Transition to the Current Expected Credit Loss Methodology, 34924-34933 [2021-13907]
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Federal Register / Vol. 86, No. 124 / Thursday, July 1, 2021 / Rules and Regulations
completely reviewed and approved in the
design certification rulemaking and do not
require a change to a design feature in the
generic DCD are governed by the
requirements in § 50.109 of this chapter.
Changes that require a change to a design
feature in the generic DCD are governed by
the requirements in paragraph A or B of this
section.
2. Changes to U.S. ABWR DC generic TS
and other operational requirements are
applicable to all applicants who reference
this appendix, except those for which the
change has been rendered technically
irrelevant by action taken under paragraph
C.3 or C.4 of this section.
3. The Commission may require plantspecific departures on generic TS and other
operational requirements that were
completely reviewed and approved, provided
a change to a design feature in the generic
DCD is not required and special
circumstances, as defined in § 2.335 of this
chapter are present. The Commission may
modify or supplement generic TS and other
operational requirements that were not
completely reviewed and approved or require
additional TS and other operational
requirements on a plant-specific basis,
provided a change to a design feature in the
generic DCD is not required.
4. An applicant who references this
appendix may request an exemption from the
generic TS or other operational requirements.
The Commission may grant such a request
only if it determines that the exemption will
comply with the requirements of § 52.7. The
granting of an exemption must be subject to
litigation in the same manner as other issues
material to the license hearing.
5. A party to an adjudicatory proceeding
for the issuance, amendment, or renewal of
a license, or for operation under § 52.103(a),
who believes that an operational requirement
approved in the DCD or a TS derived from
the generic TS must be changed, may petition
to admit such a contention into the
proceeding. The petition must comply with
the general requirements of § 2.309 of this
chapter and must either demonstrate why
special circumstances as defined in § 2.335 of
this chapter are present or demonstrate that
the proposed change is necessary for
compliance with the Commission’s
regulations applicable and in effect, as set
forth in Section V of this appendix. Any
other party may file a response to the
petition. If, on the basis of the petition and
any response, the presiding officer
determines that a sufficient showing has been
made, the presiding officer shall certify the
matter directly to the Commission for
determination of the admissibility of the
contention. All other issues with respect to
the plant-specific TS or other operational
requirements are subject to a hearing as part
of the licensing proceeding.
6. After issuance of a license, the generic
TS have no further effect on the plantspecific TS. Changes to the plant-specific TS
will be treated as license amendments under
§ 50.90 of this chapter.
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IX. [Reserved]
X. Records and Reporting
A. Records
1. The applicant for this appendix shall
maintain a copy of the generic DCD that
includes all generic changes that are made to
Tier 1 and Tier 2, and the generic TS and
other operational requirements. The
applicant shall maintain the sensitive
unclassified non-safeguards information
(including proprietary information and
security-related information) and safeguards
information referenced in the generic DCD
for the period that this appendix may be
referenced, as specified in Section VII of this
appendix.
2. An applicant or licensee who references
this appendix shall maintain the plantspecific DCD to accurately reflect both
generic changes to the generic DCD and
plant-specific departures made under Section
VIII of this appendix throughout the period
of application and for the term of the license
(including any periods of renewal).
3. An applicant or licensee who references
this appendix shall prepare and maintain
written evaluations which provide the bases
for the determinations required by Section
VIII of this appendix. These evaluations must
be retained throughout the period of
application and for the term of the license
(including any periods of renewal).
4.a. The applicant for the U.S. ABWR
design shall maintain a copy of the aircraft
impact assessment performed to comply with
the requirements of § 50.150(a) of this
chapter for the term of the certification
(including any periods of renewal).
b. An applicant or licensee who references
this appendix shall maintain a copy of the
aircraft impact assessment performed to
comply with the requirements of § 50.150(a)
of this chapter throughout the pendency of
the application and for the term of the license
(including any periods of renewal).
B. Reporting
1. An applicant or licensee who references
this appendix shall submit a report to the
NRC containing a brief description of any
plant-specific departures from the DCD,
including a summary of the evaluation of
each departure. This report must be filed in
accordance with the filing requirements
applicable to reports in § 52.3.
2. An applicant or licensee who references
this appendix shall submit updates to its
plant-specific DCD, which reflect the generic
changes to and plant-specific departures from
the generic DCD made under Section VIII of
this appendix. These updates shall be filed
under the filing requirements applicable to
final safety analysis report updates in
§§ 50.71(e) of this chapter and 52.3.
3. The reports and updates required by
paragraphs X.B.1 and X.B.2 of this appendix
must be submitted as follows:
a. On the date that an application for a
license referencing this appendix is
submitted, the application must include the
report and any updates to the generic DCD.
b. During the interval from the date of
application for a license to the date the
Commission makes its finding required by
§ 52.103(g) of this chapter, the report must be
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submitted semi-annually. Updates to the
plant-specific DCD must be submitted
annually and may be submitted along with
amendments to the application.
c. After the Commission makes the finding
required by § 52.103(g), the reports and
updates to the plant-specific DCD must be
submitted, along with updates to the sitespecific portion of the final safety analysis
report for the facility, at the intervals
required by §§ 50.59(d)(2) and 50.71(e)(4) of
this chapter, respectively, or at shorter
intervals as specified in the license.
Dated: June 23, 2021.
For the Nuclear Regulatory Commission.
Annette Vietti-Cook,
Secretary of the Commission.
[FR Doc. 2021–13801 Filed 6–30–21; 8:45 am]
BILLING CODE 7590–01–P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 702
RIN 3133–AF03
Transition to the Current Expected
Credit Loss Methodology
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
This final rule facilitates the
transition of federally insured credit
unions (FICUs) to the current expected
credit loss (CECL) methodology required
under Generally Accepted Accounting
Principles (GAAP). The final rule
provides that, for purposes of
determining a FICU’s net worth
classification under the prompt
corrective action (PCA) regulations, the
Board will phase-in the day-one adverse
effects on regulatory capital that may
result from adoption of CECL.
Consistent with regulations issued by
the other federal banking agencies, the
final rule will temporarily mitigate the
adverse PCA consequences of the dayone capital adjustments, while requiring
that FICUs account for CECL for other
purposes, such as Call Reports. The
final rule also provides that FICUs with
less than $10 million in assets are no
longer required to determine their
charges for loan losses in accordance
with GAAP. These FICUs may instead
use any reasonable reserve methodology
(incurred loss), provided that it
adequately covers known and probable
loan losses. The final rule follows
publication of an August 19, 2020,
proposed rule and takes into
consideration the public comments
received on the proposed rule.
DATES: Effective August 2, 2021.
SUMMARY:
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FOR FURTHER INFORMATION CONTACT:
Policy and Accounting: Alison L. Clark,
Chief Accountant, Office of
Examinations and Insurance, at (703)
518–6360; Legal: Ariel Pereira, Senior
Staff Attorney, Office of General
Counsel, at (703) 548–2778; or by mail
at National Credit Union
Administration, 1775 Duke Street,
Alexandria, Virginia 22314.
SUPPLEMENTARY INFORMATION:
I. This Final Rule
II. Background
A. CECL Accounting Methodology
B. The Board’s August 19, 2020, Proposed
Rule
III. Legal Authority
A. The Board’s Rulemaking Authority,
Generally
B. CECL Transition
C. Small FICU Charges for Loan Losses
D. Alternatives to GAAP
IV. Discussion of the Public Comments on
the August 19, 2020, Proposed Rule
A. The Comments, Generally
B. Comments Regarding Transition PhaseIn
C. Comments Regarding GAAP Exemption
for Smaller FICUs
V. Description of Final Rule
A. New Subpart G to Part 702
B. Eligibility for the Transition Provisions
C. NCUA Implementation of the Transition
Provisions
D. Mechanics of the CECL Transition
Provisions
E. Example of Transition Schedule
F. Statutory Limit on Amount of Net Worth
Ratio Change
G. NCUA Oversight
H. Small FICU Determinations of Charges
for Loan Losses
VI. Department of the Treasury Report
VII. Regulatory Procedures
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Executive Order 13132 on Federalism
D. Assessment of Federal Regulations and
Policies on Families
E. Small Business Regulatory Enforcement
Fairness Act
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I. This Final Rule
On July 30, 2020, the NCUA Board
(Board) proposed amending the agency’s
regulations to facilitate the adoption by
FICUs of the CECL accounting
methodology as mandated by GAAP.
The proposed rule was subsequently
published in the Federal Register on
August 19, 2020.1 This final rule follows
publication of the August 19, 2020,
proposed rule and takes into
consideration the public comments
received on the proposal. Following
consideration of the comments, the
1 85 FR 50964 (Aug. 19, 2020). The proposed rule
is available from the Federal Register website at:
https://www.govinfo.gov/content/pkg/FR-2020-0819/pdf/2020-16987.pdf.
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Board has decided to make the
following changes to the proposed rule:
1. The Board has made a technical
change to the regulatory text for
purposes of clarity. The Board has
removed the references to specific
calendar dates in the discussion of the
transition period for the phase-in. The
regulatory text now consistently refers
to fiscal years.
2. The final rule also clarifies that
state-chartered FICUs with less than $10
million in assets and that are required
by state law to comply with GAAP are
eligible for the transition phase-in.
Section IV. of this preamble
summarizes the significant issues raised
by the public commenters on the
proposed rule, as well as the Board’s
responses to these issues, including the
Board’s rationale for making the change
listed above.
II. Background
A. CECL Accounting Methodology
The CECL standard applies to all
banks, savings associations, credit
unions,2 and financial institution
holding companies, regardless of size,
that file regulatory reports for which the
reporting requirements conform to
GAAP. Adoption of CECL is expected to
result in greater transparency of
expected losses at an earlier date during
the life of a loan.
