The Current Expected Credit Loss (CECL) standard has had a profound impact on how credit unions and other institutions collect data and analyze loan performance, and loan participations add a wrinkle. The data needed to compute lifetime charge-offs comes from external sources, not your own systems. The good news: with planning and the right technology, it’s quite manageable.
1. Tailor your participation diligence process
Make sure due diligence captures every input your CECL calculation needs. If you usually request 24 months of charge-off history, confirm the period at least covers the portfolio’s expected loan life. Work with your CECL team or third-party specialist on fallback processes for when the available data is insufficient.
2. Ensure efficient and sufficient ongoing reporting
The biggest CECL changes are in ongoing reporting. Before entering a participation, both seller and buyer must be certain the seller can provide the data the buyer’s CECL model needs. At a minimum, confirm loan-level:
- Payment-level detail
- Current credit scores
- Delinquency
- Performance events: bankruptcy, foreclosure, repossession
- Gross charge-offs, recoveries and net charge-offs
Reports should be easily exportable with key identifiers: loan type, collateral type, origination and maturity dates, original credit score and unique loan IDs.
3. Don’t rely only on in-house data
If you participate in auto loans from a region entirely different from your own auto book, a scenario regulators raised in their April 2019 CECL webinar, your in-house data won’t support a proper reserve.
4. Use loan participation technology
Manually harvesting participation data for CECL is a fool’s errand. Automated reporting can deliver all relevant data to your CECL specialist in a structured, timely way, so you stay compliant while keeping the diversification and liquidity benefits of participations.