a.m.-5 p.m. ET or email to [email protected].
     Email: [email protected].
     Mail: Chief Counsel's Office, Attention: Comment 
Processing, Office of the Comptroller of the Currency, 400 7th Street 
SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2019-0013'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov website without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this notice by any of the following methods:

 Viewing Comments Electronically--Regulations.gov Classic or 
Regulations.gov Beta

    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter 
``Docket ID OCC-2019-0013'' in the Search box and click ``Search.'' 
Click on ``Open Docket Folder'' on the right side of the screen. 
Comments and supporting materials can be viewed and filtered by 
clicking on ``View all documents and comments in

[[Page 55511]]

this docket'' and then using the filtering tools on the left side of 
the screen. Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov. The docket may be viewed 
after the close of the comment period in the same manner as during the 
comment period.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click 
``Visit New Regulations.gov Site'' from the Regulations.gov classic 
homepage. Enter ``Docket ID OCC-2019-2013'' in the Search Box and click 
``Search.'' Click on the ``Comments'' tab. Comments can be viewed and 
filtered by clicking on the ``Sort By'' drop-down on the right side of 
the screen or the ``Refine Results'' options on the left side of the 
screen. Supporting Materials can be viewed by clicking on the 
``Documents'' tab and filtered by clicking on the ``Sort By'' drop-down 
on the right side of the screen or the ``Refine Results'' options on 
the left side of the screen.'' For assistance with the Regulations.gov 
Beta site please call (877) 378-5457 (toll free) or (703) 454-9859 
Monday-Friday, 9 a.m.-5 p.m. ET or email to 
[email protected].
    The docket may be viewed after the close of the comment period in 
the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For 
security reasons, the OCC requires that visitors make an appointment to 
inspect comments. You may do so by calling (202) 649-6700 or, for 
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon 
arrival, visitors will be required to present valid government-issued 
photo identification and submit to security screening in order to 
inspect comments.
    Board: You may submit written comments, identified by Docket No. 
OP-1680, by any of the following methods:
     Agency Website: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or 202-452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments will be made available on the Board's website 
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC 
20006, between 9:00 a.m. and 5:00 p.m. on weekdays.
    FDIC: You may submit comments, which should refer to ``Proposed 
Interagency Policy Statement on Allowances for Credit Losses,'' by any 
of the following methods:
     Agency Website: https://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments on the FDIC's 
website.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include ``Proposed Interagency 
Policy Statement on Allowances for Credit Losses'' in the subject line 
of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, 
Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7:00 a.m. and 5:00 p.m.
    Public Inspection: All comments received will be posted without 
change to https://www.fdic.gov/regulations/laws/federal/ including any 
personal information provided. Paper copies of public comments may be 
requested from the FDIC Public Information Center by telephone at (877) 
275-3342 or (703) 562-2200.
    NCUA: You may submit comments by any one of the following methods 
(please send comments by one method only):
     Federal Rulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name]--Comments on Proposed Interagency Policy Statement on Allowances 
for Credit Losses'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: You can view all public comments on NCUA's 
website at https://www.ncua.gov/regulation-supervision/rules-regulations/proposed-pending-and-recently-final-regulations as 
submitted, except for those we cannot post for technical reasons. NCUA 
will not edit or remove any identifying or contact information from the 
public comments submitted. You may inspect paper copies of comments in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an 
appointment, call (703) 518-6546 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: 
    OCC: Amanda Freedle, Senior Accounting Policy Advisor, Office of 
the Chief Accountant, (202) 649-6280; or Kevin Korzeniewski, Counsel, 
Chief Counsel's Office, (202) 649-5490; or for persons who are hearing 
impaired, TTY, (202) 649-5597.
    BOARD: Lara Lylozian, Assistant Chief Accountant--Supervision, 
(202) 475-6656; or Kevin Chiu, Accounting Policy Analyst, (202) 912-
4608, Division of Supervision and Regulation; or David W. Alexander, 
Senior Counsel, (202) 452-2877; or Asad Kudiya, Senior Counsel, (202) 
475-6358, Legal Division, Board of Governors of the Federal Reserve 
System, 20th and C Streets NW, Washington, DC 20551. For the hearing 
impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-
4869.
    FDIC: Shannon Beattie, Chief, Accounting and Securities Disclosure 
Section, (202) 898-3952; or John Rieger, Deputy Chief Accountant, (202) 
898-3602; or Andrew Overton, Examination Specialist (Bank Accounting), 
(202) 898-8922; Division of Risk Management Supervision; or Michael 
Phillips, Counsel, (202) 898-3581, Legal Division, Federal Deposit 
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
    NCUA: Technical information: Alison Clark, Chief Accountant, Office 
of Examination and Insurance, at the above address or telephone (703) 
518-6611 or Legal information: Ariel Pereira, Staff Attorney, Office of 
General Counsel, at (703) 548-2778.

SUPPLEMENTARY INFORMATION:

I. Background

    FASB ASC Topic 326 introduces the CECL methodology, which replaces 
the incurred loss methodology for financial assets measured at 
amortized cost, net investments in leases, and certain off-balance-
sheet credit exposures, and modifies the accounting for impairment on 
AFS debt securities. FASB ASC Topic 326 applies to all banks, savings

[[Page 55512]]

associations, credit unions, and financial institution holding 
companies (collectively, institutions), regardless of size, that file 
regulatory reports for which the reporting requirements conform to 
GAAP.\1\ The agencies are maintaining conformance with GAAP and 
consistency with FASB ASC Topic 326 through their issuance of the 
proposed Interagency Policy Statement on Allowances for Credit Losses.
---------------------------------------------------------------------------

    \1\ See section 37(a) of the Federal Deposit Insurance Act and 
section 202(a) of the Federal Credit Union Act. Under these 
statutory provisions, the accounting principles applicable to 
reports or statements required to be filed by all insured depository 
institutions with the federal banking agencies or by all insured 
credit unions with assets of $10 million or more with the NCUA Board 
must be uniform and consistent with GAAP. Furthermore, regardless of 
asset size, all federally insured credit unions must comply with 
GAAP for certain financial reporting requirements relating to 
charges for loan losses. See 12 U.S.C. 1831n(a)(2)(A), 12 U.S.C. 
1782(a)(6)(C), and 12 CFR 702.402(d).
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    For FDIC-insured institutions, the banking agencies have issued 
guidelines establishing standards for safety and soundness, including 
operational and managerial standards that address such matters as 
internal controls and information systems, an internal audit system, 
loan documentation, credit underwriting, asset quality, and earnings 
and should be appropriate for an institution's size and the nature, 
scope, and risk of its activities.\2\ The principles described in the 
proposed interagency policy statement are consistent with these 
guidelines.
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    \2\ See Appendix A to 12 CFR part 30 (OCC), Appendix D to 12 CFR 
part 208 (Board), and Appendix A to 12 CFR part 364 (FDIC), which 
were adopted by the banking agencies pursuant to Section 39 of the 
Federal Deposit Insurance Act. See 12 U.S.C. 1831p-1. National 
credit unions should refer to Section 206(b)(1) of the Federal 
Credit Union Act (12 U.S.C. 1786) and 12 CFR 741.3.
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    The effective dates of FASB ASC Topic 326 vary for different 
institutions. Under GAAP as currently in effect, FASB ASC Topic 326 is 
effective for institutions that are public business entities (PBEs) and 
also are Securities and Exchange Commission (SEC) filers, as both terms 
are defined in GAAP, for fiscal years beginning after December 15, 
2019, including interim periods within those fiscal years. For 
institutions that are PBEs but not SEC filers, FASB ASC Topic 326 is 
effective for fiscal years beginning after December 15, 2020, including 
interim periods within those fiscal years. For institutions that are 
not PBEs (non-PBEs), FASB ASC Topic 326 is effective for fiscal years 
beginning after December 15, 2021, including interim periods within 
those fiscal years.\3\ Early application of FASB ASC Topic 326 is 
permitted for all institutions for fiscal years beginning after 
December 15, 2018, including interim periods within that fiscal year.
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    \3\ On July 17, 2019, the FASB Board decided to adopt a two-
bucket approach to stagger effective dates for major accounting 
standards including FASB ASC Topic 326. The FASB Board decided that 
FASB ASC Topic 326 will be effective for SEC filers, excluding 
smaller reporting companies (SRCs) as currently defined by the SEC, 
for fiscal years beginning after December 15, 2019, including 
interim periods within those fiscal years. For all other entities, 
the FASB Board decided that FASB ASC Topic 326 will be effective for 
fiscal years beginning after December 15, 2022, including interim 
periods within those fiscal years.
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II. Overview of the Proposed Interagency Policy Statement on Allowances 
for Credit Losses

