Tag: CECL

Roundtable Requests Industry Regulators to Suspend Mark-To-Market Accounting Rules and Suspend New CECL Accounting Standard to Prevent Exacerbating Economic Crisis

Posted on by Trey Jackson

FASB logo

The Real Estate Roundtable this week submitted two requests to the Financial Accounting Standards Board (FASB) and securities regulators to prevent exacerbating the destructive economic repercussions of the coronavirus crisis. The first letter urges the immediate suspension of “mark-to-market” accounting rules (FAS 157).  The second letter encourages the expansion a provision in the CARES Act that suspends the new Current Expected Credit Losses (CECL) for banks – by including non-banking financial institutions and insurance companies. (Mark-to-Market letter, March 31 and CECL letter, April 1)

  • On March 31, The Roundtable addressed the mark-to-market – or “fair value” – rules in a comment letter to regulators.  Measuring an asset at fair value records it at a price it would obtain in an orderly market instead of the asset’s original purchase cost.  During unfavorable or volatile markets, the method does not accurately represent an asset’s true value.  (BGov, March 31)
  • When the market-based measurement no longer accurately represents the underlying asset’s true value, a company should not be forced to calculate the selling price of these assets or liabilities during unfavorable or volatile times, such as today’s COVID-19 crisis.
  • The Roundtable letter explains that the mark-to-market rules will further exacerbate the growing financial crisis. As many tenants will not be able to meet their debt obligations, liquidity in credit and capital markets has frozen, and the value of asset-backed securities collateral (including commercial mortgage-backed securities, or CMBS) is now set to decline.
  • “In light of these events, it is important for the Financial Accounting Standards Board (FASB) to take action to immediately suspend mark-to-market accounting. It is simply not possible to properly value assets in illiquid and non-functioning markets,” the letter states.
  • During the financial crisis of 2008-2009, the FASB voted on and approved new guidelines that  allowed for asset valuation to be based on a price that would be received in an orderly market rather than a forced liquidation.  The Roundtable letter encourages the FASB to take similar action now.
  • On April 1, The Roundtable wrote to the FASB and the Securities and Exchange Commission (SEC) urging the regulators to expand the suspension of  the new Current Expected Credit Losses (CECL) accounting standard during the current COVID-19 crisis beyond banks – to include all companies, including non-bank financial companies and insurance companies. (Roundtable CECL letter, April 1)
  • The CARES Act allows federally insured financial institutions to delay the implementation of the CECL standard.  Additionally, federal banking regulators recently issued an interim final rule allowing lenders to delay the estimated impact on regulatory capital. 
  • The new CECL standard changes the way banks calculate reserves on assets, requiring banks and nonbanking finance companies to estimate the expected loss over the life of a loan. For real estate, there is concern that this new standard will exacerbate the current liquidity crisis.
  • While CECL is expected to have the greatest impact on banks (which typically have extensive financial instrument portfolios), even non-banking entities are very likely to hold financial instruments within the scope of CECL.
  • U.S. commercial and multifamily real estate encompasses approximately $16 trillion in income-producing assets, supported by over $4 trillion in debt – mostly provided by commercial banks, life companies and commercial mortgage backed securities (CMBS).
  • Therefore, it is important to apply this CECL suspension to non-bank finance companies, including life companies who also play a significant role in providing essential liquidity to the commercial real estate industry. The Roundtable letter encourages the FASB to suspend application of the new CECL standard for all companies.  

The Roundtable’s Real Estate Capital and Credit Policy Advisory Committee (RECPAC) will continue to provide expertise and insight into policy steps that will help support the restoration of necessary market liquidity resulting from the COVID19 crisis. 

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CECL Accounting Standard Implementation Delayed for Certain Lenders

Posted on by Trey Jackson

The Financial Accounting Standards Board (FASB) on Wednesday passed a proposal that would give more time to smaller lending institutions to adopt the Current Expected Credit Losses (CECL) accounting standard, which forces lenders to book losses on bad loans much faster. ( ABA Banking Journal , July 17)

FASB Chairman Russell Golden stated, “Additional time would give the stakeholders more ability to learn from larger lenders, more ability to have resource providers available, and more ability to look at best practices for disclosures and controls.”  
  • The delay would set January 2023 as the new deadline for small public lenders, private lenders and nonprofits (such as credit unions) to implement CECL.  (Credit Union National Association, July 17) 
  • CECL would still take effect for publicly traded U.S. banks beginning in January 2020.  The regulatory change in how banks estimate losses in their allowance for loan and lease losses (ALLL) will require substantial changes in data analytics and financial methodologies. 
  • FASB Chairman Russell Golden stated, “Additional time would give the stakeholders more ability to learn from larger lenders, more ability to have resource providers available, and more ability to look at best practices for disclosures and controls.” (Wall Street Journal, July 17) 
  • FASB is expected to release the proposed accounting standard changes in August, subject to a 30-day comment period.  
  • For real estate, there is concern that banks may reduce lending volumes as they build up additional capital reserves to be in compliance with CECL.   A business coalition that included The Real Estate Roundtable wrote to the U.S. Securities and Exchange Commission (SEC) and FASB in March, urging further study amid concerns that CECL may soon begin to reduce aggregate bank lending.  (Coalition Letter, March 5 and Roundtable Weekly, March 8) 
  • Congressional legislation to delay CECL’s implementation was introduced in the Senate on May 21 by Sen. Thom Tillis (R-N.C.) and in the House on June 10, led by Rep. Vicente Gonzalez (D-TX). (S&P Global Intelligence, June 11) 
  • This week, FASB posted a Q&A document addressing various CECL implementation issues, including how to make a “reasonable and supportable” forecast of expected loan losses.  FASB also plans a series of CECL educational workshops throughout the country.  (FASB Advisory, July 17) 
  • The CECL accounting rule change was issued in June 2016 by FASB as a result of the 2008 financial crisis.  (FASB, Credit Losses)  

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will continue to address the potential impact of the new accounting standard and work with the CECL business coalition on implementation issues. 

