Transition to the Current Expected Credit Loss Methodology, 50963-50970 [2020-16987]

Agencies

• National Credit Union Administration

[Federal Register Volume 85, Number 161 (Wednesday, August 19, 2020)]
[Proposed Rules]
[Pages 50963-50970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16987]


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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.

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Federal Register / Vol. 85, No. 161 / Wednesday, August 19, 2020 / 
Proposed Rules

[[Page 50963]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

[NCUA-2020-0074]
RIN 3133-AF03


Transition to the Current Expected Credit Loss Methodology

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is seeking comment on a proposed rule 
to address changes to the U.S. generally accepted accounting principles 
(GAAP). Specifically, the proposed rule would provide that, for 
purposes of determining a federally insured credit union's (FICU's) net 
worth classification under the prompt corrective action (PCA) 
regulations, the Board will phase-in the day-one adverse effects on 
regulatory capital that may result from the adoption of the current 
expected credit losses (CECL) accounting methodology. Consistent with 
regulations issued by the other federal banking agencies, the proposed 
rule would temporarily mitigate the adverse PCA consequences of the 
day-one capital adjustments, while requiring that FICUs account for 
CECL for other purposes, such as Call Reports. The proposed rule would 
also provide that FICUs with less than $10 million in assets are no 
longer required to determine their charges for loan losses in 
accordance with GAAP. The Board's regulations would provide that these 
FICUs may instead use any reasonable reserve methodology (incurred 
loss), provided that it adequately covers known and probable loan 
losses.

DATES: Comments must be received on or before October 19, 2020.

ADDRESSES: You may submit comments, by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: https://www.regulations.gov. 
The docket number for this proposed rule is NCUA-2020-0074 and is 
available at https://www.regulations.gov/. Follow the instructions for 
submitting comments.
     Fax: (703) 518-6319. Include ``[Your name] Comments on 
``Transition to the Current Expected Credit Loss Methodology'' in the 
transmittal.
     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: All public comments are available on the Federal 
eRulemaking Portal at: https://www.regulations.gov as submitted, except 
as may not be possible for technical reasons. Public comments will not 
be edited to remove any identifying or contact information. Due to 
social distancing measures in effect, the usual opportunity to inspect 
paper copies of comments in the NCUA's law library is not currently 
available. After social distancing measures are relaxed, visitors may 
make an appointment to review paper copies by calling (703) 518-6540 or 
emailing [email protected].

FOR FURTHER INFORMATION CONTACT: Policy and Accounting: Alison L. 
Clark, Chief Accountant, Office of Examinations and Insurance, at (703) 
518-6360; Legal: Ariel Pereira, Staff Attorney, Office of General 
Counsel, at (703) 548-2778; or by mail at National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314.

SUPPLEMENTARY INFORMATION:
I. Background
    A. The NCUA's Minimum Capital Standards
    B. Current Expected Loss (CECL) Methodology
    C. February 14, 2019, and March 31, 2020, Banking Agency Rules 
on CECL Implementation
    D. Proposed Rule Overview
II. Legal Authority
    A. The Board's Rulemaking Authority, Generally
    B. CECL Transition
    C. Small FICU Charges for Loan Losses
    D. Alternatives to GAAP
III. Proposed Rule
    A. Proposed New Subpart G to Part 702
    B. Eligibility for the Transition Provisions
    C. NCUA Implementation of the Transition Provisions
    D. Mechanics of the CECL Transition Provisions
    E. Example of Transition Schedule
    F. Statutory Limit on Amount of Net Worth Ratio Change
    G. NCUA Oversight
    H. Small FICU Determinations of Charges for Loan Losses
IV. Regulatory Procedures
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Executive Order 13132 on Federalism
    D. Assessment of Federal Regulations and Policies on Families

I. Background

A. The NCUA's Minimum Capital Standards

    The NCUA's primary mission is to ensure the safety and soundness of 
FICUs. The NCUA performs this function by examining and supervising 
federally chartered credit unions, participating in the examination and 
supervision of federally insured, state-chartered credit unions in 
coordination with state regulators, and insuring members' accounts at 
all FICUs. In its role as the administrator of the National Credit 
Union Share Insurance Fund (NCUSIF), the NCUA is responsible for the 
regulation and supervision of 5,196 FICUs with 121.3 million members 
and $1.63 trillion in assets across all states and U.S. territories.\1\
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    \1\ Based on credit union data as of March 31, 2020. See 
National Credit Union Administration, 2020 Annual Performance Plan, 
1 (January 2020), https://www.ncua.gov/files/agenda-items/AG20200123Item1b.pdf
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    On August 7, 1998, Congress enacted the Credit Union Membership 
Access Act.\2\ Section 301 of the statute added a new section 216 to 
the Federal Credit Union Act (FCU Act).\3\ Section 216 directed the 
Board to adopt by regulation a system of PCA to restore the net worth 
of FICUs. For FICUs, other than those that meet the statutory 
definition of a ``new'' FICU, section 216 requires a framework of 
mandatory supervisory actions indexed to five statutory net worth 
categories, ranging from ``well capitalized'' to ``critically 
undercapitalized.'' The mandatory actions and conditions triggering 
conservatorship and liquidation are expressly prescribed by statute.\4\ 
To supplement the mandatory actions, section 216 charged the NCUA with 
developing discretionary actions which are ``comparable'' to the 
``discretionary safeguards'' available under section 38