The Federal Accounting Standards
Board (FASB), which establishes the
GAAP standards, provided a staggered
effective date for CECL. In doing so, it
has recognized two classes of
institutions subject to CECL: (1) Public
business entities (PBEs) that meet the
definition of a U.S. Securities and
Exchange (SEC) filer, excluding entities
eligible to be smaller reporting
companies (SRCs) as defined by the
SEC, and (2) all other entities, which
includes FICUs. The effective date for
SEC-filers (other than SRCs) was fiscal
years beginning after December 15,
2019. All other entities (including all
FICUs) are required to commence
implementation of the standard for
fiscal years beginning after December
15, 2022.3 All entities subject to CECL,
2 CECL applies to all credit unions, irrespective
of whether the credit union is federally insured or
whether it is chartered federally or under state law.
3 FASB originally established the following three
categories of entities subject to CECL: (1) PBE SEC
filers; (2) PBEs that are not SEC filers; and (3) nonPBEs (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)
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34925
however, may voluntarily elect to adopt
CECL earlier than the specified
implementation date, commencing as
early as fiscal years beginning after
December 15, 2018, including interim
periods within those fiscal years.4
CECL differs from the incurred loss
methodology currently used by FICUs in
several key respects. Most significantly
for purposes of this rulemaking, CECL
requires the recognition of lifetime
expected credit losses for financial
assets measured at amortized cost, not
just those 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.5
Upon adoption of CECL, an
institution will record a cumulativeeffect adjustment to retained earnings
(known as ‘‘the day-one adjustment’’).
and all other entities) and further extending the
implementation dates as described above. (https://
www.fasb.org/jsp/FASB/Document_C/
DocumentPage?cid=1176173775344&accepted
Disclaimer=true).
4 FASB ASU No. 2016–13, Financial
Instruments—Credit Losses (Topic 326),
Measurement of Credit Losses on Financial
Instruments, June 2016, page 5. FASB ASU No.
2016–13 is available at: https://www.fasb.org/jsp/
FASB/Document_C/DocumentPage&cid=
1176168232528. 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.
5 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/letterscredit-unions/financial-instruments-credit-lossesfaqs.pdf.
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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).
B. The Board’s August 19, 2020,
Proposed Rule
The Board issued the August 19,
2020, proposed rule to mitigate the
adverse effects on a FICU’s PCA
classification that may result from the
day-one adjustment. Specifically, the
proposed rule provides 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 threeyear period (12 quarters). The proposed
phase-in is consistent with the similar
three-year phase-in provided by the
other banking agencies to alleviate the
impacts of adopting CECL on the
banking organization subject to their
supervision.6
Under the proposed rule, the phase-in
would only be applied to those FICUs
that adopt the CECL methodology for
fiscal years beginning 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.
FICUs would continue to calculate
their net worth in accordance with
GAAP 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
6 See the February 14, 2019, proposed rule
published by the Office of Comptroller of the
Currency, the Federal Reserve Board, and the
Federal Deposit Insurance Corporation, at 84 FR
4222 (February 14, 2019), and modified by interimfinal rule published on March 31, 2020, at 62 FR
17723 (March 31, 2020).
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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.
Interested readers should refer to the
preamble of the Board’s August 19,
2020, proposed rule for additional
background information regarding the
proposed regulatory changes.
III. Legal Authority
A. The Board’s Rulemaking Authority,
Generally
The Board is issuing this final rule
pursuant to its authority under the
Federal Credit Union (FCU) Act.7 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.8 Other
provisions of the FCU Act, confer
specific rulemaking authority to address
prescribed issues or circumstances. For
example, section 216 of the FCU Act
directs the Board to establish by
regulation a system of PCA to restore the
net worth of FICUs.9 This final 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.
B. CECL Transition
Section 216 of the FCU Act 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 (FDI)
Act.10 In addition, section 216 of the
FCU Act 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.’’ 11 In accordance with the
consultation requirements, the NCUA,
at the proposed rule stage, briefed
relevant staff of the other banking
agencies of the contents and purposes of
this rulemaking.
With regards to the other factor
identified in the quoted statutory
language, the February 14, 2019, final
rule does not directly raise or lower the
leverage limit,12 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. Accordingly,
the NCUA has determined that both
conditions set forth in section 216 have
been satisfied for purposes of issuing
this proposed rule.13
The effects of the proposed phase-in
on a FICU’s net worth calculations are
consistent with section 216 of the FCU
Act and closely modeled on the CECL
transition provisions issued by the other
banking agencies. Specifically, the final
rule is narrowly tailored to temporarily
mitigating the impacts of CECL adoption
on the PCA classification of a FICUs net
worth. This final rule does not adjust
the numeric net worth ratios under the
NCUA’s PCA system. Further, the rule
does not revise the definition of net
worth, and FICUs will continue to
calculate their net worth and net worth
ratios in accordance with existing
statutory and regulatory requirements.
The sole purpose of the phase-in is to
aid FICUs in adjusting 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
11 12
7 12
U.S.C. 1751 et seq.
8 12 U.S.C. 1766(a).
9 12 U.S.C. 1790d. 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.
10 12 U.S.C. 1790d(c)(2)(A).
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U.S.C. 1790d(c)(2)(B).
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).
13 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.
12 Termed
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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.14 As
an alternative to the phase-in that would
be provided by this final rule, the Board
could have elected to revise the
definition of ‘‘total assets’’ in a manner
enabling FICUs to effect the CECL dayone adjustments without undue adverse
consequences. The Board opted for the
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.
C. 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.15 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.’’ 16
The Board’s regulations in § 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, § 702.402
exercises the Board’s discretion under
section 202 of the FCU Act to override
the exception for smaller FICUs by
prescribing regulations. 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 phasein.
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
14 12
CFR 702.2(k).
U.S.C. 1782(b)(6)(C)(i).
16 12 U.S.C. 1782(b)(6)(C)(iii).
15 12
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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.
IV. Discussion of the Public Comments
on the August 19, 2020, Proposed Rule
A. The Comments, Generally
The public comment period on the
proposed rule closed on October 19,
2020. The NCUA received 18 public
comments on the proposal. Comments
were received from individual FICUs, as
well as from national, state, and regional
organizations representing FICUs.
Thirteen of the commenters objected
to FASB’s application of CECL to FICUs,
largely due to the anticipated negative
impact of the day-one adjustment. The
commenters wrote that FICUs building
reserves to meet the CECL benchmark
will be diverting funds that could
otherwise be used to provide credit to
members and communities during the
ongoing COVID–19 event. They urged
the NCUA to continue exploring all
avenues, including working with FASB,
to exempt FICUs from the CECL
requirements.
While believing CECL should not
apply to FICUs at all, the commenters
unanimously supported the proposed
rule. The commenters commended the
Board’s efforts to assist FICUs with the
transition to the CECL methodology.
Several of these commenters, however,
also offered suggested changes to the
proposed rule.
NCUA Response: The Board
appreciates the support expressed by
the commenters, as well as the specific
questions and concerns raised in their
individual comments. The Board has
addressed these specific comments
below. The Board reiterates its belief
that, given the unique characteristics of
the credit union industry, the CECL
accounting standards should not apply
to FICUs. The Board will continue to
work with FASB, the other banking
agencies, and appropriate stakeholders
to exempt FICU from these standards.
B. Comments Regarding Transition
Phase-In
Comment: Mandatory opt-in for
transition phase-in. Under the proposed
rule, FICUs would not have the option
of electing whether to opt into (or out
of) the transition provisions. Several
commenters urged the NCUA to
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reconsider this automatic approach and
provide a FICU with the ability to opt
into or out of the transition provisions
based on its financial condition. The
commenters wrote that, for strategic
reasons, some FICUs may wish to
recognize the full cost and adverse effect
on their capital of CECL in one year
rather than phasing in the adverse
effects over a prolonged period. The
commenters wrote that if the NCUA
decides it must determine eligibility, the
agency should expand the factors upon
which the determination is made
beyond a reduction in earnings caused
by the application of CECL. For
example, the NCUA might consider
additional factors, such as asset quality
and overall risk in the loan portfolio,
current financial condition of the credit
union, and the current state of the
economy at the time of the
determination. Alternatively, the NCUA
could limit the mandatory opt-in for
FICUs with a lower CAMEL rating.
NCUA Response: The Board has
declined to adopt these comments. As
the commenters note, it is true that
some FICUs will have a business
rationale for recognizing the day-one
effects of CECL on their capital ratios.
This final rule does not compel any
FICU to make use of the transition
phase-in. A FICU that determines
adoption of CECL is in its best interests
has the option to do so, and is free to
make this decision at any time until the
effective date established by FASB for
CECL implementation (fiscal years
beginning after December 15, 2022). The
Board continues to believe, however,
that requiring an affirmative opt-in from
the majority of FICUs that require the
phase-in would constitute an
unnecessary administrative exercise.
Automatic implementation of the phasein by the NCUA will help to ensure its
uniform application and that its benefits
are provided to the greatest possible
number of eligible FICUs.
Comment: Option for longer phase-in.
Two commenters suggested that the
NCUA consider granting longer phase-in
requests when a FICU’s projected
capital level after three years is expected
to remain below normal. According to
the commenters, such flexibility would
allow FICUs to focus on restoring
capital levels during an appropriately
tailored phase-in timeframe rather than
bracing for adverse supervisory
consequences or the administrative
burden of heightened examiner
scrutiny.
NCUA Response: The Board believes
that the three-year period will suffice to
alleviate the most detrimental impacts
on a FICU’s capital ratios resulting from
adoption of CECL. Further, and as noted
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above, the Board is promulgating this
rule pursuant to the legal authority
conferred by section 216 of the FCU Act.
In general, section 216 charges the
NCUA with establishing PCA
regulations that are ‘‘comparable’’ to
section 38 of the FDI Act—the statute
that applies PCA to other federally
insured depository institutions.17 More
specifically with regards to this
rulemaking, section 216 authorizes the
Board to ‘‘correspondingly’’ revise its
regulations in response to changes made
by the other banking agencies to the
leverage limit under section 38 of the
FDI Act.18 In accordance with these
statutory directives, the phase-in
provided by this final rule is modelled
on the transition provisions adopted by
the other banking agencies, and
provides a similar three- year phase-in
period.19 The Board therefore declines
to make the suggested change in order
to maintain consistency with the CECL
transition provisions issued by the other
banking agencies.