    The agencies are issuing this proposed interagency policy statement 
on allowances for credit losses (ACLs) in response to the changes in 
accounting for credit losses in accordance with FASB ASC Topic 326. The 
proposed interagency policy statement would be effective at the time of 
each institution's adoption of FASB ASC Topic 326. The following policy 
statements would no longer be effective for an institution upon its 
adoption of FASB ASC Topic 326: The agencies' December 2006 Interagency 
Policy Statement on the Allowance for Loan and Lease Losses; the 
banking agencies' July 2001 Policy Statement on Allowance for Loan and 
Lease Losses Methodologies and Documentation for Banks and Savings 
Institutions; and the NCUA's May 2002 Interpretive Ruling and Policy 
Statement 02-3, Allowance for Loan and Lease Losses Methodologies and 
Documentation for Federally Insured Credit Unions (collectively, the 
ALLL policy statements). After FASB ASC Topic 326 is effective for all 
institutions, the agencies will rescind the ALLL policy statements.
    This proposed interagency policy statement describes the CECL 
methodology for determining ACLs applicable to financial assets 
measured at amortized cost, including loans held-for-investment, net 
investments in leases, held-to-maturity (HTM) debt securities, and 
certain off-balance-sheet credit exposures in accordance with FASB ASC 
Topic 326. It also describes the estimation of an ACL for an impaired 
AFS debt security in accordance with FASB ASC Subtopic 326-30.
    The proposed interagency policy statement also includes and updates 
concepts and practices detailed in the existing ALLL policy statements 
that remain relevant under FASB ASC Topic 326. These concepts and 
practices relate to management's responsibilities for the allowance 
estimation process, including the need to appropriately support and 
document the institution's allowance estimates; the board of directors' 
responsibilities for overseeing management's processes; and the role of 
examiners in reviewing the appropriateness of an institution's ACLs as 
part of their supervisory activities.
    An attachment to the agencies' December 2006 Interagency Policy 
Statement on the Allowance for Loan and Lease Losses addresses concepts 
and practices related to loan review systems. Rather than updating the 
agencies' guidance on loan review systems as part of the proposed 
interagency policy statement on ACLs, the agencies are currently 
developing separate standalone guidance on supervisory expectations for 
effective credit risk review.

III. Request for Comment

    The agencies request comments on all aspects of the proposed 
interagency policy statement, including but, not limited to those set 
forth below. The agencies will revise the Statement, if needed and as 
appropriate, after reviewing the comments received on the proposal.
    (1) Does the proposed interagency policy statement clearly describe 
the measurement of expected credit losses under CECL in accordance with 
FASB ASC Topic 326? Why or why not? If not, what additional information 
is needed? What information should be omitted from the policy 
statement?
    (2) Does the proposed interagency policy statement clearly describe 
the measurement of credit losses on impaired AFS debt securities in 
accordance with FASB ASC Topic 326? Why or why not? If not, what 
additional information is needed? What information should be omitted 
from the policy statement?
    (3) Does the proposed interagency policy statement clearly 
communicate supervisory expectations for designing, documenting, and 
validating expected credit loss estimation processes, internal controls 
over ACLs, and maintaining appropriate ACLs?
    (4) Has the proposed interagency policy statement appropriately 
included concepts and practices detailed in the existing ALLL policy 
statements that also are relevant under FASB ASC Topic 326? If not, 
what additional information should also be included?

IV. The Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995

[[Page 55513]]

(PRA),\4\ the agencies may not conduct or sponsor, and the respondent 
is not required to respond to, an information collection unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number.
---------------------------------------------------------------------------

    \4\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

    The proposed interagency policy statement will not create any new 
or revise any existing collections of information under the PRA. 
Therefore, no information collection request will be submitted to the 
OMB for review.

V. Proposed Interagency Policy Statement

    The text of the proposed interagency policy statement is as 
follows:

Interagency Policy Statement on the Allowances for Credit Losses 
Purpose

    The Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (FRB), the Federal Deposit 
Insurance Corporation (FDIC), and the National Credit Union 
Administration (NCUA) (collectively, the agencies) are issuing this 
Interagency Policy Statement on Allowances for Credit Losses 
(hereafter, the policy statement) to promote consistency in the 
interpretation and application of Financial Accounting Standards Board 
(FASB) Accounting Standards Update 2016-13, Financial Instruments--
Credit Losses (Topic 326): Measurement of Credit Losses on Financial 
Instruments, as well as the amendments issued since June 2016.\5\ These 
updates are codified in Accounting Standards Codification (ASC) Topic 
326, Financial Instruments--Credit Losses (FASB ASC Topic 326). FASB 
ASC Topic 326 applies to all banks, savings associations, credit 
unions, and financial institution holding companies (collectively, 
institutions), regardless of size, that file regulatory reports for 
which the reporting requirements conform to U.S. generally accepted 
accounting principles (GAAP).\6\ This policy statement describes the 
measurement of expected credit losses in accordance with FASB ASC Topic 
326; supervisory expectations for designing, documenting, and 
validating expected credit loss estimation processes, including the 
internal controls over these processes; maintaining appropriate 
allowances for credit losses (ACLs); the responsibilities of boards of 
directors and management; and examiner reviews of ACLs.
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    \5\ The FASB issued Accounting Standards Update (ASU) 2016-13 on 
June 16, 2016. The following updates were published after the 
issuance of ASU 2016-13: ASU 2018-19--Codification Improvements to 
Topic 326, Financial Instruments--Credit Losses; ASU 2019-04--
Codification Improvements to Topic 326, Financial Instruments--
Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, 
Financial Instruments; and ASU 2019-05--Financial Instruments--
Credit Losses (Topic 326): Targeted Transition Relief. Additionally, 
institutions may refer to FASB Staff Q&A-Topic 326, No. 1, Whether 
the Weighted-Average Remaining Maturity Method is an Acceptable 
Method to Estimate Expected Credit Losses, and FASB Staff Q&A-Topic 
326, No. 2, Developing an Estimate of Expected Credit Losses on 
Financial Assets.
    \6\ U.S. branches and agencies of foreign banking organizations 
may choose to, but are not required to, maintain ACLs on a branch or 
agency level. These institutions should refer to the instructions 
for the FFIEC 002, Report of Assets and Liabilities of U. S. 
Branches and Agencies of Foreign Banks; Supervision and Regulation 
(SR) Letter 95-4, Allowance for Loan and Lease Losses for U. S. 
Branches and Agencies of Foreign Banking Organizations; and SR 
Letter 95-42, Allowance for Loan and Lease Losses for U.S. Branches 
and Agencies of Foreign Banking Organizations.
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    This policy statement is effective at the time of each 
institution's adoption of FASB ASC Topic 326.\7\ The following policy 
statements are no longer effective for an institution upon its adoption 
of FASB ASC Topic 326: The December 2006 Interagency Policy Statement 
on the Allowance for Loan and Lease Losses; the July 2001 Policy 
Statement on Allowance for Loan and Lease Losses Methodologies and 
Documentation for Banks and Savings Institutions; and the NCUA's May 
2002 Interpretive Ruling and Policy Statement 02-3, Allowance for Loan 
and Lease Losses Methodologies and Documentation for Federally Insured 
Credit Unions (collectively, ALLL Policy Statements). After FASB ASC 
Topic 326 is effective for all institutions, the agencies will rescind 
the ALLL Policy Statements.
---------------------------------------------------------------------------

    \7\ The effective date for FASB ASC Topic 326 is based on an 
institution's characteristics, including an institution's U.S. 
Securities and Exchange Commission (SEC) filing status, as described 
in Accounting Standards Codification (ASC) 326-10-65-1, with early 
adoption permitted only as of the beginning of an institution's 
fiscal year.
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    The principles described in this policy statement are consistent 
with GAAP, applicable regulatory reporting requirements,\8\ safe and 
sound banking practices, and the agencies' codified guidelines 
establishing standards for safety and soundness.\9\ The operational and 
managerial standards included in those guidelines, which address such 
matters as internal controls and information systems, an internal audit 
system, loan documentation, credit underwriting, asset quality, and 
earnings, should be appropriate for an institution's size and the 
nature, scope, and risk of its activities.
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    \8\ For FDIC-insured depository institutions, Section 37(a) of 
the Federal Deposit Insurance Act (12 U.SC. 1831n(a)) states that, 
in general, the accounting principles applicable to the Consolidated 
Reports of Condition and Income (Call Report) ``shall be uniform and 
consistent with generally accepted accounting principles.'' Section 
202(a)(6)(C) of the Federal Credit Union Act (12 U.S.C. 
1782(a)(6)(C)) establishes the same standard for federally insured 
credit unions with assets of $10 million or greater, providing that, 
in general, the ``[a]ccounting principles applicable to reports or 
statements required to be filed with the [NCUA] Board by each 
insured credit union shall be uniform and consistent with generally 
accepted accounting principles.'' Furthermore, regardless of asset 
size, all federally insured credit unions must comply with GAAP for 
certain financial reporting requirements relating to charges for 
loan losses. See 12 CFR 702.402(d).
    \9\ FDIC-insured depository institutions should refer to the 
Interagency Guidelines Establishing Standards for Safety and 
Soundness adopted by their primary federal regulator pursuant to 
Section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1831p-1) 
as follows: For national banks and federal savings associations, 
Appendix A to 12 CFR part 30; for state member banks, Appendix D to 
12 CFR part 208; and for state nonmember banks, state savings 
associations, and insured state-licensed branches of foreign banks, 
Appendix A to 12 CFR part 364. Federal credit unions should refer to 
Section 206(b)(1) of the Federal Credit Union Act (12 U.S.C. 1786) 
and 12 CFR 741.3.
---------------------------------------------------------------------------