[[Page 50964]]

of the Federal Deposit Insurance Act--the statute that applies PCA to 
other federally insured depository institutions.\5\
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    \2\ Public Law 105-219, 112 Stat. 913 (1998).
    \3\ The FCU Act is codified at 12 U.S.C. 1751 et al. Section 216 
of the act is codified at 12 U.S.C. 1790d.
    \4\ 12 U.S.C. 1790d(e), (f), (g), (i); 12 U.S.C. 1786(h)(1)(F), 
1787(a)(3)(A).
    \5\ 12 U.S.C. 1790d(b)(1)(A). Section 38 of the FDI Act, 12 
U.S.C. 1831o, was added by section 131 of the Federal Deposit 
Insurance Corporation Improvement Act, Public Law 102-242, 105 Stat. 
2236 (1991).
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    For FICUs that section 216 defines as ``new''--those that have been 
in operation less than ten years and have $10 million or less in 
assets--the statute directed the NCUA to develop an alternative system 
of PCA to apply instead of the system of PCA for all other FICUs.\6\ 
Although section 216 does not prescribe specific attributes for this 
component of PCA, it instructed the NCUA to recognize that ``new'' 
FICUs initially have no net worth, need reasonable time to accumulate 
net worth, and need incentives to become ``adequately capitalized'' by 
the time they reach either ten years in operation or exceed $10 million 
in assets (i.e., no longer meet the definition of ``new'').\7\
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    \6\ 12 U.S.C. 1790d(b)(2)(A).
    \7\ 12 U.S.C. 1790d(b)(2)(B).
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    The NCUA implemented the regulatory PCA system mandated by section 
216 through a final rule published on February 18, 2000.\8\ The NCUA's 
PCA regulations are codified in 12 CFR part 702, ``Capital Adequacy.'' 
As required by section 216, the NCUA regulations provide that a FICU's 
capitalization classification is determined by calculating its ``net 
worth ratio,'' which is defined as being the ratio of the FICU's net 
worth to its total assets.\9\ Both section 216 and part 702 define 
``net worth'' as including the retained earnings balance of the FICU as 
determined under GAAP. Net worth also includes certain loans to, and 
accounts in, a FICU established pursuant to section 208 of the FCU 
Act.\10\ For low-income designated credit unions, net worth also 
includes secondary capital accounts that are uninsured and subordinate 
to all other claims, including claims of creditors, shareholders, and 
the NCUSIF.\11\ The regulations provide that a FICU's total assets may 
be measured by either its (1) average quarterly balance; (2) average 
monthly balance; (3) average daily balance; or (4) quarter-end 
balance.\12\
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    \8\ 65 FR 8560 (February 18, 2000).
    \9\ 12 U.S.C. 1790d(o)(3); 12 CFR 702.2(g).
    \10\ 12 U.S.C. 1790d(o)(2)(B); 12 CFR 702.2(f)(4). Section 208 
of the FCU Act (12 U.S.C. 1788) regards special assistance to avoid 
liquidation.
    \11\ 12 U.S.C. 1790d(o)(2)(C); 12 CFR 702.2(f)(2).
    \12\ 12 CFR 702.2(k).
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    With respect to the alternate PCA system for ``new'' FICUs, the 
Board has implemented these requirements in subpart C of the part 702 
regulations. In general, the regulations adopt relaxed net worth ratios 
for new FICUs. However, the PCA system for new FICUs mirrors in most 
important respects the system for all other FICUs. For example, the 
regulations index the capital classification of new FICUs to the same 
five net worth categories used for other FICUs. Further, the 
definitions of ``net worth,'' ``total assets,'' and ``net worth ratio'' 
also apply to new FICUs.

B. Current Expected Credit Loss (CECL) Methodology

    In response to the global economic crisis of 2007-2009, several 
observers expressed concern that GAAP restricted the ability of 
institutions to record credit losses that were expected, but that did 
not yet meet the ``probable'' threshold under the current incurred loss 
methodology. Credit loss reserves help mitigate the overstatement of 
income on loans and other assets by accounting for future losses. In 
response, in June 2016, the Financial Accounting Standards Board (FASB) 
issued Accounting Standards Update (ASU) No. 2016-13, which revises the 
accounting for credit losses under GAAP.\13\
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    \13\ FASB ASU No. 2016-13, Financial Instruments--Credit Losses 
(Topic 326), Measurement of Credit Losses on Financial Instruments, 
June 2016, available at: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176168232528.
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    The new accounting standard applies to all banks, savings 
associations, credit unions,\14\ and financial institution holding 
companies, regardless of size, that file regulatory reports for which 
the reporting requirements conform to GAAP. Adoption of CECL is 
expected to result in greater transparency of expected losses at an 
earlier date during the life of a loan. ASU No. 2016-13 emphasizes that 
CECL does not change the economics of lending, but only the timing of 
when losses are recorded. As ASU No. 2016-23 states:
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    \14\ CECL applies to all credit unions, irrespective of whether 
the credit union is federally insured or whether it is chartered 
federally or under state law.
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    In other words, the same loss ultimately will be recorded, 
regardless of the accounting requirements. What changes is an 
accounting threshold for the recognition of credit losses, which 
affects only the timing of when to record credit losses, not the 
ultimate amount realized on the financial assets.\15\
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    \15\ Supra note 13, at 244.
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    CECL differs from the incurred loss methodology in several key 
respects. Most significantly for purposes of this proposed rule, CECL 
requires the recognition of lifetime expected credit losses for 
financial assets measured at amortized cost, not just those credit 
losses that have been incurred as of the reporting date. CECL also 
requires the incorporation of reasonable and supportable forecasts in 
developing an estimate of lifetime expected credit losses, while 
maintaining the current requirement for consideration of past events 
and current conditions. Furthermore, the probable threshold for 
recognition of allowances in accordance with the incurred loss 
methodology is removed under CECL. Taken together, estimating expected 
credit losses over the life of an asset under CECL, including 
consideration of reasonable and supportable forecasts but without 
applying the probable threshold that exists under the incurred loss 
methodology, results in earlier recognition of credit losses.\16\
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    \16\ See Frequently Asked Questions on the New Accounting 
Standard on Financial Instruments--Credit Losses, issued by the 
Board of Governors of the Federal Reserve System, the Federal 
Deposit Insurance Corporation, the National Credit Union 
Administration, and the Office of the Comptroller of the Currency on 
April 3, 2019, for a more comprehensive discussion of the changes 
made by CECL to existing GAAP standards. The document is available 
at: https://www.ncua.gov/files/letters-credit-unions/financial-instruments-credit-losses-faqs.pdf
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    FASB established a staggered effective date for CECL. In doing so, 
it has recognized two classes of institutions subject to CECL: (1) 
Public business entities (PBEs) that meet the definition of a U.S. 
Securities and Exchange (SEC) filer, excluding entities eligible to be 
smaller reporting companies (SRCs) as defined by the SEC, and (2) all 
other entities, which includes FICUs. The effective date for SEC-filers 
(other than SRCs) is fiscal years beginning after December 15, 2019. 
All other entities (including all FICUs) are required to commence 
implementation of the standard for fiscal years beginning after 
December 15, 2022.\17\ All entities subject to CECL, however, may 
voluntarily elect to adopt CECL earlier than the specified 
implementation date, commencing as early as fiscal years beginning 
after December 15, 2018,