Comment: Redefining ‘‘total assets’’ in
the net worth calculation. Related to the
preceding comment, one commenter
noted the preamble language stating that
‘‘[a]s an alternative to the to the phasein . . . the Board could have elected to
revise the definition of ‘total assets’ in
a manner enabling FICUs to effect the
CECL day-one adjustments without
undue adverse consequences.’’ 20 The
commenter wrote that, while the
NCUA’s reliance on the authority
provided by section 216 of the FCU Act
is understandable from an
administrative standpoint, the agency
should consider issuing using the
alternative ‘‘total assets’’ framework to
grant FICUs more options, such as the
ability to choose a longer phase-in
period.
NCUA Response: The commenter is
correct that the Board, in large measure,
opted for the phase-in due to its ease of
administration. Ensuring the
administrative simplicity of its
regulations is a significant consideration
for the Board, especially during this
pandemic period and the resulting
economic fallout. Ease of
administration, however, was only one
of several considerations that factored
into the Board’s decision. In making
note of the statutory authority to redefine ‘‘total assets’’ in the preamble to
the August 19, 2020, proposed rule, the
17 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).
18 Supra, note 10.
19 Supra, note 6.
20 Supra note 1 at 50966–50967.
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Board simply wished to acknowledge
the existence of an alternative legal
basis for this rulemaking. A rule
implementing this alternate statutory
authority would have almost surely
been more time-consuming and
complex than the phase-in. The redefinition of ‘‘total assets’’ might have
possible effects beyond CECL
implementation to include the NCUA’s
PCA system as a whole. Moreover, and
as noted previously, the NCUA is
statutorily charged to maintain PCA
regulations that are ‘‘comparable’’ with
section 38 of the FDI Act. A change to
the definition of ‘‘total assets’’ would
require careful analysis to ensure
compliance with the statutory
comparability requirement. Given these
considerations, the Board continues to
believe that a phase-in issued on the
authority provided by section 216 of the
FCU Act is the most effective,
administratively simple, and quickest
manner to mitigate the day-one impacts
of CECL implementation on FICUs.
Comment: Non-calendar fiscal years.
One commenter objected that the
proposed regulatory text measures the
phase-in benefit by calendar dates and
fails to account for FICUs that have noncalendar fiscal years. Specifically, the
commenter wrote that the regulatory
text refers to specific calendar date in
the provisions for measuring the CECL
transition amount. The commenter
wrote that the calendar dates fail to
capture the impact for FICUs with noncalendar fiscal years. The commenter
wrote that this is inconsistent with the
preamble, which references a credit
union’s fiscal year and, in Section III.E.,
refers to a hypothetical FICU with a
calendar fiscal year, impliedly
acknowledging that FICUs may have a
fiscal year other than a calendar fiscal
year.21 The commenter also noted that
the regulation issued by the other
banking agencies defines the CECL
transition amount based on the
regulated entity’s fiscal year without
referencing specific dates.22 The
commenter suggested that to remedy
this problem, the NCUA should follow
the approach of the other banking
agencies and define the CECL
transitional amount by reference to a
credit union’s fiscal year rather than set
calendar dates.
NCUA Response: As the commenter
notes, the preamble to the proposed rule
correctly provides that the transition
period is based on the credit union’s
fiscal year (which may be a noncalendar year in the case of statechartered credit unions) and not on
21 Id.
22 12
PO 00000
at 50968.
CFR 3.301(b)(2).
Frm 00024
Fmt 4700
specific dates. The commenter notes
preamble language referencing the
possibility of a non-calendar year fiscal
year. Another example is the preamble
language providing that ‘‘[t]he
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’’
(emphasis added).23 The Board agrees
that the references to specific dates were
potentially confusing. The Board has
therefore removed the references to
specific calendar dates, and the
regulatory text now consistently refers
to fiscal years.
Comment: Calculation of transitional
amount. One commenter noted that
proposed § 702.703(b)(2) defines the
transition amount for the fourth through
twelfth quarters as the difference
between a FICU’s retained earnings on
December 31, 2023 and December 30,
2024. The commenter wrote that the
NCUA may have intended to refer to
years 2022 and 2023 in this provision,
since this measurement of the CECL
transitional amount applies to Call
Reports filed beginning on the first day
in 2024, and it does not seem feasible
to calculate the amount by reference to
a figure that cannot be determined until
the last day in 2024.
NCUA Response: As noted in the
preceding response, the NCUA has
removed the references to specific
calendar dates in the regulatory text. For
purposes of calculating the fourth
through twelfth quarters of the
transition period, the regulatory text
now provides that the CECL transitional
amount is equal to the difference
between the credit union’s retained
earnings as of the end of the fiscal year
in which the credit union adopts CECL
and the credit union’s retained earnings
as of the beginning of its next fiscal
year.
Comment: Examinations and stress
testing. Several comments, while
generally supportive of the proposed
rule, had questions regarding the NCUA
examination and stress testing protocols
resulting from its implementation. One
of these commenters suggested that the
NCUA should consider implementing
streamlined procedures for evaluating
capital plans (including net worth
restoration plans) when a FICU is
expected to encounter capital stresses
related to CECL adoption that persist
after any applicable phase-in period.
Another commenter warned that
23 Supra
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incorporating CECL into the stress
testing regimen will increase capital
volatility within the modelling and
complicate stress testing estimations.
The commenter urged the NCUA to
continue discussions with covered
FICUs and state regulators to ensure the
regulatory stress testing framework can
incorporate CECL when appropriate.
NCUA Response: The NCUA will
monitor and periodically assess the
efficacy of the CECL transition phase-in
provisions. The Board will take these
comments regarding capital plans and
stress testing under advisement and,
should it be deemed necessary, issue
supplemental guidance or implement
revised procedures to assist FICUs in
their implementation of the rule.
Comment: Need for Call Report
guidance. One of the commenters
requested clarification on how the
phased-in retained earnings would be
reported on a FICU’s Call Report. For
example, the commenter asked whether
the Call Report will reflect the phase-in
adjustment through the addition of a
new field.
NCUA Response: The Board notes
that a new field has been provided in
the Call Report for purposes of the
phase-in. The NCUA will issue
additional guidance and Call Report
revisions as deemed necessary to assist
FICUs in implementing this final rule.
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C. Comments Regarding GAAP
Exemption for Small FICUs
Comment: Future ability to phase-in
CECL. Five commenters encouraged the
NCUA to authorize a FICU
accumulating $10 million, or greater, in
assets after CECL has been implemented
to phase-in the day-one negative impact.
These commenters wrote that the onetime adjustment will be equally
injurious to FICUs adopting CECL in the
future and compensating for that is as
important as doing so now.
NCUA Response: The Board has not
revised the rule in response to these
commenters. The final 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 reclassification. Unlike FICUs that already
(or soon will) exceed the $10 million
asset threshold for GAAP compliance,
other FICUs will have more time and be
better positioned to adjust their asset
growth. The Board expects that smaller
FICUs will undertake the necessary
analysis to determine the possible
impact of coming into GAAP
compliance in developing their business
plans. As a result, the Board does not
believe that the phase-in is necessary or
appropriate for such FICUs.
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Comment: Transition phase-in for
small federally insured state-chartered
credit unions subject to GAAP. As
provided in the preamble to the
proposed rule, the exemption from the
GAAP standards does not extend to
smaller State-chartered FICUS that are
required to comply with GAAP under
State law.24 One commenter inquired
about the ability of these state-chartered
FICUs to use the transition phase-in.
The commenter noted that the
regulatory text does not specify if these
credit union are eligible for the
transition provision. The commenter
recommended the NCUA’s final rule
should make the proposed three-year
phase-in available to FICUs that must
follow GAAP, regardless of the size of
the FICU.
NCUA Response: The transition
provisions were designed to apply to all
FICUs that adopt CECL, irrespective of
their asset size. As the preamble to the
proposed rule makes clear, the only
FICUs ‘‘not eligible for the phase in’’ are
‘‘smaller FICUs that elect to use a nonGAAP measure.’’ 25 State-chartered
FICUs that are required by state law to
follow GAAP are prohibited from
making such election. Accordingly, the
Board intended them to be eligible for
the transition relief provided by this
rulemaking. The Board has revised the
regulatory text to clarify the eligibility of
these credit unions. The final rule
clarifies that state-chartered FICUs with
less than $10 million in assets and that
are required by state law to comply with
GAAP are eligible for the transition
phase-in.
Alternative GAAP structure for FICUs.
The preamble to the proposed rule notes
that ‘‘section 202 of the FCU Act could
also potentially, as an alternative to the
provisions [of the proposed rule],
authorize the Board to provide a
transition of the day-one effects of CECL
implementation.’’ 26 This provision
authorizes the Board to prescribe an
alternative accounting principle to
GAAP, so long as it is ‘‘no less
stringent’’ than the GAAP principle it
replaces.27
Four commenters wrote that the
NCUA should consider the question of
what constitutes an accounting standard
that ‘‘is no less stringent’’ than GAAP
for the purpose of expanding the scope
of CECL relief. In doing so, commenters
suggested that the NCUA might explore
the possibility of a revised incurred loss
methodology that allows more flexible
evaluation of qualitative and
24 Id.
environmental factors. The commenters
also suggested that the NCUA should
work directly with the FASB to advance
an interpretation of the ‘‘no less
stringent’’ requirement that recognizes
the unique burden that CECL poses for
FICUs. One of these commenters wrote
that the NCUA should request that
FASB recognize the incurred loss
methodology as an appropriate
alternative accounting principle under
section 202 of the FCU Act.
NCUA Response: The development of
an alternate set of accounting standards
that are ‘‘no less stringent’’ than GAAP
would be a complex and timeconsuming endeavor necessitating
consultations with FASB and other
stakeholders. At this time, the Board
believes that GAAP compliance is the
most effective way to help ensure that
financial reporting is transparent and
consistent between FICUs. The Board,
however, will continue to explore ways
to alleviate the compliance burdens
imposed by GAAP. As noted, the Board
is committed to working with FASB, the
other banking agencies, and appropriate
stakeholders on a possible exemption
for FICUs from the CECL accounting
standards.