 

Senate Legislation Introduced to New CECL Accounting Standard Affecting Treatment of Expected Loan Losses

Posted on by Trey Jackson

Legislation introduced May 21 by Sen. Thom Tillis (R-N.C.) would delay implementation of the Current Expected Credit Losses (CECL) accounting standard, which will force banks to book losses on bad loans much faster.  (ABA Journal, May 22)

  Legislation introduced May 21 by Sen. Thom Tillis (R-N.C.) would delay implementation of the Current Expected Credit Losses (CECL) accounting standard, which will force banks to book losses on bad loans much faster.

  • The independent Financial Accounting Standards Board (FASB) is proceeding with its plan to implement CECL for publicly traded U.S. banks at the beginning of 2020 – and later for other financial institutions. (Roundtable Weekly, April 5)
  • FASB  Chairman Russell Golden reiterated the organization’s commitment to implementing CECL in an interview this week with Bloomberg Tax. “We think we need to continue to work with community banks to make sure that they understand what CECL is and what it’s not,” Golden said.  (BGov, May 22)
  • The new CECL model will require certain financial institutions to estimate the expected loss over the life of a loan – a significant change to the way banks calculate reserves on assets.  The regulatory change in how banks estimate loan and lease losses (ALLL) will require substantial changes in data analytics and financial methodologies. (Wall Street Journal, April 3)  The accounting rule change was issued by the FASB in June 2016 as a result of the 2008 financial crisis.
  • For real estate, there is concern is that banks may reduce lending volumes as they build up additional capital reserves to be in compliance with CECL.  The new standard may cut into earnings and regulatory capital by forcing some banks to boost their loan-loss reserves.  (Roundtable Weekly, March 8)  
  • A business coalition that included The Real Estate Roundtable in March urged further study amid concerns that CECL may soon begin to reduce aggregate bank lending.  (Coalition Letter, March 5)

    The  Financial Accounting Standards Board (FASB) plans to implement CECL.

  • Sen. Tillis’ bill (S. 1564) would require the Securities and Exchange Commission (SEC) and bank regulators to study CECL’s effect on the availability of credit and on bank capital before the new  accounting standard takes effect.
  • Fourteen Senators – seven Democrats and seven Republicans – on May 10 sent a letter to the Federal Reserve Board and the Federal Deposit Insurance Corp. requesting a delay of CECL until the regulators analyze how the new rules could impact lending.  Twenty five members of Congress on May 6 sent a letter to the SEC requesting a delay in implementation of the new FASB rule until the SEC studies it.

At a House Financial Services Committee hearing May 22, Treasury Secretary Steven Mnuchin responded to a question about the ability of community banks to lend under  CECL.  “I share some of your concerns. This is an issue we continue to study,” Mnuchin said.  (BGov, May 22)

Business Coalition Urges Implementation Delay for FASB’s ‘Current Expected Credit Loss Accounting Standard’ (CECL), Pending Impact Analysis

Posted on by Trey Jackson

A business coalition that includes The Real Estate Roundtable on March 5 wrote to the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) to urge a delay in the implementation of the proposed Current Expected Credit Loss (CECL) accounting standard, which may begin to reduce aggregate bank lending as early as next year. (Coalition Letter, March 5)

The March 5 coalition letter cites a 2018 KPMB survey showing companies are struggling to make certain accounting, modeling and data decisions to be in compliance with CECL. (KPMG, Financial institutions feeling the crunch in countdown to CECL implementation)

  • The new CECL model will change the way banks calculate reserves on assets, requiring certain financial institutions to estimate the expected loss over the life of a loan beginning in January 2020.  For real estate, there is concern is that banks may reduce lending volumes as they build up additional capital reserves to be in compliance with CECL. 
  • The accounting rule change was issued by the Financial Accounting Standards Board (FASB) in June 2016 as a result of the 2008 financial crisis.
  • The regulatory change in how banks estimate losses in their allowance for loan and lease losses (ALLL) will require substantial changes in data analytics and financial methodologies.  The March 5 coalition letter cites a 2018 KPMB survey showing companies are struggling to make certain accounting, modeling and data decisions to be in compliance with CECL.  (KPMG, Financial institutions feeling the crunch in countdown to CECL implementation)
  • According to Trepp’s Looking at Historical CRE Losses for CECL, “To benchmark and fine-tune loss methodologies for CECL, the key for banks will be a four-letter word: data.  Unfortunately, many banks have very little in the way of granular historical data, and a number of those that do have good data have taken few to no losses in their history. This has made it difficult for those banks to effectively model future losses.”  (Trepp article by Joe McBride, April 21, 2017)
  • To avoid unintended economic consequences, the coalition states in its letter, “We believe it is important to delay implementation of CECL in order to allow for time to conduct a quantitative impact analysis and to consider potential alternatives, while allowing for post-issuance field testing. Time for further assessment will also allow regulators to better understand and address the key consequences of any proposal for capital and other regulatory purposes.”

The 8 signatories to the coalition letter are the U.S. Chamber of Commerce, American Bankers Association, Bank Policy Institute, The Real Estate Roundtable, Commercial Real Estate Finance Council, Mortgage Bankers Association, National Association of Realtors, Credit Union National Association and National Association of Federal Credit Unions.