[[Page 50965]]

including interim periods within those fiscal years.\18\
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    \17\ FASB originally established the following three categories 
of entities subject to CECL: (1) PBE SEC filers; (2) PBEs that are 
not SEC filers; and (3) non-PBEs (including FICUs). The original 
implementation date for non-PBEs was December 15, 2020. FASB 
subsequently delayed the implementation date for non-PBEs until 
December 15, 2021. (https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168232528&acceptedDisclaimer=true) FASB issued 
a second update consolidating the entities subject to CECL into two 
categories (SEC filers (not including SRCs) and all other entities) 
and further extending the implementation dates as described above. 
(https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176173775344&acceptedDisclaimer=true).
    \18\ Supra note 13, at 5. Section 4014 of the Coronavirus Aid, 
Relief, and Economic Security (CARES) Act (Pub. L. 116-136) 
suspended mandatory compliance with CECL between March 27, 2020 (the 
date of enactment of the CARES Act) and the earlier of: (1) the date 
on which the national emergency concerning the novel coronavirus 
disease (COVID-19) outbreak declared by the President on March 13, 
2020, under the National Emergencies Act (50 U.S.C. 1601 et seq.) 
terminates; or (2) December 31, 2020. This provision is not 
applicable to virtually any FICU because, as noted, they are not 
required to begin compliance with CECL until December 15, 2022, and 
a very small number have adopted it earlier voluntarily.
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    Upon adoption of CECL, an institution will record a cumulative-
effect adjustment to retained earnings (known as ``the day-one 
adjustment''). The day-one adjustment will be equal to the difference, 
if any, between the amount of credit loss allowances required under the 
incurred loss methodology and the amount of credit loss allowances 
required under CECL. A critical consideration for institutions subject 
to the new accounting rules will be the impact of CECL on capital. 
Institutions could experience a sharp increase in expected credit 
losses on the effective date as a result of the day-one adjustment, 
which could lower their capital classification under relevant statutory 
and regulatory authorities (such, as for example, under the Board's PCA 
regulations for credit unions).

C. February 14, 2019, and March 31, 2020, Banking Agency Rules on CECL 
Implementation

    On February 14, 2019,\19\ the Office of Comptroller of the 
Currency, the Federal Reserve Board, and the Federal Deposit Insurance 
Corporation (the ``other banking agencies'') issued a final rule to 
temporarily mitigate the impacts of CECL implementation on institutions 
subject to their supervision (``banking organizations''). The final 
rule provides banking organizations with the option to phase-in over a 
three-year period the adverse effects to capital ratios that may result 
from the day-one adjustment. The rule uses the term ``electing banking 
organizations'' to refer to banking organizations that opt to use the 
phase-in. When calculating regulatory capital ratios during the first 
year of an electing banking organization's adoption of CECL, the 
organization must phase-in 25 percent of the transitional amounts. The 
electing banking organization will phase-in an additional 25 percent of 
the transitional amounts over each of the next two years. At the 
beginning of the fourth year, the banking organization will have 
completely reflected in regulatory capital the day-one effects of 
CECL.\20\ Regardless of its election to use the phase-in, a banking 
organization will be required to account for CECL for other purposes, 
such as Call Reports.\21\
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    \19\ 84 FR 4222 (February 14, 2019).
    \20\ Id. at 4227-4228.
    \21\ Id. at 4230. See also the other banking agencies' Federal 
Register notice soliciting comment on the revisions to the Call 
Reports under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-
3521) published at 83 FR 49160 (Sept. 28, 2018).
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    On March 31, 2020, \22\ the other banking agencies issued an 
interim final rule, effective upon publication, further delaying full 
CECL implementation requirements to allow banking organizations to 
better focus on supporting lending to creditworthy households and 
businesses in light of recent strains on the U.S. economy as a result 
of COVID-19, while also maintaining the quality of regulatory capital. 
The March 31, 2020, interim final rule provides banking organizations 
that adopt CECL during the 2020 calendar year with the option to delay 
for two years the estimated impact of CECL on regulatory capital, 
followed by a three-year transition period to phase out the aggregate 
amount of the capital benefit provided during the initial two-year 
delay (i.e., a five-year transition, in total). The interim final rule 
does not replace the three-year transition option in the February 14, 
2019, final rule, which remains available to any banking organization 
at the time that it adopts CECL. Banking organizations that have 
already adopted CECL have the option to elect the three-year transition 
option contained in the February 14, 2019, final rule or the five-year 
transition contained in the March 31, 2020, interim final rule.
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    \22\ 62 FR 17723 (March 31, 2020).
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    Further, as noted above, the CECL effective date is for fiscal 
years beginning after December 15, 2022, including interim periods 
within those fiscal years for smaller reporting companies and nonpublic 
business entities (private companies) (a category that includes FICUs). 
Unless banking organizations falling into these two categories are 
early adopters of CECL in 2020, they will only receive the benefit of 
the three-year transition provided in the February 14, 2019, final 
rule. This places these banking organizations in a similar position to 
FICUs eligible for the three-year transition provided under this 
proposed rule.