Comment: Transition phase-in for
small federally insured state-chartered
credit unions subject to GAAP. As
provided in the preamble to the
proposed rule, the exemption from the
GAAP standards does not extend to
smaller state-chartered FICUS that are
required to comply with GAAP under
state law.28 One commenter inquired
about the ability of these state-chartered
FICUs to use the transition phase-in.
The commenter noted that the
regulatory text does not specify if these
credit union are eligible for the
transition provision. The commenter
recommended the NCUA’s final rule
should make the proposed three-year
phase-in available to FICUs that must
follow GAAP, regardless of the size of
the FICU.
NCUA Response: The transition
provisions were designed to apply to all
FICUs that adopt CECL, irrespective of
their asset size. As the preamble to the
proposed rule makes clear, the only
FICUs ‘‘not eligible for the phase in’’ are
‘‘smaller FICUs that elect to use a nonGAAP measure.’’ 29 State-chartered
FICUs that are required by state law to
follow GAAP are prohibited from
making such election. Accordingly, the
Board intended them to be eligible for
the transition relief provided by this
rulemaking. The Board has revised the
regulatory text to clarify the eligibility of
25 Id.
26 Id.
27 12
PO 00000
28 Id.
U.S.C. 1782(b)(6)(C)(ii).
Frm 00025
Fmt 4700
Sfmt 4700
34929
29 Id.
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these credit unions. The final rule
clarifies that state-chartered FICUs with
less than $10 million in assets and that
are required by state law to comply with
GAAP are eligible for the transition
phase-in.
Comment: GAAP relief for federally
insured state-chartered credit unions.
As noted above, the preamble to the
proposed rule provides that statechartered FICUs subject to state laws
and regulations may be required to
comply with GAAP or other accounting
standards under applicable state
requirements.30 One commenter wrote
that approximately half the states either
have explicit statutory or regulatory
requirements for all FISCUs to comply
with GAAP, or it is unclear whether
such an express requirement exists. Two
commenters suggested that the NCUA
should work with the appropriate
supervisory authorities to promote
regulatory relief in states where the
impediments are regulatory in nature.
For those states with statutory mandates
regarding GAAP adherence, the
commenter asked that the NCUA pursue
potential legislative fixes and to notify
state legislative leaders of the exemption
and the advantage federal credit unions
would have over similarly sized FISCUs
if not provided legislative relief.
NCUA Response: The Board will
continue to work with FASB and other
stakeholders, including appropriate
State regulators, to minimize the
detrimental impacts of GAAP
compliance on FICUs. The Board also
notes that, as discussed in the preceding
comment response, state-chartered
FICUs with less than $10 million in
assets and that are required by state law
to comply with GAAP are eligible for
the transition phase-in.
under § 702.102 or § 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.
V. Description of Final Rule
To calculate the transitional amount
under the CECL transition provision, the
NCUA will 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.
A. New Subpart G to Part 702
The final rule adds a new subpart G
to the PCA regulations in 12 CFR part
702, captioned ‘‘CECL Transition
Provisions.’’ New subpart G applies to
FICUs that meet the eligibility criteria
specified in the final rule.
Notwithstanding the CECL transition
provisions, all other aspects of part 702
would continue to apply.
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B. Eligibility for Transition Provisions
FICUs that have not adopted CECL
prior to their first fiscal year beginning
after December 15, 2022 (the
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
30 Supra
note 1, at 50965.
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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.
Automatic implementation of the phasein 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
PO 00000
Frm 00026
Fmt 4700
Sfmt 4700
The NCUA will phase-in the FICU’s
CECL transitional amount. The NCUA
would 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
will 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 reporting quarters of the
fiscal year in which the FICU adopts
CECL. The FICU may use this period to
build capital and to make resulting
material adjustments to its CECL
transitional amount. The NCUA will
base its subsequent calculations
regarding the phase-in based on the
CECL transitional amount reported by
the FICU as of the fourth reporting
quarter of the fiscal year in which the
FICU adopts CECL, and further
adjustments to the amount are not
permitted.
Beginning with the fourth reporting
quarter of the fiscal year in which the
FICU adopts CECL, the NCUA will
deem retained earnings and total assets
to be increased by 67 percent of the
FICU’s CECL transitional amount. This
percentage will be decreased to 33
percent beginning with the fourth
quarterly Call Report of the following
fiscal year (the eighth reporting quarter
of the FICU’s CECL implementation).
Commencing with the twelfth reporting
quarter of the FICU’s CECL
implementation, 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 phasein, 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
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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 × 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 × 33
percent). Using the same mathematical
equation, the $66,000 increase would
remain constant for the first three
34931
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
[Calendar fiscal year]
Transitional amounts applicable during each quarter of the
transition period (12 quarters total)
Transitional
amount
In thousands
Increase retained earnings and total assets by the CECL transitional amount ...
F. Statutory Limit on Amount of Net
Worth Ratio Change
Section 216 of the FCU Act 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).’’ 31 The limitation is not
applicable to this final 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.
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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
31 12
U.S.C. 1790d(c)(2)(A).
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$200
Quarters 4–7
Quarters 8–11
Quarter 12
First three
quarters
of 2023
Four quarters
at 67%
(4th quarter of
2023 and first
three quarters
of 2024)
Four quarters
at 33%
(4th quarter of
2024 and first
three quarters
of 2025)
Full
recognition
of day-one
adjustment
(commencing
4th quarter
of 2025)
$200
$134
$66
0
Quarters 1–3
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.
to state laws and regulations may be
required to comply with GAAP or other
accounting standards under applicable
State requirements. These credit unions
are eligible for the phase-in.
VI. Department of the Treasury Report
The Senate Committee Report to the
Financial Services and General
H. Small FICU Determination of Charges Government Appropriations Act,
for Loan Losses
2020,32 directs the Department of the
As discussed, section 202 of the FCU
Treasury, in consultation with the other
Act provides an exception for FICUs
banking agencies and the NCUA to
with less than $10 million in total assets ‘‘conduct a study on the need, if any, for
to the general requirements that reports
changes to regulatory capital
and statements filed with the Board
requirements necessitated by CECL.’’ 33
comply with GAAP. As also noted
The Department of the Treasury issued
above, the Board’s regulations in
its report on September 15, 2020.34
While the report affirms the
§ 702.402 require that charges for loan
Department of the Treasury’s support
losses be made in accordance with
GAAP and does not distinguish between for the goals of CECL, it also
acknowledged that a ‘‘definitive
the asset size of FICUs. The Board,
however, is aware that compliance with assessment of the impact of CECL on
regulatory capital is not currently
GAAP may be burdensome for smaller
feasible, in light of the state of CECL
FICUs. This difficulty is likely to be
exacerbated with the adoption of CECL. implementation across financial
Accordingly, the final rule provides that institutions and current market
dynamics.’’ 35 Accordingly, the report
FICUs with total assets of less than $10
provides that the Department of the
million may make charges for loan
Treasury ‘‘will continue to actively
losses either in accordance with GAAP
monitor CECL implementation and
or with any reasonable reserve
methodology (incurred loss) provided it
32 Division C of the Consolidated Appropriations
adequately covers known and probable
Act, 2020; Public Law 116–93, approved December
loan losses. This provision will
20, 2019.
eliminate the adverse PCA
33 Senate Report 116–111, at page 11.
consequences for smaller FICUs
34 U.S. Department of the Treasury, ‘‘The Current
resulting from CECL, and these FICUs
Expected Credit Loss Accounting Standard and
Financial Institution Regulatory Capital’’ (2020).
will not be subject to the phase-in
The report is available at: https://
procedure detailed above.
home.treasury.gov/system/files/216/The-CECLThe Board does note, however, that
Accounting-Standard-and-Financial-Institutionpursuant to section 202 state-chartered,
Regulatory-Capital-Study-9-15-20.pdf.
35 Id., at page 5.
federally insured credit unions subject
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Federal Register / Vol. 86, No. 124 / Thursday, July 1, 2021 / Rules and Regulations
consult with relevant stakeholders,
including the prudential regulators,
FASB, and the SEC.’’ 36 Among other
recommendations, the report suggests
that the prudential regulators ‘‘monitor
the use and impact of transitional relief
granted, and extend or amend the relief,
as necessary.’’ 37 Further, the report
provides that ‘‘FASB, together with the
prudential regulators, should examine
the application of CECL to smaller
lenders.’’ The report highlights FICUs
and community banks in this regard,
noting that the NCUA and the FDIC
have separately asked for relief from
FASB.38
This final rule is consistent with the
Department of the Treasury’s report,
particularly with respect to the
recommendation regarding transitional
relief. The Board will continue to assess
the impacts of CECL on regulatory
capital and will consider these— and
any other future recommendations made
by the Department of the Treasury—in
taking further action to address the
impacts of CECL implementation on the
credit union industry.
VII. Regulatory Procedures
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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
final rule. For example, the 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.
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,
37 Id.
38 Id.,
at pages 28–29.
39 5 U.S.C. 603(a).
40 80 FR 57512 (Sept. 24, 2015).
41 44 U.S.C. 3501–3520.
15:54 Jun 30, 2021
SBREFA, the NCUA has submitted this
final rule to the Office of Management
and Budget (OMB) for it to determine if
the final rule is a ‘‘major rule’’ for
purposes of SBREFA. The NCUA also
will file appropriate reports with
Congress and the Government
Accountability Office so this rule may
be reviewed.
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 final 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.
By the National Credit Union
Administration Board, this 24th day of June
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
D. Assessment of Federal Regulations
and Policies on Families
The NCUA has determined that this
final rule will not affect family wellbeing within the meaning of Section 654
of the Treasury and General
Government Appropriations Act,
1999.43
E. Small Business Regulatory
Enforcement Fairness Act
The Small Business Regulatory
Enforcement Fairness Act of 1996
(SBREFA) 44 generally provides for
congressional review of agency rules. A
reporting requirement is triggered in
instances where the NCUA issues a final
rule as defined by section 551 of the
Administrative Procedure Act.45 An
agency rule, in addition to being subject
to congressional oversight, may also be
subject to a delayed effective date if the
rule is a ‘‘major rule.’’ The NCUA does
not believe this rule is a ‘‘major rule’’
within the meaning of the relevant
sections of SBREFA. As required by
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).