Contents

Scope............................................................     16
Measurement of ACLs for Loans, Leases, Held-to-Maturity Debt          19
 Securities, and Off-Balance-Sheet Credit Exposures..............
    Overview of ACLs.............................................     19
    Collective Evaluation of Expected Losses.....................     20
    Estimation Methods for Expected Credit Losses................     21
    Contractual Term of a Financial Asset........................     22
    Historical Loss Information..................................     23
    Reasonable and Supportable Forecasts.........................     23
    Reversion....................................................     24
    Qualitative Factor Adjustments...............................     25
    Collateral-Dependent Financial Assets........................     28
    Troubled Debt Restructurings.................................     29
    Purchased Credit-Deteriorated Assets.........................     30
    Financial Assets Secured with Collateral Maintenance              31
     Agreements..................................................

[[Page 55514]]

 
    Accrued Interest Receivable..................................     32
    Financial Assets with Zero Credit Loss Expectations..........     33
    Estimated Credit Losses for Off-Balance-Sheet Credit              35
     Exposures...................................................
Measurement of the ACL for Available-for-Sale Debt Securities....     36
Documentation Standards..........................................     37
Analyzing and Validating the Overall Measurement of ACLs.........     42
Responsibilities of the Board of Directors.......................     44
Responsibilities of Management...................................     45
Examiner Review of ACLs..........................................     48
 

Scope

    This policy statement describes the current expected credit losses 
(CECL) methodology for determining the ACLs applicable to loans held-
for-investment, net investments in leases, and held-to-maturity debt 
securities accounted for at amortized cost.\10\ It also describes the 
estimation of the ACL for an available-for-sale debt security in 
accordance with FASB ASC Subtopic 326-30. This policy statement does 
not address or supersede existing agency requirements or guidance 
regarding appropriate due diligence in connection with the purchase or 
sale of assets or determining whether assets are permissible to be 
purchased or held by institutions.\11\
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    \10\ FASB ASC Topic 326 defines the amortized cost basis of an 
asset as the amount at which a financing receivable or investment is 
originated or acquired, adjusted for applicable accrued interest, 
accretion, or amortization of premium, discount, and net deferred 
fees or costs, collection of cash, write-offs, foreign exchange, and 
fair value hedge accounting.
    \11\ See OCC Bulletin 2012-18, Guidance on Due Diligence 
Requirements in Determining Whether Securities are Eligible for 
Investment (for national banks and federal savings associations), 12 
CFR part 1, Investment Securities (for national banks), and 12 CFR 
part 160, Lending and Investment (for federal savings associations). 
Federal credit unions should refer to 12 CFR part 703, Investment 
and Deposit Activities. Federally insured, state-chartered credit 
unions should refer to applicable state laws and regulations, as 
well as 12 CFR 741.219 (``investment requirements'').
---------------------------------------------------------------------------

    The CECL methodology described in FASB ASC Topic 326 applies to 
financial assets measured at amortized cost, net investments in leases, 
and off-balance-sheet credit exposures (collectively, financial assets) 
including:
     Financing receivables such as loans held-for-investment;
     Overdrawn deposit accounts (i.e. overdrafts) that are 
reclassified as held-for-investment loans;
     Held-to-maturity debt securities;
     Receivables that result from revenue transactions within 
the scope of Topic 606 on revenue from contracts with customers and 
Topic 610 on other income, which applies, for example, to the sale of 
foreclosed real estate;
     Reinsurance recoverables that result from insurance 
transactions within the scope of Topic 944 on insurance;
     Receivables related to repurchase agreements and 
securities lending agreements within the scope of Topic 860 on 
transfers and servicing;
     Net investments in leases recognized by a lessor in 
accordance with Topic 842 on leases; and
     Off-balance-sheet credit exposures including off-balance-
sheet loan commitments, standby letters of credit, financial guarantees 
not accounted for as insurance, and other similar instruments except 
for those within the scope of Topic 815 on derivatives and hedging.
    The CECL methodology does not apply to the following financial 
assets:
     Financial assets measured at fair value through net 
income, including those assets for which the fair value option has been 
elected;
     Available-for-sale debt securities; \12\
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    \12\ Refer to FASB ASC Subtopic 326-30, Financial Instruments--
Credit Losses--Available-for-Sale Debt Securities (FASB ASC Subtopic 
326-30).
---------------------------------------------------------------------------

     Loans held-for-sale;
     Policy loan receivables of an insurance entity;
     Loans and receivables between entities under common 
control; and
     Receivables arising from operating leases.

Measurement of ACLs for Loans, Leases, Held-to-Maturity Debt 
Securities, and Off-Balance-Sheet Credit Exposures

Overview of ACLs

    An ACL is a valuation account that is deducted from, or added to, 
the amortized cost basis of financial assets to present the net amount 
expected to be collected over the contractual term \13\ of the assets. 
In estimating the net amount expected to be collected, management 
should consider the effects of past events, current conditions, and 
reasonable and supportable forecasts on the collectibility of the 
institution's financial assets.\14\ FASB ASC Topic 326 requires 
management to use relevant forward-looking information and expectations 
drawn from reasonable and supportable forecasts when estimating 
expected credit losses.
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    \13\ Consistent with FASB ASC Topic 326, an institution's 
determination of the contractual term should reflect the financial 
asset's contractual life adjusted for prepayments, renewal and 
extension options that are not unconditionally cancellable by the 
institution, and reasonably expected troubled debt restructurings. 
For more information, see the ``Contractual Term of a Financial 
Asset'' section in this policy statement.
    \14\ Recoveries are a component of management's estimation of 
the net amount expected to be collected for a financial asset. 
Expected recoveries of amounts previously written off or expected to 
be written off that are included in ACLs may not exceed the 
aggregate amounts previously written off or expected to be written 
off. In some circumstances, the ACL for a specific portfolio or loan 
may be negative because the amount expected to be collected, 
including expected recoveries, exceeds the financial asset's 
amortized cost basis.
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    ACLs are evaluated as of the end of each reporting period. The 
methods used to determine ACLs generally should be applied consistently 
over time and reflect management's current expectations of credit 
losses. Changes to ACLs resulting from these periodic evaluations are 
recorded through increases or decreases to the related provisions for 
credit losses (PCLs). When available information confirms that specific 
loans, securities, other assets, or portions thereof, are 
uncollectible, these amounts should be promptly written off \15\ 
against the related ACLs.
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    \15\ Consistent with FASB ASC Topic 326, this policy statement 
uses the verbs ``write off'' and ``written off'' and the noun 
``write-off.'' These terms are used interchangeably with ``charge 
off,'' ``charged off,'' and ``charge-off,'' respectively, in the 
agencies' regulations, guidance, and regulatory reporting 
instructions.
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    Estimating appropriate ACLs involves a high degree of management 
judgment and is inherently imprecise. An institution's process for 
determining appropriate ACLs may result in a range of estimates for 
expected credit losses. An institution should support and record its 
best estimate within the range of expected credit losses.

Collective Evaluation of Expected Losses

    FASB ASC Topic 326 requires expected losses to be evaluated on a 
collective, or pool, basis when financial assets share similar risk 
characteristics. Financial assets may be segmented based on one 
characteristic, or a combination of characteristics.
    Examples of risk characteristics relevant to this evaluation 
include, but are not limited to:
     Internal or external credit scores or credit ratings;
     Risk ratings or classifications;
     Financial asset type;

[[Page 55515]]

     Collateral type;
     Size;
     Effective interest rate;
     Term;
     Geographical location;
     Industry of the borrower; and
     Vintage.
    Other risk characteristics that may be relevant for segmenting 
held-to-maturity debt securities include issuer, maturity, coupon rate, 
yield, payment frequency, source of repayment, bond payment structure, 
and embedded options.
    FASB ASC Topic 326 does not prescribe a process for segmenting 
financial assets for collective evaluation. Therefore, management 
should exercise judgment when establishing appropriate segments or 
pools. Management should evaluate financial asset segmentation on an 
ongoing basis to determine whether the financial assets in the pool 
continue to share similar risk characteristics. If a financial asset 
ceases to share risk characteristics with other assets in its segment, 
it should be moved to a different segment with assets sharing similar 
risk characteristics if such a segment exists.
    If a financial asset does not share similar risk characteristics 
with other assets, expected credit losses for that asset should be 
evaluated individually. Individually evaluated assets should not be 
included in a collective assessment of expected credit losses.