D. Proposed Rule Overview

    Consistent with the other banking agencies' February 14, 2019, 
final rule, the NCUA Board is issuing this proposed rule to mitigate 
the adverse effects on a FICU's net worth category that may result from 
the day-one adjustment.\23\ Specifically, the proposed rule would 
provide that, for purposes of the PCA regulations, the Board will 
phase-in the day-one effects on a FICU's net worth ratio over a three-
year period (12 quarters). The phase-in would only be applied to those 
FICUs that adopt the CECL methodology on or after December 15, 2022. 
FICUs that elect to adopt CECL earlier than the deadline established by 
FASB would not be eligible for the phase-in. Further, unlike banking 
organizations subject to the rule issued by the other banking agencies, 
eligible FICUs would not have the choice of opting into (or out of) the 
phase-in. Rather, the Board will apply the phase-in for all FICUs that 
meet the prescribed eligibility criteria.
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    \23\ The Senate Committee Report to the Financial Services and 
General Government Appropriations Act, 2020 (Division C of the 
Consolidated Appropriations Act, 2020; Pub. L. 116-93, approved 
December 20, 2019), directs the Department of the Treasury, in 
consultation with the other banking agencies and the NCUA to 
``conduct a study on the need, if any, for changes to regulatory 
capital requirements necessitated by CECL'' (Senate Report 116-111, 
at page 11). The Board will take the results of this study into 
consideration as this rulemaking progresses.
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    FICUs would continue to calculate their net worth in accordance 
with GAAP as generally required by section 216, and would also continue 
to be required to account for CECL for all other purposes, such as Call 
Reports. Further, under the proposed rule, FICUs with less than $10 
million in assets would no longer be required to determine their 
charges for loan losses in accordance with GAAP. This provision would 
eliminate the adverse PCA consequences for smaller FICUs resulting from 
CECL. The Board's regulations would allow these FICUs to instead make 
charges for loan losses in accordance with any reasonable reserve 
methodology (incurred loss), provided that it adequately covers known 
and probable loan losses. Accordingly, FICUs in this asset-size 
category that choose to use the incurred loss methodology would not be 
subject to the phase-in described in this proposed rule.\24\ The Board 
also notes that, despite the language of the proposed rule, state-
chartered, federally insured

[[Page 50966]]

credit unions subject to State laws and regulations may be required to 
comply with GAAP or other accounting standards under applicable State 
requirements.
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    \24\ The GAAP exemption for smaller FICUs does not perfectly 
overlap with the statutory definition of a ``new'' FICU. As 
discussed above, section 216 defines ``new'' FICUs, in part, as 
those with total assets of ``$10 million or less,'' while the GAAP 
exception under section 202 applies to FICUs with total assets of 
``less than $10 million.'' Accordingly, new FICUs with $10 million 
in total assets are subject to GAAP; however, the majority of FICUs 
that have existed for ten years or less have less than $10 million 
in total assets and will therefore be exempt from GAAP pursuant to 
section 202 and this proposed rule.
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    Section III of this preamble discusses the provisions of the 
proposed rule in greater detail.

II. Legal Authority

A. The Board's Rulemaking Authority, Generally.

    The Board is issuing this proposed rule pursuant to its authority 
under the FCU Act. The FCU Act grants the Board a broad mandate to 
issue regulations governing both federal credit unions and all FICUs. 
For example, section 120 of the FCU Act is a general grant of 
regulatory authority and authorizes the Board to prescribe rules and 
regulations for the administration of the act.\25\ Other provisions of 
the act, such as section 216, confer specific rulemaking authority to 
address prescribed issues or circumstances.\26\ This proposed rule is 
being issued under both the general rulemaking authority conferred by 
section 120 of the FCU Act and also, as discussed below, the more 
specific grant of authority under section 216.
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    \25\ 12 U.S.C. 1766(a).
    \26\ Other provisions of the FCU Act providing the Board with 
specific rulemaking authority include section 207 (12 U.S.C. 1787), 
which is a specific grant of authority over share insurance 
coverage, conservatorships, and liquidations. Section 209 (12 U.S.C. 
1789) grants the Board plenary regulatory authority to issue rules 
and regulations necessary or appropriate to carry out its role as 
share insurer for all FICUs.
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B. CECL Transition

    Section 216 authorizes the NCUA Board to issue regulations 
adjusting the net worth ratio requirements for FICUs if the other 
``banking agencies increase or decrease the required minimum level for 
the leverage limit'' pursuant to section 38 of the Federal Deposit 
Insurance Act.\27\ The quoted statutory language establishes two 
conditions for Board rulemaking under this provision: (1) The other 
banking agencies must revise the leverage limit; and (2) the revision 
must be pursuant to section 38 of the Federal Deposit Insurance Act. In 
addition, section 216 also requires that the Board determine--in 
consultation with the other banking agencies--``the reason for the 
increase or decrease in the required minimum level for the leverage 
limit also justifies adjustment to the net worth ratios.'' \28\ In 
accordance with the consultation requirements, the NCUA has briefed 
relevant staff of the other banking agencies of the contents and 
purposes of this proposed rule.
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    \27\ 12 U.S.C. 1790d(c)(2)(A).
    \28\ 12 U.S.C. 1790d(c)(2)(B).
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    With regards to the two factors identified in the quoted statutory 
language, the other banking agencies specify in the preamble to their 
February 14, 2019, final rule, that they are issuing the regulatory 
changes under the authority of section 38 of the Federal Deposit 
Insurance Act.\29\ The 2019 final rule, however, does not directly 
raise or lower the leverage limit,\30\ or any other of the capital 
ratios applicable to banking organizations. For example, the leverage 
limit (defined as the ratio of tier 1 capital to average total 
consolidated assets) remains unchanged at 4 percent. Nevertheless, the 
stated intent of the other banking agencies was to effectively modify 
the capital ratios for purposes of PCA oversight. As the preamble to 
the final rule provides:
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    \29\ See the Paperwork Reduction Act statement at 84 FR 4231-
42333, which provides: ``This information collection [contained in 
this rule] is authorized by section 38(o) of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o(c)). . . .'' See also footnote 35 of 
the Federal Reserve Board's Regulatory Flexibility Act statement on 
page 4234.
    \30\ Termed the ``leverage ratio'' in the banking agencies' 
regulations governing capital adequacy standards. See, 12 CFR 12 CFR 
3.10 (OCC), 217.10 (FRB), and 324.10 (FDIC).