43 Public Law 105–277, 112 Stat. 2681 (1998).
44 Public Law 104–121, 110 Stat. 147 (1996).
45 5 U.S.C. 551.
36 Id.
VerDate Sep<11>2014
disclosure or recordkeeping
requirement, each referred to as an
information collection. The 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.
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List of Subjects in 12 CFR Part 702
Credit unions, Investments, Reporting
and recordkeeping requirements.
For the reasons discussed above, the
NCUA amends 12 CFR part 702 as
follows:
PART 702—CAPITAL ADEQUACY
1. The authority citation for part 702
continues to read as follows:
■
Authority: 12 U.S.C. 1766(a), 1790d.
2. Revise § 702.402(d)(1) to read as
follows:
■
§ 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;
*
*
*
*
*
■ 3. Add subpart G, consisting of
§§ 702.701 through 702.703. to read as
follows:
Subpart G—CECL Transition
Provisions
Sec.
702.701
702.702
702.703
§ 702.701
Authority, purpose, and scope.
Definitions.
CECL transition provisions.
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
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01JYR1
Federal Register / Vol. 86, No. 124 / Thursday, July 1, 2021 / Rules and Regulations
Act, 12 U.S.C. 1790d, as added by
section 301 of the Credit Union
Membership Access Act, Public Law
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. (1) 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)
that make charges for loan losses in
accordance with:
(i) Generally accepted accounting
principles (GAAP) under
§ 702.402(d)(1)(i); or
(ii) In the case of Federally-insured,
State-chartered credit unions, any other
applicable standard under State law or
regulation under § 702.402(d)(1)(ii)(B).
(2) The transition provisions of this
subpart do not apply to Federallyinsured credit unions, whether
Federally or State-chartered, including
credit unions defined as ‘‘new’’
pursuant to section 1790d(b)(2), that
make charges for loan losses using a
reasonable reserve methodology under
§ 702.402(d)(1)(ii)(A).
§ 702.702
Definitions.
In addition to the definitions set forth
in § 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
§ 702.703(b).
Transition period means the 12quarter reporting period beginning the
first day of the fiscal year in which the
credit union adopts CECL.
amount is equal to the difference
between the credit union’s retained
earnings as of the beginning of the fiscal
year in which the credit union adopts
CECL and the credit union’s retained
earnings as of the closing of the fiscal
year immediately prior to the credit
union’s adoption of CECL.
(2) For purposes of calculating the
fourth through twelfth quarters of the
transition period, as described in
paragraphs (c)(2) and (c)(3) of this
section, the CECL transitional amount is
equal to the difference between the
credit union’s retained earnings as of
the end of the fiscal year in which the
credit union adopts CECL and the credit
union’s retained earnings as of the
beginning of its next fiscal year.
(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 the
fiscal year in which the credit union
adopts CECL);
(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 the fiscal
year in which the credit union adopts
CECL and first three reporting quarters
of the next fiscal year); 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.
[FR Doc. 2021–13907 Filed 6–30–21; 8:45 am]
BILLING CODE 7535–01–P
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§ 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 its first fiscal year
beginning after 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
VerDate Sep<11>2014
15:54 Jun 30, 2021
Jkt 253001
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2021–0540; Project
Identifier MCAI–2021–00694–T; Amendment
39–21635; AD 2021–14–08]
RIN 2120–AA64
Airworthiness Directives; Airbus SAS
Airplanes
Federal Aviation
Administration (FAA), DOT.
AGENCY:
PO 00000
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34933
Final rule; request for
comments.
ACTION:
The FAA is adopting a new
airworthiness directive (AD) for all
Airbus SAS Model A319–151N, A319–
153N, A319–171N, A320–251N, A320–
252N, A320–253N, A320–271N, A320–
272N, A320–273N, A321–251N, A321–
251NX, A321–252N, A321–252NX,
A321–253N, A321–253NX, A321–271N,
A321–271NX, A321–272N and A321–
272NX airplanes. This AD was
prompted by reports of an increasing
number of operational disruptions due
to airspeed discrepancies. This AD
requires revising the existing airplane
flight manual (AFM) to include a
procedure to reinforce the airspeed
check during the take-off phase and
provide instructions to abort take-off in
certain cases, as specified in a European
Union Aviation Safety Agency (EASA)
AD, which is incorporated by reference.
The FAA is issuing this AD to address
the unsafe condition on these products.
DATES: This AD becomes effective July
1, 2021.
The Director of the Federal Register
approved the incorporation by reference
of a certain publication listed in this AD
as of July 1, 2021.
The FAA must receive comments on
this AD by August 16, 2021.
ADDRESSES: You may send comments,
using the procedures found in 14 CFR
11.43 and 11.45, by any of the following
methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
For EASA material incorporated by
reference (IBR) in this AD, contact
EASA, Konrad-Adenauer-Ufer 3, 50668
Cologne, Germany; telephone +49 221
8999 000; email ADs@easa.europa.eu;
internet www.easa.europa.eu. You may
find this IBR material on the EASA
website at https://ad.easa.europa.eu.
You may view this IBR material at the
FAA, Airworthiness Products Section,
Operational Safety Branch, 2200 South
216th St., Des Moines, WA. For
information on the availability of this
material at the FAA, call 206–231–3195.
It is also available in the AD docket on
the internet at https://
www.regulations.gov by searching for
SUMMARY:
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]]>Agencies
[Federal Register Volume 86, Number 124 (Thursday, July 1, 2021)]
[Rules and Regulations]
[Pages 34924-34933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13907]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
RIN 3133-AF03
Transition to the Current Expected Credit Loss Methodology
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule facilitates the transition of federally
insured credit unions (FICUs) to the current expected credit loss
(CECL) methodology required under Generally Accepted Accounting
Principles (GAAP). The final rule provides that, for purposes of
determining a FICU's net worth classification under the prompt
corrective action (PCA) regulations, the Board will phase-in the day-
one adverse effects on regulatory capital that may result from adoption
of CECL. Consistent with regulations issued by the other federal
banking agencies, the final rule will temporarily mitigate the adverse
PCA consequences of the day-one capital adjustments, while requiring
that FICUs account for CECL for other purposes, such as Call Reports.
The final rule also provides that FICUs with less than $10 million in
assets are no longer required to determine their charges for loan
losses in accordance with GAAP. These FICUs may instead use any
reasonable reserve methodology (incurred loss), provided that it
adequately covers known and probable loan losses. The final rule
follows publication of an August 19, 2020, proposed rule and takes into
consideration the public comments received on the proposed rule.
DATES: Effective August 2, 2021.
[[Page 34925]]
FOR FURTHER INFORMATION CONTACT: Policy and Accounting: Alison L.
Clark, Chief Accountant, Office of Examinations and Insurance, at (703)
518-6360; Legal: Ariel Pereira, Senior Staff Attorney, Office of
General Counsel, at (703) 548-2778; or by mail at National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314.
SUPPLEMENTARY INFORMATION:
I. This Final Rule
II. Background
A. CECL Accounting Methodology
B. The Board's August 19, 2020, Proposed Rule
III. Legal Authority
A. The Board's Rulemaking Authority, Generally
B. CECL Transition
C. Small FICU Charges for Loan Losses
D. Alternatives to GAAP
IV. Discussion of the Public Comments on the August 19, 2020,
Proposed Rule
A. The Comments, Generally
B. Comments Regarding Transition Phase-In
C. Comments Regarding GAAP Exemption for Smaller FICUs
V. Description of Final Rule
A. New Subpart G to Part 702
B. Eligibility for the Transition Provisions
C. NCUA Implementation of the Transition Provisions
D. Mechanics of the CECL Transition Provisions
E. Example of Transition Schedule
F. Statutory Limit on Amount of Net Worth Ratio Change
G. NCUA Oversight
H. Small FICU Determinations of Charges for Loan Losses
VI. Department of the Treasury Report
VII. Regulatory Procedures
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Executive Order 13132 on Federalism
D. Assessment of Federal Regulations and Policies on Families
E. Small Business Regulatory Enforcement Fairness Act
I. This Final Rule
On July 30, 2020, the NCUA Board (Board) proposed amending the
agency's regulations to facilitate the adoption by FICUs of the CECL
accounting methodology as mandated by GAAP. The proposed rule was
subsequently published in the Federal Register on August 19, 2020.\1\
This final rule follows publication of the August 19, 2020, proposed
rule and takes into consideration the public comments received on the
proposal. Following consideration of the comments, the Board has
decided to make the following changes to the proposed rule:
---------------------------------------------------------------------------
\1\ 85 FR 50964 (Aug. 19, 2020). The proposed rule is available
from the Federal Register website at: https://www.govinfo.gov/content/pkg/FR-2020-08-19/pdf/2020-16987.pdf.
---------------------------------------------------------------------------
1. The Board has made a technical change to the regulatory text for
purposes of clarity. The Board has removed the references to specific
calendar dates in the discussion of the transition period for the
phase-in. The regulatory text now consistently refers to fiscal years.
2. The final rule also clarifies that state-chartered FICUs with
less than $10 million in assets and that are required by state law to
comply with GAAP are eligible for the transition phase-in.
Section IV. of this preamble summarizes the significant issues
raised by the public commenters on the proposed rule, as well as the
Board's responses to these issues, including the Board's rationale for
making the change listed above.
II. Background
A. CECL Accounting Methodology
The CECL standard applies to all banks, savings associations,
credit unions,\2\ and financial institution holding companies,
regardless of size, that file regulatory reports for which the
reporting requirements conform to GAAP. Adoption of CECL is expected to
result in greater transparency of expected losses at an earlier date
during the life of a loan.
---------------------------------------------------------------------------
\2\ CECL applies to all credit unions, irrespective of whether
the credit union is federally insured or whether it is chartered
federally or under state law.
