[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]


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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.

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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:
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    \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.
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    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.
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    \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.
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    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\
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    \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.
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    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\
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    \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.
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    Upon adoption of CECL, an institution will record a cumulative-
effect adjustment to retained earnings (known as ``the day-one 
adjustment'').

[[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\
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    \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).
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    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.
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    \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.
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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.
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    \10\ 12 U.S.C. 1790d(c)(2)(A).
    \11\ 12 U.S.C. 1790d(c)(2)(B).
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    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\
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    \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.
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    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.
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    \14\ 12 CFR 702.2(k).
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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\
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    \15\ 12 U.S.C. 1782(b)(6)(C)(i).
    \16\ 12 U.S.C. 1782(b)(6)(C)(iii).
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    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.
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    \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.
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    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.
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    \20\ Supra note 1 at 50966-50967.
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    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.
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    \21\ Id. at 50968.
    \22\ 12 CFR 3.301(b)(2).
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    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.
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    \23\ Supra note 1, at 50967.
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    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.
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 1790d(c)(2)(A).
---------------------------------------------------------------------------

G. NCUA Oversight

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

H. Small FICU Determination of Charges for Loan Losses

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

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \35\ Id., at page 5.
    \36\ Id.
    \37\ Id.
    \38\ Id., at pages 28-29.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or increases an existing burden.\41\ For purposes of the PRA, 
a paperwork burden may take the form of a reporting, disclosure or 
recordkeeping requirement, each referred to as an information 
collection. The 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.
---------------------------------------------------------------------------

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

D. Assessment of Federal Regulations and Policies on Families

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

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

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.
---------------------------------------------------------------------------

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