Methodology Validation

A credit union should validate its CECL methodology to compare differences between estimated losses and actual, subsequent charge-offs. A credit union may need to adjust its methodology to account for material differences. Additional adjustments may be appropriate if the credit union’s loan portfolio has changed significantly through new loan products or risk exposure. The credit union’s CECL policy should specify the frequency that the credit union will review and validate its methodology.

The party that validates a credit union’s CECL methodology should be independent from the ACL calculation and credit approval processes. If a credit union does not have an internal audit function, the ACLLL account validation can be performed by:

• The supervisory committee

• Credit union staff not responsible for lending or the ACLLL account

• A qualified third party hired by the supervisory committee

Changes to a CECL methodology may be likely after adoption and may merit further review.

For the Simplified CECL Tool developed by NCUA, a credit union should compare differences between estimated losses and actual, subsequent charge-offs. This analysis will refine qualitative adjustments used in the tool as well as to support the reasonableness of these adjustments.

For more information see NCUA Letter to Credit Unions 17-CU-05, Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses .

Last updated on June 05, 2023