---------------------------------------------------------------------------
The Federal Accounting Standards Board (FASB), which establishes
the GAAP standards, provided a staggered effective date for CECL. In
doing so, it has recognized two classes of institutions subject to
CECL: (1) Public business entities (PBEs) that meet the definition of a
U.S. Securities and Exchange (SEC) filer, excluding entities eligible
to be smaller reporting companies (SRCs) as defined by the SEC, and (2)
all other entities, which includes FICUs. The effective date for SEC-
filers (other than SRCs) was fiscal years beginning after December 15,
2019. All other entities (including all FICUs) are required to commence
implementation of the standard for fiscal years beginning after
December 15, 2022.\3\ All entities subject to CECL, however, may
voluntarily elect to adopt CECL earlier than the specified
implementation date, commencing as early as fiscal years beginning
after December 15, 2018, including interim periods within those fiscal
years.\4\
---------------------------------------------------------------------------
\3\ FASB originally established the following three categories
of entities subject to CECL: (1) PBE SEC filers; (2) PBEs that are
not SEC filers; and (3) non-PBEs (including FICUs). The original
implementation date for non-PBEs was December 15, 2020. FASB
subsequently delayed the implementation date for non-PBEs until
December 15, 2021. (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).
\4\ FASB ASU No. 2016-13, Financial Instruments--Credit Losses
(Topic 326), Measurement of Credit Losses on Financial Instruments,
June 2016, page 5. FASB ASU No. 2016-13 is available at: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176168232528.
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.
---------------------------------------------------------------------------
CECL differs from the incurred loss methodology currently used by
FICUs in several key respects. Most significantly for purposes of this
rulemaking, CECL requires the recognition of lifetime expected credit
losses for financial assets measured at amortized cost, not just those
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.\5\
---------------------------------------------------------------------------
\5\ 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.
---------------------------------------------------------------------------
Upon adoption of CECL, an institution will record a cumulative-
effect adjustment to retained earnings (known as ``the day-one
adjustment'').
[[Page 34926]]
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).
B. The Board's August 19, 2020, Proposed Rule
The Board issued the August 19, 2020, proposed rule to mitigate the
adverse effects on a FICU's PCA classification that may result from the
day-one adjustment. Specifically, the proposed rule provides 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 proposed phase-in is consistent with the similar three-
year phase-in provided by the other banking agencies to alleviate the
impacts of adopting CECL on the banking organization subject to their
supervision.\6\
---------------------------------------------------------------------------
\6\ See the February 14, 2019, proposed rule published by the
Office of Comptroller of the Currency, the Federal Reserve Board,
and the Federal Deposit Insurance Corporation, at 84 FR 4222
(February 14, 2019), and modified by interim-final rule published on
March 31, 2020, at 62 FR 17723 (March 31, 2020).
---------------------------------------------------------------------------
Under the proposed rule, the phase-in would only be applied to
those FICUs that adopt the CECL methodology for fiscal years beginning
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.
FICUs would continue to calculate their net worth in accordance
with GAAP 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.
Interested readers should refer to the preamble of the Board's
August 19, 2020, proposed rule for additional background information
regarding the proposed regulatory changes.
III. Legal Authority
A. The Board's Rulemaking Authority, Generally
The Board is issuing this final rule pursuant to its authority
under the Federal Credit Union (FCU) Act.\7\ 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.\8\
Other provisions of the FCU Act, confer specific rulemaking authority
to address prescribed issues or circumstances. For example, section 216
of the FCU Act directs the Board to establish by regulation a system of
PCA to restore the net worth of FICUs.\9\ This final 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.
---------------------------------------------------------------------------
\7\ 12 U.S.C. 1751 et seq.
\8\ 12 U.S.C. 1766(a).
\9\ 12 U.S.C. 1790d. 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.
---------------------------------------------------------------------------
B. CECL Transition
Section 216 of the FCU Act 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 (FDI) Act.\10\ In addition, section 216 of the FCU
Act 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.'' \11\ In accordance with the
consultation requirements, the NCUA, at the proposed rule stage,
briefed relevant staff of the other banking agencies of the contents
and purposes of this rulemaking.
---------------------------------------------------------------------------
\10\ 12 U.S.C. 1790d(c)(2)(A).
\11\ 12 U.S.C. 1790d(c)(2)(B).
---------------------------------------------------------------------------
With regards to the other factor identified in the quoted statutory
language, the February 14, 2019, final rule does not directly raise or
lower the leverage limit,\12\ 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. Accordingly, the NCUA has
determined that both conditions set forth in section 216 have been
satisfied for purposes of issuing this proposed rule.\13\
---------------------------------------------------------------------------
\12\ 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).
\13\ 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.
---------------------------------------------------------------------------
The effects of the proposed phase-in on a FICU's net worth
calculations are consistent with section 216 of the FCU Act and closely
modeled on the CECL transition provisions issued by the other banking
agencies. Specifically, the final rule is narrowly tailored to
temporarily mitigating the impacts of CECL adoption on the PCA
classification of a FICUs net worth. This final rule does not adjust
the numeric net worth ratios under the NCUA's PCA system. Further, the
rule does not revise the definition of net worth, and FICUs will
continue to calculate their net worth and net worth ratios in
accordance with existing statutory and regulatory requirements. The
sole purpose of the phase-in is to aid FICUs in adjusting 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
[[Page 34927]]
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.\14\ As an alternative to the phase-in that would be provided
by this final rule, the Board could have elected to revise the
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 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.
---------------------------------------------------------------------------
\14\ 12 CFR 702.2(k).
---------------------------------------------------------------------------
C. 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.\15\ 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.'' \16\
---------------------------------------------------------------------------
\15\ 12 U.S.C. 1782(b)(6)(C)(i).
\16\ 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. 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 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.
IV. Discussion of the Public Comments on the August 19, 2020, Proposed
Rule
A. The Comments, Generally
The public comment period on the proposed rule closed on October
19, 2020. The NCUA received 18 public comments on the proposal.
Comments were received from individual FICUs, as well as from national,
state, and regional organizations representing FICUs.
Thirteen of the commenters objected to FASB's application of CECL
to FICUs, largely due to the anticipated negative impact of the day-one
adjustment. The commenters wrote that FICUs building reserves to meet
the CECL benchmark will be diverting funds that could otherwise be used
to provide credit to members and communities during the ongoing COVID-
19 event. They urged the NCUA to continue exploring all avenues,
including working with FASB, to exempt FICUs from the CECL
requirements.
While believing CECL should not apply to FICUs at all, the
commenters unanimously supported the proposed rule. The commenters
commended the Board's efforts to assist FICUs with the transition to
the CECL methodology. Several of these commenters, however, also
offered suggested changes to the proposed rule.
NCUA Response: The Board appreciates the support expressed by the
commenters, as well as the specific questions and concerns raised in
their individual comments. The Board has addressed these specific
comments below. The Board reiterates its belief that, given the unique
characteristics of the credit union industry, the CECL accounting
standards should not apply to FICUs. The Board will continue to work
with FASB, the other banking agencies, and appropriate stakeholders to
exempt FICU from these standards.
B. Comments Regarding Transition Phase-In
Comment: Mandatory opt-in for transition phase-in. Under the
proposed rule, FICUs would not have the option of electing whether to
opt into (or out of) the transition provisions. Several commenters
urged the NCUA to reconsider this automatic approach and provide a FICU
with the ability to opt into or out of the transition provisions based
on its financial condition. The commenters wrote that, for strategic
reasons, some FICUs may wish to recognize the full cost and adverse
effect on their capital of CECL in one year rather than phasing in the
adverse effects over a prolonged period. The commenters wrote that if
the NCUA decides it must determine eligibility, the agency should
expand the factors upon which the determination is made beyond a
reduction in earnings caused by the application of CECL. For example,
the NCUA might consider additional factors, such as asset quality and
overall risk in the loan portfolio, current financial condition of the
credit union, and the current state of the economy at the time of the
determination. Alternatively, the NCUA could limit the mandatory opt-in
for FICUs with a lower CAMEL rating.
NCUA Response: The Board has declined to adopt these comments. As
the commenters note, it is true that some FICUs will have a business
rationale for recognizing the day-one effects of CECL on their capital
ratios. This final rule does not compel any FICU to make use of the
transition phase-in. A FICU that determines adoption of CECL is in its
best interests has the option to do so, and is free to make this
decision at any time until the effective date established by FASB for
CECL implementation (fiscal years beginning after December 15, 2022).
The Board continues to believe, however, that requiring an affirmative
opt-in from the majority of FICUs that require the phase-in would
constitute an unnecessary administrative exercise. 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.
Comment: Option for longer phase-in. Two commenters suggested that
the NCUA consider granting longer phase-in requests when a FICU's
projected capital level after three years is expected to remain below
normal. According to the commenters, such flexibility would allow FICUs
to focus on restoring capital levels during an appropriately tailored
phase-in timeframe rather than bracing for adverse supervisory
consequences or the administrative burden of heightened examiner
scrutiny.
NCUA Response: The Board believes that the three-year period will
suffice to alleviate the most detrimental impacts on a FICU's capital
ratios resulting from adoption of CECL. Further, and as noted
[[Page 34928]]
above, the Board is promulgating this rule pursuant to the legal
authority conferred by section 216 of the FCU Act. In general, section
216 charges the NCUA with establishing PCA regulations that are
``comparable'' to section 38 of the FDI Act--the statute that applies
PCA to other federally insured depository institutions.\17\ More
specifically with regards to this rulemaking, section 216 authorizes
the Board to ``correspondingly'' revise its regulations in response to
changes made by the other banking agencies to the leverage limit under
section 38 of the FDI Act.\18\ In accordance with these statutory
directives, the phase-in provided by this final rule is modelled on the
transition provisions adopted by the other banking agencies, and
provides a similar three- year phase-in period.\19\ The Board therefore
declines to make the suggested change in order to maintain consistency
with the CECL transition provisions issued by the other banking
agencies.
---------------------------------------------------------------------------
\17\ 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).
\18\ Supra, note 10.
\19\ Supra, note 6.
---------------------------------------------------------------------------
Comment: Redefining ``total assets'' in the net worth calculation.