Estimation Methods for Expected Credit Losses

    FASB ASC Topic 326 does not require the use of a specific loss 
estimation method for purposes of determining ACLs. Various methods may 
be used to estimate the expected collectibility of financial assets, 
with those methods generally applied consistently over time. The same 
loss estimation method does not need to be applied to all financial 
assets. Management is not precluded from selecting a different method 
when it determines the method will result in a better estimate of ACLs.
    Management may use a loss-rate method,\16\ probability of default/
loss given default (PD/LGD) method, roll-rate method, discounted cash 
flow method, a method that uses aging schedules, or another reasonable 
method to estimate expected credit losses. The selected method(s) 
should be appropriate for the financial assets being evaluated, 
consistent with the institution's size and complexity.
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    \16\ Various loss-rate methods may be used to estimate expected 
credit losses under the CECL methodology. These include the 
weighted-average remaining maturity (WARM) method, vintage analysis, 
and the snapshot or open pool method.
---------------------------------------------------------------------------

Contractual Term of a Financial Asset

    FASB ASC Topic 326 requires an institution to measure estimated 
expected credit losses over the contractual term of its financial 
assets, considering expected prepayments. Renewals, extensions, and 
modifications are excluded from the contractual term of a financial 
asset for purposes of estimating the ACL unless there is a reasonable 
expectation of executing a troubled debt restructuring (TDR) or the 
renewal and extension options are part of the original or modified 
contract and are not unconditionally cancellable by the institution. If 
such renewal or extension options are present, management must evaluate 
the likelihood of a borrower exercising those options when determining 
the contractual term.

Historical Loss Information

    Historical loss information generally provides a basis for an 
institution's assessment of expected credit losses. Historical loss 
information may be based on internal information, external information, 
or a combination of both. Management should consider whether the 
historical loss information may need to be adjusted for differences in 
current asset specific characteristics such as differences in 
underwriting standards, portfolio mix, or when historical asset terms 
do not reflect the contractual terms of the financial assets being 
evaluated as of the reporting date.
    Management should then consider whether further adjustments to 
historical loss information are needed to reflect the extent to which 
current conditions and reasonable and supportable forecasts differ from 
the conditions that existed during the historical loss period. 
Adjustments to historical loss information may be quantitative or 
qualitative in nature and should reflect changes to relevant data (such 
as changes in unemployment rates, delinquency, or other factors 
associated with the financial assets).

Reasonable and Supportable Forecasts

    When estimating expected credit losses, FASB ASC Topic 326 requires 
management to consider forward-looking information that is both 
reasonable and supportable and relevant to assessing the collectibility 
of cash flows. Reasonable and supportable forecasts may extend over the 
entire contractual term of a financial asset or a period shorter than 
the contractual term. FASB ASC Topic 326 does not prescribe a specific 
method for determining reasonable and supportable forecasts nor does it 
include bright lines for establishing a minimum or maximum length of 
time for reasonable and supportable forecast period(s). Judgment is 
necessary in determining an appropriate period(s) for each institution. 
Reasonable and supportable forecasts may vary by portfolio segment or 
individual forecast input. These forecasts may include data from 
internal sources, external sources, or a combination of both. 
Management is not required to search for all possible information nor 
incur undue cost and effort to collect data for its forecasts. However, 
reasonably available and relevant information should not be ignored in 
assessing the collectibility of cash flows. Management should evaluate 
the appropriateness of the reasonable and supportable forecast 
period(s) each reporting period, consistent with other inputs used in 
the estimation of expected credit losses.
    Institutions may develop reasonable and supportable forecasts by 
using one or more economic scenarios. FASB ASC Topic 326 does not 
require the use of multiple economic scenarios, however, institutions 
are not precluded from considering multiple economic scenarios when 
estimating expected credit losses.

Reversion

    When the contractual term of a financial asset extends beyond the 
reasonable and supportable period, FASB ASC Topic 326 requires 
reverting to historical loss information, or an appropriate proxy, for 
those periods beyond the reasonable and supportable forecast period 
(often referred to as the reversion period). Management may revert to 
historical loss information for each individual forecast input or based 
on the entire estimate of loss.
    FASB ASC Topic 326 does not require the application of a specific 
reversion technique or use of a specific reversion period. Reversion to 
historical loss information may be immediate, occur on a straight-line 
basis, or use any systematic, rational method. Management may apply 
different reversion techniques depending on the economic environment or 
the financial asset portfolio. Reversion techniques are not accounting 
policy elections and should be evaluated for appropriateness each 
reporting period, consistent with other inputs used in the estimation 
of expected credit losses.
    FASB ASC Topic 326 does not specify the historical loss information 
that is used in the reversion period. This historical loss information 
may be based on long-term average losses or on losses that occurred 
during a particular historical period(s). Management may

[[Page 55516]]

use multiple historical periods that are not sequential. Management 
should not adjust historical loss information for existing economic 
conditions or expectations of future economic conditions for periods 
beyond the reasonable and supportable period. However, management 
should consider whether the historical loss information may need to be 
adjusted for differences in current asset specific characteristics such 
as differences in underwriting standards, portfolio mix, or when 
historical asset terms do not reflect the contractual terms of the 
financial assets being evaluated as of the reporting date.

Qualitative Factor Adjustments

    The estimation of ACLs should reflect consideration of all 
significant factors relevant to the expected collectibility of the 
institution's financial assets as of the reporting date. Management may 
begin the expected credit loss estimation process by determining its 
historical loss information or obtaining reliable and relevant 
historical loss proxy data for each segment of financial assets with 
similar risk characteristics. Historical credit losses (or even recent 
trends in losses) generally do not, by themselves, form a sufficient 
basis to determine the appropriate levels for ACLs.
    Management should consider the need to qualitatively adjust 
expected credit loss estimates for information not already captured in 
the loss estimation process. These qualitative factor adjustments may 
increase or decrease management's estimate of expected credit losses. 
Adjustments should not be made for information that has already been 
considered and included in the loss estimation process.
    Management should consider the qualitative factors that are 
relevant to the institution as of the reporting date, which may 
include, but are not limited to:
     The nature and volume of the institution's financial 
assets;
     The existence, growth, and effect of any concentrations of 
credit;
     The volume and severity of past due financial assets, the 
volume of nonaccrual assets, and the volume and severity of adversely 
classified or graded assets; \17\
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    \17\ For banks and savings associations, adversely classified or 
graded loans are loans rated ``substandard'' (or its equivalent) or 
worse under the institution's loan classification system. For credit 
unions, adversely graded loans are loans included in the more 
severely graded categories under the institution's credit grading 
system, i.e., those loans that tend to be included in the credit 
union's ``watch lists.'' Criteria related to the classification of 
an investment security may be found in the interagency policy 
statement Uniform Agreement on the Classification and Appraisal of 
Securities Held by Depository Institutions issued by the FDIC, 
Board, and OCC in October 2013.
---------------------------------------------------------------------------

     The value of the underlying collateral for loans that are 
not collateral-dependent; \18\
---------------------------------------------------------------------------

    \18\ See the ``Collateral-Dependent Financial Assets'' section 
of this policy statement for more information on collateral-
dependent loans.
---------------------------------------------------------------------------

     The institution's lending policies and procedures, 
including changes in underwriting standards and practices for 
collections, write-offs, and recoveries;
     The quality of the institution's credit review function;
     The experience, ability, and depth of the institution's 
lending, investment, collection, and other relevant management and 
staff;
     The effect of other external factors such as the 
regulatory, legal and technological environments; competition; and 
events such as natural disasters; and
     Actual and expected changes in international, national, 
regional, and local economic and business conditions and developments 
\19\ in which the institution operates that affect the collectibility 
of financial assets.
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    \19\ Changes in economic and business conditions and 
developments included in qualitative factor adjustments are limited 
to those that affect the collectibility of an institution's 
financial assets and are relevant to the institution's financial 
asset portfolios. For example, an economic factor for current or 
forecasted unemployment at the national or state level may indicate 
a strong job market based on low national or state unemployment 
rates, but a local unemployment rate, which may be significantly 
higher, for example, because of the actual or forecasted loss of a 
major local employer may be more relevant to the collectibility of 
an institution's financial assets.
---------------------------------------------------------------------------

    Management may consider the following additional qualitative 
factors specific to debt securities as of the reporting date: \20\
---------------------------------------------------------------------------

    \20\ This list is not all-inclusive and all of the factors 
listed may not be relevant to all institutions.
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     The effect of recent changes in investment strategies and 
policies;
     The existence and effect of loss allocation methods, the 
definition of default, the impact of performance and market value 
triggers, and credit and liquidity enhancements associated with debt 
securities;
     The effect of structural subordination and collateral 
deterioration on tranche performance of debt securities;
     The quality of underwriting for any collateral backing 
debt securities; and
     The effect of legal covenants associated with debt 
securities.
    Changes in the level of an institution's ACLs may not always be 
directionally consistent with changes in the level of qualitative 
factor adjustments due to the incorporation of reasonable and 
supportable forecasts in estimating expected losses. For example, if 
improving credit quality trends are evident throughout an institution's 
portfolio in recent years, but management's evaluation of reasonable 
and supportable forecasts indicates expected deterioration in credit 
quality of the institution's financial assets during the forecast 
period, the ACL as a percentage of the portfolio may increase.

