Governance

The overall responsibility for maintaining the ACLLL account rests with a credit union’s board of directors and senior management. Several other roles (for example, supervisory committee members and internal and external auditors) are also involved in the process.

The Governance topic covers the following:

Board of Directors

A credit union’s board of directors is responsible for directing management and approving the ACL methodology used to determine an appropriate ACLLL account balance. This may include the use of a third-party consultant. For more information, see Supervisory Letter 07-01, Evaluating Third-Party Relationships.

The board of directors’ oversight includes, but is not limited to:

  • Reviewing and approving the credit union’s written CECL policy and procedures. The Interagency Policy Statement on Allowances for Credit Losses suggests ACL policy review should occur no less than annually.

  • Ensuring the CECL policy specifically addresses the credit union’s unique products, systems, risk profile, and personnel.

  • Reviewing and approving senior management’s calculation and supporting documentation for the ACLLL account and CLE amounts reported each period for compliance with policies and procedures.

  • Requiring management to periodic validate the CECL methodology through an independent party not involved with the CECL process and adjust the CECL methodology, when appropriate.

  • Overseeing senior management’s process for individually evaluated loans and the anticipated collection amounts, to ensure the process is sound, appropriate, and effective.

Senior Management

Senior management establishes and implements the methodology to estimate the ACLLL account; this methodology is approved by the board to comply with full and fair disclosure requirements. Specific senior management responsibilities include, but are not limited to:

  • Developing the CECL policy. The board approves the CECL policy, but senior management plays a vital role in developing an effective policy and defining the procedures used to carry out the policy

  • Establishing a CECL methodology commensurate with the size and complexity of the loan portfolio and in compliance with GAAP—this methodology should be vetted and become the board-approved CECL policy

  • Performing the CECL calculation and developing adequate internal controls to ensure the calculation:

    • Is based on current, reliable data

    • Uses justifiable qualitative adjustments for current conditions and reasonable and supportable forecasts

    • Complies with established policies and GAAP

  • Evaluating the adequacy of the ACL on loans and leases account. Within the parameters of board-approved policy, and with proper board reporting, senior management funds the allowance account based on an evaluation of:

    • Risk in the portfolio and historical losses

    • External factors

    • Ongoing portfolio analysis, which may include:

      • Risk ratings (FICO scores) or classifications

      • Financial asset size and type

      • Effective interest rate

      • Vintage

      • Credit loss patterns

      • Geographic location

    • Loan performance

    • Future cash flows

    • Current conditions and reasonable and supportable forecasts

There may be instances where new information warrants making additional adjustments to the allowance account balance after the periodic evaluation. Consistent with the (Interagency Policy Statement on Allowances for Credit Losses), credit unions following best practices will provide adequate support and documentation for any such adjustments to the allowance account funding. This documentation and analysis usually include:

  • Reporting to its board the results of periodic evaluations and any subsequent entries made to the allowance account

  • Ensuring the credit union has reported the allowance account balance accurately on its financial statements and quarterly Call Reports

  • Implementing corrective action in response to recommendations or findings from auditors or examiners regarding the allowance account

  • Validating the CECL methodology periodically through a qualified, independent party and, if appropriate, adjusting the CECL methodology

Supervisory Committee

With respect to the ACLLL account, the supervisory committee:

  • Ensures the board and management follow established policy and procedures

  • Develops procedures to monitor the internal controls over the allowance account estimation process as part of their reviews performed throughout the year along with the annual audit

  • Responds to any examination findings or audit recommendations

  • Secures a qualified, independent party to validate the CECL methodology

  • Verifies that management revises the CECL methodology based on the results of this validation, if appropriate

  • Tests the mathematical accuracy of the ACL and ensures the methodology is properly applied

  • Tests loan delinquency and charge-offs for timeliness and compliance with charge-off and ACL policies

Internal Auditor

In credit unions with an internal auditor, or internal audit department, the auditor will test and validate the ACLLL account and report gaps in the implementation or the calculation process. The internal auditor may periodically validate a credit union’s CECL methodology to confirm its effectiveness in estimating credit losses. For more information, see Methodology Validation.

A credit union’s internal audit function should operate independently and report directly to the supervisory committee.

External Auditor

A credit union’s supervisory committee may use a third party to perform certain functions with respect to the ACLLL account. A third party may:

  • Verify the credit union is following GAAP and established internal policies in its CECL methodology and related funding analysis

  • Validate the credit union’s CECL methodology to confirm its effectiveness in estimating credit losses

A validation of the CECL methodology may not be within the scope of the annual audit required by NCUA regulation part 715, Supervisory Committee Audits and Verifications. A CPA opinion audit, however, may include a test or analytical procedures to determine the accuracy of the CECL methodology for the independent auditors’ report. For instance, some CPAs may determine the reserve amount is materially accurate based on their analysis without performing detailed testing of the credit union’s calculations. The engagement letter generally indicates whether a validation of the CECL methodology (on loans and leases) is included as part of the engagement scope. Credit union management may specifically engage external auditors, consultants, or statisticians to validate the CECL methodology.

Last updated on June 05, 2023