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Th e M Rep o RT | 13 cover story T he 2008 financial crisis left credit unions and independent, small banks in the un- enviable position of having to dodge the nuclear fallout of lending regulations. Adding insult to injury is a proposed accounting rule change that is on the horizon unless the industry manages to either quash it or revamp it in the coming months. This perceived regulatory assault feels even more oppressive when considering credit unions and smaller banks were the ones extending lifelines to the credit markets in the wake of the finan- cial crisis. Fast-forward six years, and the fallout from regulations and new proposals is still threatening to zap the very bridge that these smaller financial institutions built between Main Street and the financial services industry. The final straw could be the Financial Accounting Standards Board's (FASBs) recent proposal to change the way financial institutions—in- cluding small banks and credit unions—estimate their loan losses for accounting purposes. Even though the changes in accounting for these losses are not yet finalized, credit unions are already bracing for the possible ripple effect, while simultaneously warning FASB not to flip the switch just yet. In a letter to FASB, the Credit Union National Association (CUNA) suggested credit unions should be handled separately from larger financial firms when concocting new accounting rules. Specifically, CUNA argues that FASB's proposed change in loan- loss accounting would require cred- it unions to use additional criteria in estimating potential credit losses, thereby making it more taxing for these institutions to organize capital in a manner that is most beneficial to their local borrowers. Mary Dunn, SVP and deputy general counsel for CUNA, under- stands why FASB proposed the accounting changes, but she fears the impact regardless. Dunn has released numerous statements on the issue and is often grilled about CUNA's thoughts on the proposal. These days she finds herself ex- plaining the polarizing accounting proposal, which looks innocuous on its surface. It's when you dig down that you find reasons for panic, smaller banks and credit unions warn. "Right now when you have a loss and you recognize a loss, you make sure your allowance ac- count has enough funding," Dunn explained. Within current generally accept- ed accounting principles (GAAP), credit losses are determined by a "triggering event"—something that causes you to think the loan is not going to be repaid, Dunn says. "Under the new proposal, you are not supposed to wait for a triggering event," she added. "You are to look at the totality of the circumstances and look at how this loan is going to perform throughout the entirety of the loan and then make sure you have enough in your allowance account to foresee any possible losses throughout the lifetime of the loan." Julie Renderos, EVP and CFO of Suncoast Credit Union, noted that "the biggest impact of this change is from applying a 12-month loss ratio to using a lifetime credit loss rate when calculating allowance for loan loss reserves." She added that while FASB's newly proposed Current Expected Credit Loss (CECL) model pro- vides the ability to use reasonable and supportable forecasts, these changes "will have an impact on both the reserve balances and the resources required to support the complex data analytical models necessary to support the proposed guidance." For credit unions and small banks that have to do more with less, the proposed changes are strenuous and opaque at best. Dunn admits there's a concern