Collateral-Dependent Financial Assets

    FASB ASC Topic 326 describes a collateral-dependent asset as a 
financial asset for which the repayment is expected to be provided 
substantially through the operation or sale of the collateral when the 
borrower, based on management's assessment, is experiencing financial 
difficulty as of the reporting date. For regulatory reporting purposes, 
the ACL for a collateral-dependent loan is measured using the fair 
value of collateral, regardless of whether foreclosure is probable.\21\
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    \21\ The agencies, at times, prescribe specific regulatory 
reporting requirements that fall within a range of acceptable 
practice under GAAP. These specific reporting requirements, such as 
the requirement for institutions to apply the practical expedient in 
ASC 326-20-35-5 for collateral-dependent loans, regardless of 
whether foreclosure is probable, have been adopted to achieve safety 
and soundness and other public policy objectives and to ensure 
comparability among institutions. The regulatory reporting 
requirement to apply the practical expedient for collateral-
dependent financial assets is consistent with the agencies' 
longstanding practice for collateral-dependent loans, and it 
continues to be limited to collateral-dependent loans. It does not 
apply to other financial assets such as held-to-maturity debt 
securities that are collateral-dependent.
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    When estimating the ACL for a collateral-dependent loan, FASB ASC 
Topic 326 requires the fair value of collateral to be adjusted to 
consider estimated costs to sell if repayment or satisfaction of the 
loan depends on the sale of the collateral. ACL adjustments for 
estimated costs to sell are not appropriate when the repayment of a 
collateral-dependent loan is expected from the operation of the 
collateral.
    The fair value of collateral securing a collateral-dependent loan 
may change over time. If the fair value of the collateral as of the ACL 
evaluation date has decreased since the previous ACL evaluation date, 
the ACL should be increased to reflect the additional deterioration in 
the fair value of the collateral. Likewise, if the fair value of the 
collateral has increased as of the ACL evaluation date, the increase in 
the fair value of the collateral is reflected through a reduction in 
the ACL. Any negative ACL that results is capped at

[[Page 55517]]

the amount previously written off. Changes in the fair value of 
collateral described herein should be supported and documented through 
recent appraisals or evaluations.\22\
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    \22\ For more information on regulatory expectations related to 
the use of appraisals and evaluations, see the Interagency Appraisal 
and Evaluation Guidelines published on December 10, 2010. Insured 
depository institutions should also refer to the interagency 
regulations on appraisals adopted by their primary federal regulator 
as follows: For national banks and federal savings associations, 
Subpart C of 12 CFR part 34; for state member banks, 12 CFR parts 
208 and 225; for state nonmember banks, state savings associations, 
and insured state-licensed branches of foreign banks, 12 CFR part 
323; and for national credit unions, 12 CFR part 722.
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Troubled Debt Restructurings 23
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    \23\ A troubled debt restructuring is defined in ASC Subtopic 
310-40, Receivables--Troubled Debt Restructurings by Creditors. The 
October 24, 2013, Interagency Supervisory Guidance Addressing 
Certain Issues Related to Troubled Debt Restructurings provides more 
information on TDRs including, but not limited to, accrual status, 
regulatory credit risk grade, classification and write-off 
treatment, and capitalized costs. This interagency supervisory 
guidance remains applicable, unless affected by FASB ASC Topic 326. 
Information on the reporting of a subsequent restructuring of a TDR 
may be found in the instructions for the Call Report.
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    Expected credit losses on financial assets modified in TDRs or 
reasonably expected to be modified in TDRs (collectively, TDRs) are 
estimated under the same CECL methodology that is applied to other 
financial assets measured at amortized cost. Expected credit losses are 
evaluated on a collective basis, or, if a TDR does not share similar 
risk characteristics with other financial assets, on an individual 
basis.
    FASB ASC Topic 326 allows an institution to use any appropriate 
loss estimation method to estimate ACLs for TDRs. However, there are 
circumstances when specific measurement methods are required. If a TDR, 
or a financial asset for which a TDR is reasonably expected, is 
collateral-dependent, the ACL is estimated using the fair value of 
collateral.
    In addition, when management has a reasonable expectation of 
executing a TDR or if a TDR has been executed, the expected effect of 
the modification (e.g., term extension or interest rate concession) is 
included in the estimate of the ACLs. Management should determine, 
support, and document how it identifies and estimates the effect of a 
reasonably expected TDR and estimates the related ACL. The estimated 
effect of reasonably expected TDRs may be included in an institution's 
qualitative factor adjustments.

Purchased Credit-Deteriorated Assets

    FASB ASC Topic 326 introduces the concept of purchased credit-
deteriorated (PCD) assets. PCD assets are acquired financial assets 
that, at acquisition, have experienced more-than-insignificant 
deterioration in credit quality since origination. FASB ASC Topic 326 
does not provide a prescriptive definition of more-than-insignificant 
credit deterioration. The acquiring institution's management should 
establish and document a reasonable process to consistently determine 
what constitutes a more-than-insignificant deterioration in credit 
quality.
    When recording the acquisition of PCD assets, the amount of 
expected credit losses as of the acquisition date is added to the 
purchase price of the financial assets rather than recording these 
losses through PCLs. This establishes the amortized cost basis of the 
PCD assets. Any difference between the unpaid principal balance of the 
PCD assets and the amortized cost basis of the assets as of the 
acquisition date is the non-credit discount or premium. The initial ACL 
and non-credit discount or premium determined on a collective basis at 
that acquisition date are allocated to the individual PCD assets.
    After acquisition, ACLs for PCD assets should be adjusted at each 
reporting date with a corresponding debit or credit to the PCLs to 
reflect management's current estimate of expected credit losses. The 
non-credit discount recorded at acquisition will be accreted into 
interest income over the remaining life of the PCD assets on a level-
yield basis.

Financial Assets With Collateral Maintenance Agreements

    Institutions may have financial assets that are secured by 
collateral (such as debt securities) and are subject to collateral 
maintenance agreements requiring the borrower to continuously replenish 
the amount of collateral securing the asset. If the fair value of the 
collateral declines, the borrower is required to provide additional 
collateral as specified by the agreement.
    FASB ASC Topic 326 includes a practical expedient for financial 
assets with collateral maintenance agreements where the borrower is 
required to provide collateral greater than or equal to the amortized 
cost basis of the asset and is expected to continuously replenish the 
collateral. In those cases, management may elect the collateral 
maintenance practical expedient and measure expected credit losses for 
these qualifying assets based on the fair value of the collateral.\24\ 
If the fair value of the collateral is greater than the amortized cost 
of the financial asset and management expects the borrower to replenish 
collateral as needed, management may record an ACL of zero for the 
financial asset when the collateral maintenance practical expedient is 
applied. Similarly, if the fair value of the collateral is less than 
the amortized cost basis of the financial asset and management expects 
the borrower to replenish collateral as needed, the ACL is limited to 
the difference between the fair value of the collateral and the 
amortized cost basis of the asset as of the reporting date when 
applying the collateral maintenance practical expedient.
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    \24\ For example, an institution enters into a reverse 
repurchase agreement with a collateral maintenance agreement. 
Management may not need to record the expected credit losses at each 
reporting date as long as the fair value of the security collateral 
is greater than the amortized cost basis of the reverse repurchase 
agreement. Refer to ASC 326-20-55-46 for more information.
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Accrued Interest Receivable

    FASB ASC Topic 326 includes accrued interest receivable in the 
amortized cost basis of a financial asset. As a result, accrued 
interest receivable is included in the amounts for which ACLs are 
estimated. Generally, any accrued interest receivable that is not 
collectible is written off against the related ACL.
    FASB ASC Topic 326 permits a series of independent accounting 
policy elections related to accrued interest receivable that alter the 
accounting treatment described in the preceding paragraph. These 
elections are made upon adoption of FASB ASC Topic 326 and may differ 
by financial asset portfolio. The available accounting policy elections 
\25\ are:
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    \25\ The accounting policy elections related to accrued interest 
receivable that are described in this paragraph also apply to 
accrued interest receivable for an available-for-sale debt security 
that, for purposes of identifying and measuring an impairment, 
exclude the applicable accrued interest from both the fair value and 
amortized cost basis of the securities.
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     Management may elect not to measure ACLs for accrued 
interest receivable if uncollectible accrued interest is written off in 
a timely manner. Management should define and document its definition 
of a timely write-off.
     Management may elect to write off accrued interest 
receivable by either reversing interest income, recognizing the loss 
through PCLs, or through a combination of both methods.
     Management may elect to separately present accrued 
interest receivable from the associated financial asset in its

[[Page 55518]]

regulatory reports and financial statements, if applicable. The accrued 
interest receivable is presented net of ACLs (if any).