    For purposes of determining whether an electing banking 
organization is in compliance with its regulatory capital 
requirements (including capital buffer and prompt corrective action 
(PCA) requirements), the agencies will use the electing banking 
organization's regulatory capital ratios as adjusted by the CECL 
transition provision.\31\
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    \31\ Supra note 19, at 4229.

    The regulatory text of the final rule also provides that the 
transition provision requires an electing banking organization to make 
certain adjustments ``in its calculation of regulatory capital 
ratios.'' \32\ Other regulatory text discusses adjustments to specific 
capital ratios under the transition provision. For example, the 
regulation provides that an electing banking organization will 
``[i]ncrease average total consolidated assets as reported on the Call 
Report for purposes of the leverage ratio.'' \33\
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    \32\ 12 CFR 3.301(c)(1) (OCC), 217.301(c)(1) (FRB), and 
324.301(c)(1) (FDIC).
    \33\ 12 CFR 3.301(c)(1)(iv) (OCC), 217.301(c)(1)(iv) (FRB), and 
324.301(c)(1)(iv) (FDIC) (emphasis added).
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    The quoted preamble language and regulatory text make clear that, 
while the other banking agencies did not expressly revise the numeric 
capital thresholds, they issued the February 14, 2019, final rule for 
purposes of effectively adjusting the leverage limit and other capital 
ratios that would be used for PCA oversight. Accordingly, the NCUA has 
determined that both conditions set forth in section 216 have been 
satisfied for purposes of issuing this proposed rule.\34\
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    \34\ The Board also finds that the other banking agencies' March 
31, 2020, interim final rule on this subject does not affect this 
analysis because it affects only those banking organizations that 
have adopted CECL as of 2020 and does not alter the three-year 
phase-in for other banking organizations that are covered in the 
same category of FASB's standards.
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    The Board is following the lead of the other banking agencies and 
issuing this proposed rule to phase-in the possible adverse 
consequences on a FICU's PCA classification resulting from the day-one 
adjustment. The rule would not revise the definition of net worth, 
which as discussed above is statutorily prescribed. FICUs would 
continue to calculate their net worth and net worth ratios in 
accordance with existing statutory and regulatory requirements. It is 
true, however, that the effect of the phase-in could be to effectively, 
albeit temporarily, increase a FICU's net worth. However, any such 
deemed increases would be consistent with the authority conferred to 
the NCUA under section 216 to adjust its PCA determinations in 
conformity to similar action by the other banking agencies. The effects 
of the proposed phase-in on a FICU's net worth calculations are 
consistent with section 216 and closely modeled on the CECL transition 
provisions issued by the other banking agencies. Specifically, the 
proposed rule is narrowly tailored to temporarily mitigating the 
impacts of CECL adoption on the PCA classification of a FICUs net 
worth. Further, this proposed rule does not adjust the numeric net 
worth ratios under the NCUA's PCA system. The sole purpose of the 
proposed phase-in is to aid FICUs to adjust to the new GAAP standards 
in a uniform manner and without disrupting their ability to serve their 
members.
    The Board notes that while section 216 defines ``net worth''--the 
numerator for determining the net worth ratio--it does not define the 
term ``total assets,'' which comprises the denominator of the equation. 
The definition of the term is left to the regulatory discretion of the 
Board. The Board has elected to exercise this discretion and defined 
``total assets'' in part 702. Specifically, the regulations provide 
that a FICU's total assets may be measured by either its (1) average 
quarterly balance; (2) average monthly balance; (3) average daily 
balance; or (4) quarter-end balance.\35\ As an alternative to the 
phase-in that would be provided by this proposed rule, the Board could 
have elected to revise the

[[Page 50967]]

definition of ``total assets'' in a manner enabling FICUs to effect the 
CECL day-one adjustments without undue adverse consequences. The Board 
opted for the proposed phase-in given its simplicity and ease of 
administration. Nonetheless, the Board acknowledges that an alternative 
legal basis exists for rulemaking to mitigate the consequences of CECL 
implementation.
---------------------------------------------------------------------------

    \35\ 12 CFR 702.2(k).
---------------------------------------------------------------------------

B. Small FICU Charges for Loan Losses

    Section 202 of the FCU Act requires that, in general, ``applicable 
reports and statements required to be filed with the Board shall be 
uniform and consistent with'' GAAP.\36\ The statute, however, also 
provides an exception to GAAP compliance for FICUs with total assets of 
``less than $10,000,000, unless prescribed by the Board or an 
appropriate State credit union supervisor.'' \37\
---------------------------------------------------------------------------

    \36\ 12 U.S.C. 1782(b)(6)(C)(i).
    \37\ 12 U.S.C. 1782(b)(6)(C)(iii).
---------------------------------------------------------------------------

    The Board's regulations in Sec.  702.402 require that charges for 
loan losses be made in accordance with GAAP and does not distinguish 
based on the asset size of FICUs. In effect, Sec.  702.402 exercises 
the Board's discretion under section 202 of the FCU Act to override the 
exception for smaller FICUs by prescribing regulations. For reasons 
discussed more fully below, the Board has elected to once again 
exercise its statutory discretion under section 202 of the FCU Act. The 
Board's regulations will no longer require that FICUs with total assets 
less than $10 million make charges for loan losses in accordance with 
GAAP. Instead the regulations will allow these FICUs to make such 
charges under any reasonable reserve methodology (incurred loss) 
provided it adequately covers known and probable loan losses. The 
transition provisions described above apply to FICUs adopting CECL. 
Accordingly, smaller FICUs that elect to use a non-GAAP measure are not 
eligible for the phase-in. The Board also notes that, despite the 
language of the proposed rule, section 202 makes clear that state-
chartered, federally insured credit unions subject to State laws and 
regulations may be required to comply with GAAP or other accounting 
standards under applicable State requirements.