Related to the preceding comment, one commenter noted the preamble
language stating that ``[a]s an alternative to the to the phase-in . .
. the Board could have elected to revise the definition of `total
assets' in a manner enabling FICUs to effect the CECL day-one
adjustments without undue adverse consequences.'' \20\ The commenter
wrote that, while the NCUA's reliance on the authority provided by
section 216 of the FCU Act is understandable from an administrative
standpoint, the agency should consider issuing using the alternative
``total assets'' framework to grant FICUs more options, such as the
ability to choose a longer phase-in period.
---------------------------------------------------------------------------
\20\ Supra note 1 at 50966-50967.
---------------------------------------------------------------------------
NCUA Response: The commenter is correct that the Board, in large
measure, opted for the phase-in due to its ease of administration.
Ensuring the administrative simplicity of its regulations is a
significant consideration for the Board, especially during this
pandemic period and the resulting economic fallout. Ease of
administration, however, was only one of several considerations that
factored into the Board's decision. In making note of the statutory
authority to re-define ``total assets'' in the preamble to the August
19, 2020, proposed rule, the Board simply wished to acknowledge the
existence of an alternative legal basis for this rulemaking. A rule
implementing this alternate statutory authority would have almost
surely been more time-consuming and complex than the phase-in. The re-
definition of ``total assets'' might have possible effects beyond CECL
implementation to include the NCUA's PCA system as a whole. Moreover,
and as noted previously, the NCUA is statutorily charged to maintain
PCA regulations that are ``comparable'' with section 38 of the FDI Act.
A change to the definition of ``total assets'' would require careful
analysis to ensure compliance with the statutory comparability
requirement. Given these considerations, the Board continues to believe
that a phase-in issued on the authority provided by section 216 of the
FCU Act is the most effective, administratively simple, and quickest
manner to mitigate the day-one impacts of CECL implementation on FICUs.
Comment: Non-calendar fiscal years. One commenter objected that the
proposed regulatory text measures the phase-in benefit by calendar
dates and fails to account for FICUs that have non-calendar fiscal
years. Specifically, the commenter wrote that the regulatory text
refers to specific calendar date in the provisions for measuring the
CECL transition amount. The commenter wrote that the calendar dates
fail to capture the impact for FICUs with non-calendar fiscal years.
The commenter wrote that this is inconsistent with the preamble, which
references a credit union's fiscal year and, in Section III.E., refers
to a hypothetical FICU with a calendar fiscal year, impliedly
acknowledging that FICUs may have a fiscal year other than a calendar
fiscal year.\21\ The commenter also noted that the regulation issued by
the other banking agencies defines the CECL transition amount based on
the regulated entity's fiscal year without referencing specific
dates.\22\ The commenter suggested that to remedy this problem, the
NCUA should follow the approach of the other banking agencies and
define the CECL transitional amount by reference to a credit union's
fiscal year rather than set calendar dates.
---------------------------------------------------------------------------
\21\ Id. at 50968.
\22\ 12 CFR 3.301(b)(2).
---------------------------------------------------------------------------
NCUA Response: As the commenter notes, the preamble to the proposed
rule correctly provides that the transition period is based on the
credit union's fiscal year (which may be a non-calendar year in the
case of state-chartered credit unions) and not on specific dates. The
commenter notes preamble language referencing the possibility of a non-
calendar year fiscal year. Another example is the preamble language
providing that ``[t]he 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'' (emphasis added).\23\ The
Board agrees that the references to specific dates were potentially
confusing. The Board has therefore removed the references to specific
calendar dates, and the regulatory text now consistently refers to
fiscal years.
---------------------------------------------------------------------------
\23\ Supra note 1, at 50967.
---------------------------------------------------------------------------
Comment: Calculation of transitional amount. One commenter noted
that proposed Sec. 702.703(b)(2) defines the transition amount for the
fourth through twelfth quarters as the difference between a FICU's
retained earnings on December 31, 2023 and December 30, 2024. The
commenter wrote that the NCUA may have intended to refer to years 2022
and 2023 in this provision, since this measurement of the CECL
transitional amount applies to Call Reports filed beginning on the
first day in 2024, and it does not seem feasible to calculate the
amount by reference to a figure that cannot be determined until the
last day in 2024.
NCUA Response: As noted in the preceding response, the NCUA has
removed the references to specific calendar dates in the regulatory
text. For purposes of calculating the fourth through twelfth quarters
of the transition period, the regulatory text now provides that the
CECL transitional amount is equal to the difference between the credit
union's retained earnings as of the end of the fiscal year in which the
credit union adopts CECL and the credit union's retained earnings as of
the beginning of its next fiscal year.
Comment: Examinations and stress testing. Several comments, while
generally supportive of the proposed rule, had questions regarding the
NCUA examination and stress testing protocols resulting from its
implementation. One of these commenters suggested that the NCUA should
consider implementing streamlined procedures for evaluating capital
plans (including net worth restoration plans) when a FICU is expected
to encounter capital stresses related to CECL adoption that persist
after any applicable phase-in period. Another commenter warned that
[[Page 34929]]
incorporating CECL into the stress testing regimen will increase
capital volatility within the modelling and complicate stress testing
estimations. The commenter urged the NCUA to continue discussions with
covered FICUs and state regulators to ensure the regulatory stress
testing framework can incorporate CECL when appropriate.
NCUA Response: The NCUA will monitor and periodically assess the
efficacy of the CECL transition phase-in provisions. The Board will
take these comments regarding capital plans and stress testing under
advisement and, should it be deemed necessary, issue supplemental
guidance or implement revised procedures to assist FICUs in their
implementation of the rule.
Comment: Need for Call Report guidance. One of the commenters
requested clarification on how the phased-in retained earnings would be
reported on a FICU's Call Report. For example, the commenter asked
whether the Call Report will reflect the phase-in adjustment through
the addition of a new field.
NCUA Response: The Board notes that a new field has been provided
in the Call Report for purposes of the phase-in. The NCUA will issue
additional guidance and Call Report revisions as deemed necessary to
assist FICUs in implementing this final rule.
C. Comments Regarding GAAP Exemption for Small FICUs
Comment: Future ability to phase-in CECL. Five commenters
encouraged the NCUA to authorize a FICU accumulating $10 million, or
greater, in assets after CECL has been implemented to phase-in the day-
one negative impact. These commenters wrote that the one-time
adjustment will be equally injurious to FICUs adopting CECL in the
future and compensating for that is as important as doing so now.
NCUA Response: The Board has not revised the rule in response to
these commenters. The final 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. Unlike FICUs that already (or
soon will) exceed the $10 million asset threshold for GAAP compliance,
other FICUs will have more time and be better positioned to adjust
their asset growth. The Board expects that smaller FICUs will undertake
the necessary analysis to determine the possible impact of coming into
GAAP compliance in developing their business plans. As a result, the
Board does not believe that the phase-in is necessary or appropriate
for such FICUs.
Comment: Transition phase-in for small federally insured state-
chartered credit unions subject to GAAP. As provided in the preamble to
the proposed rule, the exemption from the GAAP standards does not
extend to smaller State-chartered FICUS that are required to comply
with GAAP under State law.\24\ One commenter inquired about the ability
of these state-chartered FICUs to use the transition phase-in. The
commenter noted that the regulatory text does not specify if these
credit union are eligible for the transition provision. The commenter
recommended the NCUA's final rule should make the proposed three-year
phase-in available to FICUs that must follow GAAP, regardless of the
size of the FICU.
---------------------------------------------------------------------------
\24\ Id.
---------------------------------------------------------------------------
NCUA Response: The transition provisions were designed to apply to
all FICUs that adopt CECL, irrespective of their asset size. As the
preamble to the proposed rule makes clear, the only FICUs ``not
eligible for the phase in'' are ``smaller FICUs that elect to use a
non-GAAP measure.'' \25\ State-chartered FICUs that are required by
state law to follow GAAP are prohibited from making such election.
Accordingly, the Board intended them to be eligible for the transition
relief provided by this rulemaking. The Board has revised the
regulatory text to clarify the eligibility of these credit unions. The
final rule clarifies that state-chartered FICUs with less than $10
million in assets and that are required by state law to comply with
GAAP are eligible for the transition phase-in.
---------------------------------------------------------------------------
\25\ Id.
---------------------------------------------------------------------------
Alternative GAAP structure for FICUs. The preamble to the proposed
rule notes that ``section 202 of the FCU Act could also potentially, as
an alternative to the provisions [of the proposed rule], authorize the
Board to provide a transition of the day-one effects of CECL
implementation.'' \26\ This provision authorizes the Board to prescribe
an alternative accounting principle to GAAP, so long as it is ``no less
stringent'' than the GAAP principle it replaces.\27\
---------------------------------------------------------------------------
\26\ Id.
\27\ 12 U.S.C. 1782(b)(6)(C)(ii).
---------------------------------------------------------------------------
Four commenters wrote that the NCUA should consider the question of
what constitutes an accounting standard that ``is no less stringent''
than GAAP for the purpose of expanding the scope of CECL relief. In
doing so, commenters suggested that the NCUA might explore the
possibility of a revised incurred loss methodology that allows more
flexible evaluation of qualitative and environmental factors. The
commenters also suggested that the NCUA should work directly with the
FASB to advance an interpretation of the ``no less stringent''
requirement that recognizes the unique burden that CECL poses for
FICUs. One of these commenters wrote that the NCUA should request that
FASB recognize the incurred loss methodology as an appropriate
alternative accounting principle under section 202 of the FCU Act.
NCUA Response: The development of an alternate set of accounting
standards that are ``no less stringent'' than GAAP would be a complex
and time-consuming endeavor necessitating consultations with FASB and
other stakeholders. At this time, the Board believes that GAAP
compliance is the most effective way to help ensure that financial
reporting is transparent and consistent between FICUs. The Board,
however, will continue to explore ways to alleviate the compliance
burdens imposed by GAAP. As noted, the Board is committed to working
with FASB, the other banking agencies, and appropriate stakeholders on
a possible exemption for FICUs from the CECL accounting standards.