Financial Assets With Zero Credit Loss Expectations

    There may be certain financial assets for which the expectation of 
credit loss is zero after evaluating historical loss information, 
making necessary adjustments for current conditions and reasonable and 
supportable forecasts, and considering any collateral or guarantee 
arrangements that are not free-standing contracts. Factors to consider 
when evaluating whether expectations of zero credit loss are 
appropriate may include, but are not limited to:
     A long history of zero credit loss;
     A financial asset that is fully secured by cash or cash 
equivalents;
     High credit ratings from rating agencies with no expected 
future downgrade; \26\
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    \26\ Management should not rely solely on credit rating agencies 
but should also make its own assessment based on third party 
research, default statistics, and other data that may indicate a 
decline in credit rating.
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     Principal and interest payments that are guaranteed by the 
U.S. government;
     The issuer, guarantor, or sponsor can print its own 
currency and the currency is held by other central banks as reserve 
currency; and
     The interest rate on the security is recognized as a risk-
free rate.
    A loan that is fully secured by cash or cash equivalents, such as 
certificates of deposit issued by the lending institution, would likely 
have zero credit loss expectations. Similarly, the guaranteed portion 
of a U.S. Small Business Administration (SBA) loan or security 
purchased on the secondary market through the SBA's fiscal and transfer 
agent would likely have zero credit loss expectations because these 
financial assets are unconditionally guaranteed by the U.S. government. 
Examples of held-to-maturity debt securities that may result in 
expectations of zero credit loss include U.S. Treasury securities as 
well as mortgage-backed securities issued and guaranteed by the 
Government National Mortgage Association, the Federal Home Loan 
Mortgage Corporation, and the Federal National Mortgage Association. 
Assumptions related to zero credit loss expectations should be included 
in the institution's ACL documentation.

Estimated Credit Losses for Off-Balance-Sheet Credit Exposures

    FASB ASC Topic 326 requires that an institution estimate expected 
credit losses for off-balance-sheet credit exposures within the scope 
of FASB ASC Topic 326 over the contractual period during which the 
institution is exposed to credit risk. The estimate of expected credit 
losses should take into consideration the likelihood that funding will 
occur as well as the amount expected to be funded over the estimated 
remaining contractual term of the off-balance-sheet credit exposures. 
Management should not record an estimate of expected credit losses for 
off-balance-sheet exposures that are unconditionally cancellable by the 
issuer.
    Management must evaluate expected credit losses for off-balance-
sheet credit exposures as of each reporting date. While the process for 
estimating expected credit losses for these exposures is similar to the 
one used for on-balance-sheet financial assets, these estimated credit 
losses are not recorded as part of the ACLs because cash has not yet 
been disbursed to fund the contractual obligation to extend credit. 
Instead, these loss estimates are recorded as a liability, separate and 
distinct from the ACLs.\27\ The amount needed to adjust the liability 
for expected credit losses on off-balance-sheet credit exposures is 
reported as an other noninterest expense rather than being reported as 
part of the PCLs.\28\
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    \27\ The ACL associated with off-balance-sheet credit exposures 
is included in the ``Allowance for credit losses on off-balance-
sheet credit exposures'' in Schedule RC-G--Other Liabilities in the 
Call Report and in the Liabilities schedule in NCUA Call Report Form 
5300.
    \28\ Provisions for credit losses on off-balance-sheet credit 
exposures are included as part of ``Other noninterest expense'' in 
Schedule RI--Income Statement in the Call Report and in ``Credit 
Loss Expense--Off-Balance-Sheet Credit Exposures'' in the Statement 
of Income and Expense in NCUA Call Report Form 5300.
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Measurement of the ACL for Available-for-Sale Debt Securities

    FASB ASC Subtopic 326-30, Financial Instruments--Credit Losses--
Available-for-Sale Debt Securities (FASB ASC Subtopic 326-30) describes 
the accounting for expected credit losses associated with available-
for-sale debt securities. Credit losses for available-for-sale debt 
securities are evaluated as of each reporting date when the fair value 
is less than amortized cost. FASB ASC Subtopic 326-30 requires credit 
losses to be calculated individually, rather than collectively, using a 
discounted cash flow method, through which management compares the 
present value of expected cash flows with the amortized cost basis of 
the security. An ACL is established, with a charge to the PCL, to 
reflect the credit loss component of the decline in fair value below 
amortized cost. If the fair value of the security increases over time, 
any ACL that has not been written off may be reversed through a credit 
to the PCL. The ACL for an available-for-sale debt security is limited 
by the amount that the fair value is less than the amortized cost, 
which is referred to as the fair value floor.
    If management intends to sell an available-for-sale debt security 
or will more likely than not be required to sell the security before 
recovery of the amortized cost basis, the security's ACL should be 
written off and the amortized cost basis of the security should be 
written down to its fair value at the reporting date with any 
incremental impairment reported in income.
    A change during the reporting period in the non-credit component of 
any decline in fair value below amortized cost on an available-for-sale 
debt security is reported in other comprehensive income, net of 
applicable income taxes.\29\
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    \29\ Non-credit impairment on an available-for-sale debt 
security that is not required to be recorded through the ACL should 
be reported in other comprehensive income as described in ASC 326-
30-35-2.
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    When evaluating impairment for available-for-sale debt securities, 
management may evaluate the amortized cost basis including accrued 
interest receivable, or may evaluate the accrued interest receivable 
separately from the remaining amortized cost basis. If evaluated 
separately, accrued interest receivable is excluded from both the fair 
value of the available-for-sale debt security and its amortized cost 
basis.\30\
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    \30\ The accounting policy elections described in the ``Accrued 
Interest Receivable'' section of this policy statement apply to 
accrued interest receivable recorded for an available-for-sale debt 
security if an institution excludes applicable accrued interest 
receivable from both the fair value and amortized cost basis of the 
security for purposes of identifying and measuring impairment.
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Documentation Standards

    For financial and regulatory reporting purposes, ACLs and PCLs must 
be determined in accordance with GAAP. ACLs and PCLs should be well 
documented, with clear explanations of the supporting analyses and 
rationale. Sound policies, procedures, and control systems should be 
appropriately tailored to an institution's size and complexity, 
organizational structure, business environment and strategy, risk 
appetite, financial asset characteristics, loan administration 
procedures,

[[Page 55519]]

investment strategy, and management information systems.\31\ 
Maintaining, analyzing, supporting, and documenting appropriate ACLs 
and PCLs in accordance with GAAP is consistent with safe and sound 
banking practices.
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    \31\ Management often documents policies, procedures, and 
controls related to ACLs in accounting or credit risk management 
policies, or a combination thereof.
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    The policies and procedures governing an institution's ACL 
processes and the controls over these processes should be designed, 
implemented, and maintained to reasonably estimate expected credit 
losses for financial assets and off-balance-sheet credit exposures as 
of the reporting date. The policies and procedures should describe 
management's processes for evaluating the credit quality and 
collectibility of financial asset portfolios, including reasonable and 
supportable forecasts about changes in the credit quality of these 
portfolios, through a disciplined and consistently applied process that 
results in an appropriate estimate of the ACLs. Management should 
review and, as needed, revise the institution's ACL policies and 
procedures at least annually, or more frequently if necessary.
    An institution's policies and procedures for the systems, 
processes, and controls necessary to maintain appropriate ACLs should 
address, but not be limited to:
     Processes that support the determination and maintenance 
of appropriate levels for ACLs that are based on a comprehensive, well-
documented, and consistently applied analysis of an institution's 
financial asset portfolios and off-balance-sheet credit exposures. The 
analyses and loss estimation processes used should consider all 
significant factors that affect the credit risk and collectibility of 
the financial asset portfolios;
     The roles, responsibilities, and segregation of duties of 
the institution's senior management and other personnel who provide 
input into ACL processes, determine ACLs, or review ACLs. These 
departments and individuals may include accounting, financial 
reporting, treasury, investment management, lending, special asset or 
problem loan workout teams, retail collections and foreclosure groups, 
credit review, model risk management, internal audit, and others, as 
applicable. Individuals with responsibilities related to the estimation 
of ACLs should be competent and well-trained, with the ability to 
escalate material issues;
     Processes for determining the appropriate historical 
period(s) to use as the basis for estimating expected credit losses and 
approaches for adjusting historical credit loss information to reflect 
differences in asset specific characteristics, as well as current 
conditions and reasonable and supportable forecasts that are different 
from conditions existing in the historical period(s);
     Processes for determining and revising the appropriate 
techniques and periods to revert to historical credit loss information 
when the contractual term of a financial asset or off-balance-sheet 
credit exposure extends beyond the reasonable and supportable forecast 
period(s);
     Processes for segmenting financial assets for estimating 
expected credit losses and periodically evaluating the segments to 
determine whether the assets continue to share similar risk 
characteristics;
     Data capture and reporting systems that supply the quality 
and breadth of relevant and reliable information necessary, whether 
obtained internally or externally, to support and document the 
estimates of appropriate ACLs for regulatory reporting requirements 
and, if applicable, financial statement and disclosure requirements;
     The description of the institution's systematic and 
logical loss estimation process(es) for determining and consolidating 
expected credit losses to ensure that the ACLs are recorded in 
accordance with GAAP and regulatory reporting requirements. This may 
include, but is not limited to:
    [cir] Management's judgments, accounting policy elections, and 
application of practical expedients in determining the amount of 
expected credit losses;
    [cir] The process for determining when a loan is collateral-
dependent;
    [cir] The process for determining the fair value of collateral, if 
any, used as an input when estimating the ACL, including the basis for 
making any adjustments to the market value conclusion and how costs to 
sell, if applicable, are calculated;
    [cir] The process for determining when a financial asset has zero 
credit loss expectations;
    [cir] The process for determining expected credit losses when a 
financial asset has a collateral maintenance provision; and
    [cir] A description of and support for qualitative factors that 
affect collectibility of financial assets;
     Procedures for validating and independently reviewing the 
loss estimation process as well as any changes to the process from 
prior periods;
     Policies and procedures for the prompt write-off of 
financial assets, or portions of financial assets, when available 
information confirms the assets to be uncollectible, consistent with 
regulatory reporting requirements; and
     The systems of internal controls used to confirm that the 
ACL processes are maintained and periodically adjusted in accordance 
with GAAP and interagency guidelines establishing standards for safety 
and soundness.
    Internal control systems for the ACL estimation processes should:
     Provide reasonable assurance regarding the relevance, 
reliability, and integrity of data and other information used in 
estimating expected credit losses;
     Provide reasonable assurance of compliance with laws, 
regulations, and the institution's policies and procedures;
     Provide reasonable assurance that the institution's 
financial statements are prepared in accordance with GAAP, and the 
institution's regulatory reports are prepared in accordance with the 
applicable instructions;
     Include a well-defined and effective loan review and 
grading process that is consistently applied and identifies, measures, 
monitors, and addresses asset quality problems in an accurate, sound 
and timely manner. The loan review process should respond to changes in 
internal and external factors affecting the level of credit risk in the 
portfolio; and
     Include a well-defined and effective process for 
monitoring credit quality in the debt securities portfolio.