C. Alternatives to GAAP

    The Board also notes that section 202 of the FCU Act could also 
potentially, as an alternative to the provisions discussed above, 
authorize the Board to provide a transition of the day-one effects of 
CECL implementation. This provision authorizes the Board to prescribe 
an accounting principle for application to any FICU if the Board 
determines that the application of a GAAP principle is not appropriate. 
Because the Board has clear authority to effect the transition to CECL 
under section 216, it is not necessary to rely on section 202. As the 
statute provides, the alternative principle would need to be as 
stringent as the GAAP principle it replaces, which would bear further 
study to determine whether a phase-in of CECL would be deemed no less 
stringent than CECL. Furthermore, the Board might need to engage in a 
fuller analysis of the appropriateness of CECL as applied to all 
insured credit unions with $10 million or greater in assets, which 
would likely be time-consuming as compared to the more direct, across-
the-board approach proposed above. The transition analyzed and proposed 
above would provide relief to all insured credit unions subject to CECL 
beginning with fiscal years commencing after December 15, 2022, in a 
streamlined, prompt fashion.

III. Proposed Rule

A. Proposed New Subpart G to Part 702

    The NCUA proposes to add a new subpart G to part 702, captioned 
``CECL Transition Provisions,'' which would apply to FICUs that meet 
the eligibility criteria specified in the proposed rule. 
Notwithstanding the CECL transition provisions, all other aspects of 
part 702 would continue to apply.

B. Eligibility for the Transition Provisions

    As discussed above, the proposed rule is designed to facilitate a 
FICU's transition to CECL without disrupting its ability to serve its 
members as a result of a PCA re-classification. An early-adopter FICU 
is presumed to have undertaken the necessary analysis to determine the 
impact of the day-one adjustment and to have made its early adoption 
decision accordingly. As a result, the Board does not believe that the 
phase-in is either necessary or appropriate for such FICUs. FICUs that 
have not adopted CECL prior to the December 15, 2022, implementation 
date established by FASB are eligible for the phase-in. The NCUA will 
use the phase-in to determine the FICU's net worth category under Sec.  
702.102 or Sec.  702.202 (for FICUs statutorily defined as ``new''). To 
be eligible for the transition provision, the FICU must record a 
reduction in retained earnings due to the adoption of CECL.

C. NCUA Implementation of the Transition Provisions

    Eligible FICUs would not have the option of electing whether to 
opt-into (or out of) the transition provisions. Although this differs 
from the other banking agencies' rule, it is consistent with the goal 
of this rulemaking to mitigate disruptions caused by CECL adoption. As 
noted, eligibility for the transition provision is limited to those 
FICUs for which the phase-in is truly necessary-that is, they will 
experience a reduction in retained earnings as a result of CECL. The 
Board believes that requiring these FICUs to affirmatively opt-into the 
transition provisions would constitute an unnecessary administrative 
exercise to confirm their already obvious need for the phase-in. 
Moreover, some FICUs eligible for the phase-in may inadvertently fail 
to make the election in the Call Report, thereby reducing the benefit 
of the transition provision. Automatic implementation of the phase-in 
by the NCUA will help to ensure its uniform application and that its 
benefits are provided to the greatest possible number of eligible 
FICUs.
    The final rule issued by the other banking agencies relies on 
banking organizations to calculate the phase-in amounts. In contrast, 
the NCUA will make the required phase-in calculations. As above, the 
Board has determined that this will help ensure the uniform 
implementation of the phase-in, as well as facilitate the accurate 
calculation of the transition amounts.

D. Mechanics of the CECL Transition Provisions

    To calculate the transitional amount under the CECL transition 
provision, the NCUA would compare the differences in a FICU's retained 
earnings between: (1) The FICU's closing balance sheet amount for the 
fiscal year-end immediately prior to its adoption of CECL (pre-CECL 
amount); and (2) the FICU's balance sheet amount as of the beginning of 
the fiscal year in which the FICU adopts CECL (post-CECL amount). The 
difference in retained earnings constitutes the transitional amount 
that would be phased-in to the net worth ratio calculation over the 
proposed transition period, which would be the three-year period 
(twelve quarters) beginning the first day of the fiscal year in which 
the FICU adopts CECL. Specifically, a FICU's CECL transitional amount 
would be the difference between the pre-CECL and post-CECL amounts of 
retained earnings.
    Under the proposed rule, the NCUA would phase-in the FICU's CECL 
transitional amount. The NCUA would

[[Page 50968]]

also phase-in the CECL transitional amount to the FICU's total assets 
for purposes of the net worth ratio. Both the FICU's retained earnings 
and total assets would be deemed increased by the CECL transitional 
amount. The CECL transitional amount would be phased-in over the 
transition period on a straight line basis automatically as part of the 
Call Report.
    As noted, FICUs are currently required to commence implementation 
of the standard for fiscal years beginning after December 15, 2022. In 
determining the net worth ratio of a FICU, the NCUA would deem retained 
earnings and total assets as reported on the Call Report to be 
increased by 100 percent of the FICU's CECL transitional amount during 
the first three quarters of calendar year 2023. The FICU may use this 
period to build capital and to make resulting material adjustments to 
its CECL transitional amount until December 30, 2023. The NCUA would 
base its subsequent calculations regarding the phase-in based on the 
CECL transitional amount reported by the FICU as of December 31, 2023 
(the due date for the fourth quarterly report of calendar year 2023), 
and further adjustments to the amount are not permitted.
    Beginning with the fourth quarterly Call Report of calendar 2023, 
the NCUA would deem retained earnings and total assets to be increased 
by 67 percent of the FICU's CECL transitional amount. This percentage 
would be decreased to 33 percent beginning with the fourth quarterly 
Call Report in calendar year 2024. Commencing with the fourth quarterly 
Call Report in calendar year 2025, the FICU's net worth ratio will 
completely reflect the day-one effects of CECL. All other items 
remaining equal, this computation will result in a gradual phase-in of 
the CECL day-one effects.