Comment: Transition phase-in for small federally insured state-
chartered credit unions subject to GAAP. As provided in the preamble to
the proposed rule, the exemption from the GAAP standards does not
extend to smaller state-chartered FICUS that are required to comply
with GAAP under state law.\28\ One commenter inquired about the ability
of these state-chartered FICUs to use the transition phase-in. The
commenter noted that the regulatory text does not specify if these
credit union are eligible for the transition provision. The commenter
recommended the NCUA's final rule should make the proposed three-year
phase-in available to FICUs that must follow GAAP, regardless of the
size of the FICU.
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
NCUA Response: The transition provisions were designed to apply to
all FICUs that adopt CECL, irrespective of their asset size. As the
preamble to the proposed rule makes clear, the only FICUs ``not
eligible for the phase in'' are ``smaller FICUs that elect to use a
non-GAAP measure.'' \29\ State-chartered FICUs that are required by
state law to follow GAAP are prohibited from making such election.
Accordingly, the Board intended them to be eligible for the transition
relief provided by this rulemaking. The Board has revised the
regulatory text to clarify the eligibility of
[[Page 34930]]
these credit unions. The final rule clarifies that state-chartered
FICUs with less than $10 million in assets and that are required by
state law to comply with GAAP are eligible for the transition phase-in.
---------------------------------------------------------------------------
\29\ Id.
---------------------------------------------------------------------------
Comment: GAAP relief for federally insured state-chartered credit
unions. As noted above, the preamble to the proposed rule provides that
state-chartered FICUs subject to state laws and regulations may be
required to comply with GAAP or other accounting standards under
applicable state requirements.\30\ One commenter wrote that
approximately half the states either have explicit statutory or
regulatory requirements for all FISCUs to comply with GAAP, or it is
unclear whether such an express requirement exists. Two commenters
suggested that the NCUA should work with the appropriate supervisory
authorities to promote regulatory relief in states where the
impediments are regulatory in nature. For those states with statutory
mandates regarding GAAP adherence, the commenter asked that the NCUA
pursue potential legislative fixes and to notify state legislative
leaders of the exemption and the advantage federal credit unions would
have over similarly sized FISCUs if not provided legislative relief.
---------------------------------------------------------------------------
\30\ Supra note 1, at 50965.
---------------------------------------------------------------------------
NCUA Response: The Board will continue to work with FASB and other
stakeholders, including appropriate State regulators, to minimize the
detrimental impacts of GAAP compliance on FICUs. The Board also notes
that, as discussed in the preceding comment response, state-chartered
FICUs with less than $10 million in assets and that are required by
state law to comply with GAAP are eligible for the transition phase-in.
V. Description of Final Rule
A. New Subpart G to Part 702
The final rule adds a new subpart G to the PCA regulations in 12
CFR part 702, captioned ``CECL Transition Provisions.'' New subpart G
applies to FICUs that meet the eligibility criteria specified in the
final rule. Notwithstanding the CECL transition provisions, all other
aspects of part 702 would continue to apply.
B. Eligibility for Transition Provisions
FICUs that have not adopted CECL prior to their first fiscal year
beginning after December 15, 2022 (the 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.
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 will 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.
The NCUA will phase-in the FICU's CECL transitional amount. The
NCUA would 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 will 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 reporting quarters of the fiscal year in which the FICU
adopts CECL. The FICU may use this period to build capital and to make
resulting material adjustments to its CECL transitional amount. The
NCUA will base its subsequent calculations regarding the phase-in based
on the CECL transitional amount reported by the FICU as of the fourth
reporting quarter of the fiscal year in which the FICU adopts CECL, and
further adjustments to the amount are not permitted.
Beginning with the fourth reporting quarter of the fiscal year in
which the FICU adopts CECL, the NCUA will deem retained earnings and
total assets to be increased by 67 percent of the FICU's CECL
transitional amount. This percentage will be decreased to 33 percent
beginning with the fourth quarterly Call Report of the following fiscal
year (the eighth reporting quarter of the FICU's CECL implementation).
Commencing with the twelfth reporting quarter of the FICU's CECL
implementation, 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
[[Page 34931]]
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
[Calendar fiscal year]
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 of
First three at 67% (4th at 33% (4th day-one
quarters of quarter of 2023 quarter of 2024 adjustment
2023 and first three and first three (commencing 4th
quarters of quarters of quarter of
2024) 2025) 2025)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increase retained earnings and total assets by the CECL $200 $200 $134 $66 0
transitional amount...............................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
F. Statutory Limit on Amount of Net Worth Ratio Change
Section 216 of the FCU Act 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).'' \31\ The limitation is not applicable to this
final 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.
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\31\ 12 U.S.C. 1790d(c)(2)(A).
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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 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 final 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 will eliminate the adverse PCA
consequences for smaller FICUs resulting from CECL, and these FICUs
will not be subject to the phase-in procedure detailed above.
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. These credit unions are
eligible for the phase-in.
VI. Department of the Treasury Report
The Senate Committee Report to the Financial Services and General
Government Appropriations Act, 2020,\32\ 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.'' \33\ The Department of the
Treasury issued its report on September 15, 2020.\34\
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\32\ Division C of the Consolidated Appropriations Act, 2020;
Public Law 116-93, approved December 20, 2019.
\33\ Senate Report 116-111, at page 11.
\34\ U.S. Department of the Treasury, ``The Current Expected
Credit Loss Accounting Standard and Financial Institution Regulatory
Capital'' (2020). The report is available at: https://home.treasury.gov/system/files/216/The-CECL-Accounting-Standard-and-Financial-Institution-Regulatory-Capital-Study-9-15-20.pdf.
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While the report affirms the Department of the Treasury's support
for the goals of CECL, it also acknowledged that a ``definitive
assessment of the impact of CECL on regulatory capital is not currently
feasible, in light of the state of CECL implementation across financial
institutions and current market dynamics.'' \35\ Accordingly, the
report provides that the Department of the Treasury ``will continue to
actively monitor CECL implementation and
[[Page 34932]]
consult with relevant stakeholders, including the prudential
regulators, FASB, and the SEC.'' \36\ Among other recommendations, the
report suggests that the prudential regulators ``monitor the use and
impact of transitional relief granted, and extend or amend the relief,
as necessary.'' \37\ Further, the report provides that ``FASB, together
with the prudential regulators, should examine the application of CECL
to smaller lenders.'' The report highlights FICUs and community banks
in this regard, noting that the NCUA and the FDIC have separately asked
for relief from FASB.\38\
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\35\ Id., at page 5.
\36\ Id.
\37\ Id.
\38\ Id., at pages 28-29.
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This final rule is consistent with the Department of the Treasury's
report, particularly with respect to the recommendation regarding
transitional relief. The Board will continue to assess the impacts of
CECL on regulatory capital and will consider these-- and any other
future recommendations made by the Department of the Treasury--in
taking further action to address the impacts of CECL implementation on
the credit union industry.
VII. 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 final rule. For example, the 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.
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\39\ 5 U.S.C. 603(a).
\40\ 80 FR 57512 (Sept. 24, 2015).
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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 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 final 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.
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\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).
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D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule will not affect family
well-being within the meaning of Section 654 of the Treasury and
General Government Appropriations Act, 1999.\43\
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\43\ Public Law 105-277, 112 Stat. 2681 (1998).
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E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) \44\ generally provides for congressional review of agency
rules. A reporting requirement is triggered in instances where the NCUA
issues a final rule as defined by section 551 of the Administrative
Procedure Act.\45\ An agency rule, in addition to being subject to
congressional oversight, may also be subject to a delayed effective
date if the rule is a ``major rule.'' The NCUA does not believe this
rule is a ``major rule'' within the meaning of the relevant sections of
SBREFA. As required by SBREFA, the NCUA has submitted this final rule
to the Office of Management and Budget (OMB) for it to determine if the
final rule is a ``major rule'' for purposes of SBREFA. The NCUA also
will file appropriate reports with Congress and the Government
Accountability Office so this rule may be reviewed.
---------------------------------------------------------------------------
\44\ Public Law 104-121, 110 Stat. 147 (1996).
\45\ 5 U.S.C. 551.
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List of Subjects in 12 CFR Part 702
Credit unions, Investments, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board, this 24th day
of June 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed above, the NCUA amends 12 CFR 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, consisting of Sec. Sec. 702.701 through 702.703. to
read as follows:
Subpart G--CECL Transition Provisions
Sec.
702.701 Authority, purpose, and scope.
702.702 Definitions.
702.703 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
[[Page 34933]]
Act, 12 U.S.C. 1790d, as added by section 301 of the Credit Union
Membership Access Act, Public Law 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. (1) 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) that make charges for loan losses in accordance with:
(i) Generally accepted accounting principles (GAAP) under Sec.
702.402(d)(1)(i); or
(ii) In the case of Federally-insured, State-chartered credit
unions, any other applicable standard under State law or regulation
under Sec. 702.402(d)(1)(ii)(B).
(2) The transition provisions of this subpart do not apply to
Federally-insured credit unions, whether Federally or State-chartered,
including credit unions defined as ``new'' pursuant to section
1790d(b)(2), that make charges for loan losses using a reasonable
reserve methodology under Sec. 702.402(d)(1)(ii)(A).
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
the first day of the fiscal year in which the credit union adopts CECL.
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 its first fiscal
year beginning after 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 as of the beginning of the fiscal year in which the credit
union adopts CECL and the credit union's retained earnings as of the
closing of the fiscal year immediately prior to the credit union's
adoption of CECL.
(2) For purposes of calculating the fourth through twelfth quarters
of the transition period, as described in paragraphs (c)(2) and (c)(3)
of this section, the CECL transitional amount is equal to the
difference between the credit union's retained earnings as of the end
of the fiscal year in which the credit union adopts CECL and the credit
union's retained earnings as of the beginning of its next fiscal year.
(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 the fiscal year in
which the credit union adopts CECL);
(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 the fiscal year in which
the credit union adopts CECL and first three reporting quarters of the
next fiscal year); 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.
[FR Doc. 2021-13907 Filed 6-30-21; 8:45 am]
BILLING CODE 7535-01-P