Analyzing and Validating the Overall Measurement of ACLs

    To ensure that ACLs are presented fairly, in accordance with GAAP 
and regulatory reporting requirements, and are transparent for 
regulatory examinations, management should document its measurements of 
the amounts of ACLs reported in regulatory reports and financial 
statements, if applicable, for each type of financial asset (e.g., 
loans, held-to-maturity debt securities, and available-for-sale debt 
securities) and for off-balance-sheet credit exposures. This 
documentation should include ACL calculations, qualitative adjustments, 
and any adjustments to the ACLs that are required as part of the 
internal review and challenge process. The board of directors, or a 
committee thereof, should review management's assessments of and 
justifications for the reported amounts of ACLs.

[[Page 55520]]

    Various techniques are available to assist management in analyzing 
and evaluating the ACLs. For example, comparing estimates of expected 
credit losses to actual write-offs in aggregate, and by portfolio, may 
enable management to assess whether the institution's loss estimation 
process is sufficiently designed.\32\ Further, comparing the estimate 
of ACLs to actual write-offs at the financial asset portfolio level 
allows management to analyze changing portfolio characteristics, such 
as the volume of assets or increases in write-off rates, which may 
affect future forecast adjustments. Techniques applied in these 
instances do not have to be complex to be effective, but, if used, 
should be commensurate with the institution's size and complexity.
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    \32\ Institutions using models in the loss estimation process 
may incorporate a qualitative factor adjustment in the estimate of 
expected credit losses to capture the variance between modeled 
credit loss expectations and actual historical losses when the model 
is still considered predictive and fit for use. Institutions should 
monitor this variance, as well as changes to the variance, to 
determine if the variance is significant or material enough to 
warrant further changes to the model.
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    Ratio analysis may also be useful for evaluating the overall 
reasonableness of ACLs. Ratio analysis assists in identifying divergent 
or emerging trends in the relationship of ACLs to other factors such as 
adversely classified or graded loans, past due and nonaccrual loans, 
total loans, historical gross write-offs, net write-offs, and historic 
delinquency and default trends for securities.
    Comparing the institution's ACLs to those of peer institutions may 
provide management with limited insight into management's own ACL 
estimates. Management should apply caution when performing peer 
comparisons as there may be significant differences among peer 
institutions in the mix of financial asset portfolios, reasonable and 
supportable forecast period assumptions, reversion techniques, the data 
used for historical loss information, and other factors.
    When used prudently, comparisons of estimated expected losses to 
actual write-offs, ratio analysis, and peer comparisons can be helpful 
as a supplemental check on the reasonableness of management's 
assumptions and analyses. Because appropriate ACLs are institution-
specific estimates, the use of comparisons does not eliminate the need 
for a comprehensive analysis of financial asset portfolios and the 
factors affecting their collectibility.
    When an appropriate expected credit loss framework has been used to 
estimate expected credit losses, it is inappropriate for the board of 
directors or management to make further adjustments to ACLs for the 
sole purpose of reporting ACLs that correspond to a peer group median, 
a target ratio, or a budgeted amount.
    After analyzing ACLs, management should periodically validate the 
loss estimation process, and any changes to the process, to confirm 
that the process remains appropriate for the institution's size, 
complexity, and risk profile. The validation process should include 
procedures for review by a party with appropriate knowledge, technical 
expertise, and experience who is independent of the institution's 
credit approval and ACL estimation processes. A party who is 
independent of these processes could be from internal audit staff, a 
risk management unit of the institution independent of management 
supervising these processes, or a contracted third-party. One party 
need not perform the entire analysis as the validation may be divided 
among various independent parties.\33\
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    \33\ Engaging the institution's external auditor to perform the 
validation process described in this paragraph may impair the 
auditor's independence under applicable auditor independence 
standards and prevent the auditor from performing an independent 
audit of the institution's financial statements.
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Responsibilities of the Board of Directors

    The board of directors, or a committee thereof, is responsible for 
overseeing management's significant judgments and estimates used in 
determining appropriate ACLs. Evidence of the board of directors' 
oversight activities is subject to review by examiners. These 
activities should include, but are not limited to:
     Retaining experienced and qualified management to oversee 
all ACL and PCL activities;
     Reviewing and approving the institution's written loss 
estimation policies, including any revisions thereto, at least 
annually;
     Reviewing management's assessment of the loan review 
system and management's conclusion and support for whether the system 
is sound and appropriate for the institution's size and complexity;
     Reviewing management's assessment of the effectiveness of 
processes and controls for monitoring the credit quality of the 
investment portfolio;
     Reviewing management's assessments of and justifications 
for the estimated amounts reported each period for the ACLs and the 
PCLs;
     Requiring management to periodically validate, and, when 
appropriate, revise loss estimation methods;
     Approving the internal and external audit plans for the 
ACLs, as applicable; and
     Reviewing any identified audit findings and monitoring 
resolution of those items.

Responsibilities of Management

    Management is responsible for maintaining ACLs at appropriate 
levels and for documenting its analyses in accordance with the concepts 
and requirements set forth in GAAP, regulatory reporting requirements, 
and this policy statement. Management should evaluate the ACLs reported 
on the balance sheet as of the end of each period (and for credit 
unions, prior to paying dividends), and debit or credit the related 
PCLs to bring the ACLs to an appropriate level as of each reporting 
date. The determination of the amounts of the ACLs and the PCLs should 
be based on management's current judgments about the credit quality of 
the institution's financial assets and should consider known and 
expected relevant internal and external factors that significantly 
affect collectibility over reasonable and supportable forecast periods 
for the institution's financial assets as well as appropriate reversion 
techniques applied to periods beyond the reasonable and supportable 
forecast periods. Management's evaluations are subject to review by 
examiners.
    In carrying out its responsibility for maintaining appropriate 
ACLs, management should adopt and adhere to written policies and 
procedures that are appropriate to the institution's size and the 
nature, scope, and risk of its lending and investing activities. These 
policies and procedures should address the processes and activities 
described in the ``Documentation Standards'' section of this policy 
statement.
    Management fulfills other responsibilities that aid in the 
maintenance of appropriate ACLs. These activities include, but are not 
limited to:
     Establishing and maintaining appropriate governance 
activities for the loss estimation process(es). These activities may 
include reviewing and challenging the assumptions used in estimating 
expected credit losses and designing and executing effective internal 
controls over the credit loss estimation method(s);
     Periodically performing procedures that compare credit 
loss estimates to actual write-offs, at the portfolio level and in 
aggregate, to confirm that