E. Example of Transition Schedule

    As an example of the proposed phase-in, consider a hypothetical 
FICU that has a calendar fiscal year. On the closing balance sheet date 
immediately prior to adopting CECL, the FICU has $10 million in 
retained earnings and $1 million of Allowance for Loan and Lease Losses 
(ALLL) (i.e., credit loss). On the opening balance sheet date of 
January 1, 2023, immediately after adopting CECL, the FICU determined 
it needs $1.2 million of allowance for credit losses. The FICU would 
recognize the adoption of CECL by recording a reduction in beginning 
retained earnings of $200,000. For each of the first three quarterly 
reporting periods in 2023, the NCUA would deem both the FICU's retained 
earnings and total assets to be increased by the full $200,000. 
Commencing with the fourth quarterly Call Report submitted in 2023 the 
FICU's retained earnings and total assets would be deemed increased by 
$134,000 ($200,000 x 67 percent), for purposes of calculating the 
FICU's net worth ratio. The $134,000 increase would remain constant for 
the first three quarters in 2024. Starting with the fourth quarterly 
Call Report in 2024, retained earnings and total assets would be deemed 
increased by $66,000 ($200,000 x 33 percent). Using the same 
mathematical equation, the $66,000 increase would remain constant for 
the first three quarters in 2025. Upon the FICU's submission of its 
fourth quarterly report in 2025, there would be zero increase in 
retained earnings and total assets, thus the FICU's net worth ratio 
will completely reflect the day-one effects of CECL.
    Table 1 presents the example above in tabular format:

                            Table 1--Example of a CECL Transition Provision Schedule
----------------------------------------------------------------------------------------------------------------
                                                    Transitional amounts applicable during each quarter of the
                                                               transition period (12 quarters total)
                                                 ---------------------------------------------------------------
                                                   Quarters 1-3    Quarters 4-7    Quarters 8-11    Quarter 12
                                                 ---------------------------------------------------------------
                                   Transitional                                                        Full
          In thousands                amount                       Four quarters   Four quarters    recognition
                                                    First three     at 67% (4th     at 33% (4th     of day-one
                                                    quarters of     quarter of      quarter of      adjustment
                                                       2023       2023 and first  2024 and first    (commencing
                                                                  three quarters  three quarters  4th quarter of
                                                                     of 2024)        of 2025)          2025)
----------------------------------------------------------------------------------------------------------------
Increase retained earnings and              $200            $200            $134             $66               0
 total assets by the CECL
 transitional amount............
----------------------------------------------------------------------------------------------------------------

F. Statutory Limit on Amount of Net Worth Ratio Change

    Section 216 limits any change to the net worth ratio thresholds for 
each of the five net worth categories to ``an amount that is equal to 
not more than the difference between the required minimum level most 
recently established by the Federal banking agencies and 4 percent of 
total assets (with respect to institutions regulated by those 
agencies).'' \38\ The limitation is not applicable to this proposed 
rule because, as noted above, the Board is following the lead of the 
other banking agencies and not modifying any specific net worth ratio 
threshold amount. Therefore, applying this element would be 
impracticable and would frustrate the purpose of the statutory 
provision. While the effect of the proposed regulatory amendments will 
be to adjust the calculation of the net worth ratios and, in some 
instances, the resultant net worth classifications, the actual numeric 
threshold amounts will remain the same. For example, a FICU will 
continue to be ``well capitalized'' if its net worth ratio is 7 percent 
or higher and it meets any applicable risk-based net worth requirement.
---------------------------------------------------------------------------

    \38\ 12 U.S.C. 1790d(c)(2)(A).
---------------------------------------------------------------------------

G. NCUA Oversight

    For purposes of determining whether a FICU is in compliance with 
its PCA requirements, the NCUA will use the FICU's net worth ratio as 
adjusted by the CECL transition provision. Through the supervisory 
process, the NCUA will continue to examine credit loss estimates and 
allowance balances regardless of whether the FICU is subject to the 
CECL transition provision. In addition, the NCUA may examine whether 
FICUs will have adequate amounts of capital at the expiration of their 
CECL transition provision period.

H. Small FICU Determination of Charges for Loan Losses

    As discussed, section 202 of the FCU Act provides an exception for 
FICUs with less than $10 million in total assets to the general 
requirements that reports and statements filed with the Board

[[Page 50969]]

comply with GAAP. As also noted above, the Board's regulations in Sec.  
702.402 require that charges for loan losses be made in accordance with 
GAAP and does not distinguish between the asset size of FICUs. The 
Board, however, is aware that compliance with GAAP may be burdensome 
for smaller FICUs. This difficulty is likely to be exacerbated with the 
adoption of CECL. Accordingly, the proposed rule provides that FICUs 
with total assets of less than $10 million may make charges for loan 
losses either in accordance with GAAP or with any reasonable reserve 
methodology (incurred loss) provided it adequately covers known and 
probable loan losses. This provision would eliminate the adverse PCA 
consequences for smaller FICUs resulting from CECL, and those FICUs 
would not be subject to the phase-in procedure detailed in this 
proposed rule. The Board does note, however, that pursuant to section 
202 state-chartered, federally insured credit unions subject to State 
laws and regulations may be required to comply with GAAP or other 
accounting standards under applicable State requirements.

IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities.\39\ For purposes of 
this analysis, the NCUA considers small credit unions to be those 
having under $100 million in assets.\40\ The Board fully considered the 
potential economic impacts of the proposed phase-in on small credit 
unions during the development of the proposed rule. For example, the 
proposed rule would, to the extents authorized by statute, completely 
exempt some of the smallest FICUs (i.e., those with total assets less 
than $10 million) from the adverse effects of CECL. Accordingly, NCUA 
certifies that it would not have a significant economic impact on a 
substantial number of small credit unions.
---------------------------------------------------------------------------

    \39\ 5 U.S.C. 603(a).
    \40\ 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or increases an existing burden.\41\ For purposes of the PRA, 
a paperwork burden may take the form of a reporting, disclosure or 
recordkeeping requirement, each referred to as an information 
collection. The proposed changes to part 702 may revise existing 
information collection requirements to the Call Report. Should changes 
be made to the Call Report, they will be addressed in a separate 
Federal Register notice. The revisions to the Call Report will be 
submitted for approval by the Office of Information and Regulatory 
Affairs at the Office of Management and Budget prior to their effective 
date.
---------------------------------------------------------------------------

    \41\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------

C. Executive Order 13132, on Federalism

    Executive Order 13132 \42\ encourages independent regulatory 
agencies to consider the impact of their actions on state and local 
interests. The NCUA, an independent regulatory agency, as defined in 44 
U.S.C. 3502(5), voluntarily complies with the executive order to adhere 
to fundamental federalism principles. The proposed rule would not have 
substantial direct effects on the states, on the relationship between 
the national government and the states, or on the distribution of power 
and responsibilities among the various levels of government. The Board 
has therefore determined that this rule does not constitute a policy 
that has federalism implications for purposes of the executive order.
---------------------------------------------------------------------------

    \42\ Executive Order 13132 on Federalism, was signed by former 
President Clinton on August 4, 1999, and subsequently published in 
the Federal Register on August 10, 1999 (64 FR 43255).
---------------------------------------------------------------------------

D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule would not affect 
family well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999.\43\
---------------------------------------------------------------------------

    \43\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 702

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board, this 30th day 
of July, 2020.
Gerard Poliquin,
Secretary of the Board.
    For the reasons discussed above, the NCUA proposes to amend part 
702 as follows:

PART 702--CAPITAL ADEQUACY

0
1. The authority citation for part 702 continues to read as follows:

    Authority: 12 U.S.C. 1766(a), 1790d.

0
2. Revise Sec.  702.402(d)(1) to read as follows:


Sec.  702.402  Full and Fair disclosure of financial condition.

* * * * *
    (d) * * *
    (1)(i) Federally insured credit unions with total assets of $10 
million or greater shall make charges for loan losses in accordance 
with generally accepted accounting principles (GAAP);
    (ii) Federally insured credit unions with total assets of less than 
$10 million shall make charges for loan losses in accordance either 
with either:
    (A) Any reasonable reserve methodology (incurred loss) provided it 
adequately covers known and probable loan losses; or
    (B) In the case of Federally-insured, State-chartered credit 
unions, any other applicable standard under State law or regulation;
* * * * *
0
3. Add subpart G to read as follows:

Subpart G--CECL Transition Provisions

Sec.
702.701 Authority, purpose, and scope.
702.702 Definitions.
702.704 CECL transition provisions.


Sec.  702.701  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the National Credit Union 
Administration Board pursuant to section 216 of the Federal Credit 
Union Act, 12 U.S.C. 1790d, as added by section 301 of the Credit Union 
Membership Access Act, Pub. L. 105-219, 112 Stat. 913 (1998).
    (b) Purpose. This subpart provides for the phase in of the adverse 
effects on the regulatory capital of federally insured credit unions 
that may result from the adoption of the current expected credit losses 
(CECL) accounting methodology.
    (c) Scope. The transition provisions of this subpart apply to 
federally insured credit unions, whether federally or state-chartered, 
including credit unions defined as ``new'' pursuant to section 
1790d(b)(2) with total assets of at least $10 million.


Sec.  702.702  Definitions.

    In addition to the definitions set forth in Sec.  702.2, the 
following definitions apply to this subpart:
    Current Expected Credit Losses (CECL) means the current expected 
credit losses methodology under GAAP.
    CECL transitional amount means the decrease of a credit union's 
retained earnings resulting from its adoption of CECL, as determined 
pursuant to Sec.  702.703(b).
    Transition period means the 12-quarter reporting period beginning 
with

[[Page 50970]]

the quarterly Call Report for the quarter ending March 31, 2023 and 
ending with the quarterly Call Report for the quarter ending December 
31, 2025.


Sec.  702.703  CECL transition provisions.

    (a) Eligibility--The NCUA shall use the transition provisions of 
this subpart in determining a credit union's net worth category under 
this part, as applicable, if:
    (1) The credit union has not adopted CECL before December 15, 2022; 
and
    (2) The credit union records a reduction in retained earnings due 
to the adoption of CECL.
    (b) Determination of CECL transition amount. (1) For purposes of 
calculating the first three quarters of the transition period, as 
described in paragraph (c)(1) of this section, the CECL transitional 
amount is equal to the difference between the credit union's retained 
earnings on December 15, 2022, and the credit union's retained earnings 
on January 1, 2023.
    (2) For purposes of calculating the fourth through twelfth quarters 
of the transition period, as described in paragraphs (c)(2) and (3) of 
this section, the CECL transitional amount is equal to the difference 
between the credit union's retained earnings on December 31, 2023, and 
the credit union's retained earnings on December 30, 2024.
    (c) Calculation of CECL transition provision. In determining the 
net worth category of a credit union as provided in paragraph (a) of 
this section, the NCUA shall:
    (1) Increase retained earnings and total assets as reported on the 
Call Report for purposes of the net worth ratio by 100 percent of its 
CECL transitional amount during the first three quarters of the 
transition period (first three reporting quarters of 2023);
    (2) Increase retained earnings and total assets as reported on the 
Call Report for purposes of the net worth ratio by sixty-seven percent 
of its CECL transitional amount during the second four quarters of the 
transition period (fourth reporting quarter of 2023 and first three 
reporting quarters of 2024); and
    (3) Increase retained earnings and total assets as reported on the 
Call Report for purposes of the net worth ratio by thirty-three percent 
of its CECL transitional amount during the final four quarters of the 
transition period (fourth reporting quarter of 2024 and first three 
reporting quarters of 2025).

[FR Doc. 2020-16987 Filed 8-18-20; 8:45 am]
BILLING CODE P