Allowance for Loan and Lease Losses

The COVID-19 pandemic has the potential to impose significant financial hardship on many credit union members. This economic uncertainty creates the need for credit unions to evaluate the negative impact of the COVID-19 pandemic on the estimate of probable loan losses and, if needed, include additional reserves in the ALLL account.

Due to the recent economic developments resulting from the COVID-19 pandemic, it is pertinent to ensure credit unions maintain an adequate ALLL account in accordance with ASC Subtopic 450-20 (loss contingencies) and/or ASC 310-10 (loan impairment).

Please review the COVID-19 FAQs for credit unions related to the ALLL account on the agency’s website, under the Credit Union Operations heading and refer to the loan modification and TDR flow chart.

Methodology and Funding

Credit unions are responsible for establishing an appropriate ALLL account and documenting their methodology. Credit unions should use the guidance in IRPS 02-3, Allowance For Loan and Lease Losses Methodologies and Documentation For Federally-Insured Credit Unions, in the design and implementation of an ALLL methodology. The ALLL methodology should also conform to GAAP. This includes ASC Subtopic 450-20, Loss Contingencies and ASC Subtopic 310-10, Loan Impairment. If the credit union has adopted the CECL methodology, then ASC Subtopic 326-20 would apply.

Credit union management may need to adjust the loss estimates to provide for funding in the ALLL to account for economic factors. Credit unions may opt to use proxy data for experienced loan losses as a result of prior disasters (such as Hurricane Katrina). Credit unions must document the nature of any adjustments to the ALLL and the underlying rationale for making the changes. IRPS 02-03 states that an unallocated loan loss reserve is appropriate when it reflects an estimate of probable losses determined in accordance with GAAP and is properly supported.

In addition, the CARES Act § 4013, Temporary Relief from Troubled Debt Restructurings, allows credit unions to suspend the requirements to classify certain loan modifications as TDRs, however, credit unions should consider how environmental factors affect these loans. Accordingly, credit unions should consider placing these loans in the same pool they were in before the modification, or it may be appropriate for a credit union to establish a loan pool for § 4013, Temporary Relief from Troubled Debt Restructurings, loans that share risk characteristics for allowance estimates.

Refer to the Allowance for Loan and Lease Losses chapter of the Examiner’s Guide for guidance on loan pools and other processes and procedures credit unions may use in establishing an adequate ALLL balance and PLLL.

Last updated on June 30, 2020