[[Page 55521]]

amounts recorded in the ACLs were sufficient to cover actual credit 
losses. This analysis supports that appropriate ACLs were recorded and 
provides insight into the loss estimation process's ability to estimate 
expected credit losses. This analysis is not intended to reflect the 
accuracy of management's economic forecasts;
     Periodically validating the loss estimation process(es), 
including changes, if any, to confirm it is appropriate for the 
institution; and
     Engaging in sound risk management of third-parties 
involved \34\ in ACL estimation process(es), if applicable, to ensure 
that the loss estimation processes are commensurate with the level of 
risk, the complexity of the third-party relationship and the 
institution's organizational structure.
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    \34\ Guidance on third party service providers may be found in 
SR Letter 13-19/Consumer Affairs Letter 13-21, Guidance on Managing 
Outsourcing Risk (FRB); Financial Institution Letter (FIL) 44-2008, 
Guidance for Managing Third Party Risk (FDIC); Supervisory Letter 
No. 07-01, Evaluating Third Party Relationships (NCUA); and OCC 
Bulletin 2013-29, Third Party Relationships: Risk Management 
Guidance, OCC Bulletin 2017-7, Third Party Relationships: 
Supplemental Examination Procedures, and OCC Bulletin 2017-21, Third 
Party Relationships: Frequently Asked Questions to Supplement OCC 
Bulletin 2013-29.
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    Additionally, if an institution uses loss estimation models in 
determining expected credit losses, management should evaluate the 
models before they are employed and modify the model logic and 
assumptions, as needed, to help ensure that the resulting loss 
estimates are consistent with GAAP and regulatory reporting 
requirements.\35\ To demonstrate such consistency, management should 
document its evaluations and conclusions regarding the appropriateness 
of estimating credit losses with models. When used for multiple 
purposes within an institution, models should be specifically adjusted 
and validated for use in ACL loss estimation processes. Management 
should document and support any adjustments made to the models, the 
outputs of the models, and compensating controls applied in determining 
the estimated expected credit losses.
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    \35\ See the interagency statement titled, Supervisory Guidance 
on Model Risk Management, published by the Board in SR Letter 11-7 
and OCC Bulletin 2011-12 on April 4, 2011. The statement also 
addresses the incorporation of vendor products into an institution's 
model risk management framework following the same principles 
relevant to in-house models. The FDIC adopted the interagency 
statement on June 7, 2017. Institutions supervised by the FDIC 
should refer to FIL 22-2017, Adoption of Supervisory Guidance on 
Model Risk Management, including the statement of applicability in 
the FIL.
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Examiner Review of ACLs

    Examiners are expected to assess the appropriateness of 
management's loss estimation processes and the appropriateness of the 
institution's ACL balances as part of their supervisory activities. The 
review of ACLs, including the depth of the examiner's assessment, 
should be commensurate with the institution's size, complexity, and 
risk profile. As part of their supervisory activities, examiners 
generally assess the credit quality and credit risk of an institution's 
financial asset portfolios, the adequacy of the institution's credit 
loss estimation processes, the adequacy of supporting documentation, 
and the appropriateness of the reported ACLs and PCLs in the 
institution's regulatory reports and financial statements, if 
applicable. Examiners may consider the significant factors that affect 
collectibility, including the value of collateral securing financial 
assets and any other repayment sources. Supervisory activities may 
include evaluating management's effectiveness in assessing credit risk 
for debt securities (both prior to purchase and on an on-going basis). 
In reviewing the appropriateness of an institution's ACLs, examiners 
may:
     Evaluate the institution's ACL policies and procedures and 
assess the loss estimation method(s) used to arrive at overall 
estimates of ACLs, including the documentation supporting the 
reasonableness of management's assumptions, valuations, and judgments. 
Supporting activities may include, but, are not limited to:
    [cir] Evaluating whether management has appropriately considered 
historical loss information, current conditions, and reasonable and 
supportable forecasts, including significant qualitative factors that 
affect the collectibility of the financial asset portfolios;
    [cir] Assessing loss estimation techniques, including loss 
estimation models, if applicable, as well as the incorporation of 
qualitative adjustments to determine whether the resulting estimates of 
expected credit losses are in conformity with GAAP and regulatory 
reporting requirements; and
    [cir] Evaluating the adequacy of the documentation and the 
effectiveness of the controls used to support the measurement of the 
ACLs;
     Assess the effectiveness of board oversight as well as 
management's effectiveness in identifying, measuring, monitoring, and 
controlling credit risk. This may include, but is not limited to, a 
review of underwriting standards and practices, portfolio composition 
and trends, credit risk review functions, risk rating systems, credit 
administration practices, investment securities management practices, 
and related management information systems and reports;
     Review the appropriateness and reasonableness of the 
overall level of the ACLs relative to the level of credit risk, the 
complexity of the institution's financial asset portfolios, and 
available information relevant to assessing collectibility, including 
consideration of current conditions and reasonable and supportable 
forecasts. Examiners may include a quantitative analysis (e.g., using 
management's results comparing expected write-offs to actual write-offs 
as well as ratio analysis) to assess the appropriateness of the ACLs. 
This quantitative analysis may be used to determine the reasonableness 
of management's assumptions, valuations, and judgments and understand 
variances between actual and estimated credit losses. Loss estimates 
that are consistently and materially over or under predicting actual 
losses may indicate a weakness in the loss forecasting process;
     Review the ACLs reported in the institution's regulatory 
reports and in any financial statements and other key financial reports 
to determine whether the reported amounts reconcile to the 
institution's estimate of the ACLs. The consolidated loss estimates 
determined by the institution's loss estimation method(s) should be 
consistent with the final ACLs reported in its regulatory reports and 
financial statements, if applicable;
     Verify that models used in the loss estimation process, if 
any, are subject to initial and ongoing validation activities. 
Validation activities include evaluating and concluding on the 
conceptual soundness of the model, including developmental evidence, 
performing ongoing monitoring activities, including process 
verification and benchmarking, and analyzing model output.\36\ 
Examiners may review model validation findings, management's response 
to those findings, and applicable action plans to remediate any 
concerns, if applicable. Examiners may also assess the adequacy of the 
institution's processes to implement changes in a timely manner; and
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    \36\ See footnote 35.
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     Review the effectiveness of the institution's third-party 
risk management framework associated with the estimation of ACLs, if 
applicable, to assess whether the processes are commensurate with the 
level of risk, the complexity and nature of the

[[Page 55522]]

relationship, and the institution's organizational structure. Examiners 
may determine whether management monitors material risks and 
deficiencies in third-party relationships, and takes appropriate action 
as needed.\37\
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    \37\ See footnote 34.
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    When assessing the appropriateness of ACLs, examiners should 
recognize that the processes, loss estimation methods, and underlying 
assumptions an institution uses to calculate ACLs require the exercise 
of a substantial degree of management judgment. Even when an 
institution maintains sound procedures, controls, and monitoring 
activities, an estimate of expected credit losses is not a single 
precise amount and may result in a range of acceptable outcomes for 
these estimates. This is a result of the flexibility FASB ASC Topic 326 
provides institutions in selecting loss estimation methods and the wide 
range of qualitative and forecasting factors that are considered.
    Management's ability to estimate expected credit losses should 
improve over the contractual term of financial assets as substantive 
information accumulates regarding the factors affecting repayment 
prospects. Examiners generally should accept an institution's ACL 
estimates and not seek adjustments to the ACLs, when management has 
provided adequate support for the loss estimation process employed, and 
the ACL balances and the assumptions used in the ACL estimates are in 
accordance with GAAP and regulatory reporting requirements. It is 
inappropriate for examiners to seek adjustments to ACLs for the sole 
purpose of achieving ACL levels that correspond to a peer group median, 
a target ratio, or a benchmark amount when management has used an 
appropriate expected credit loss framework to estimate expected credit 
losses.
    If the examiner concludes that an institution's reported ACLs are 
not appropriate or determines that its ACL evaluation processes or loss 
estimation method(s) are otherwise deficient, these concerns should be 
noted in the report of examination and communicated to the board of 
directors and senior management.\38\ Additional supervisory action may 
be taken based on the magnitude of the shortcomings in ACLs, including 
the materiality of any errors in the reported amounts of ACLs.
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    \38\ Each agency has formal and informal communication channels 
for sharing supervisory information with the board of directors and 
management depending on agency practices and the nature of the 
information being shared. These channels may include, but are not 
limited to, institution specific supervisory letters, letters to the 
industry, transmittal letters, visitation findings summary letters, 
targeted review conclusion letters, or official examination or 
inspection reports.

    Dated: October 1, 2019.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, October 9, 2019.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on August 20, 2019.
Valerie J. Best,
Assistant Executive Secretary.
    By the National Credit Union Administration Board on September 
3, 2019.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2019-22655 Filed 10-16-19; 8:45 am]
BILLING CODE 4810-33-P; 7590-01 P; 6741-01-P; 6210-01-P
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