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14 | Th e M Rep o RT cover story credit unions will have a difficult time making the projections. "They want you to look at a variety of indicators," Dunn said of FASB's proposed CECL model. "It looks at a whole variety of things in terms of the economy. For example, if a borrower is part of a particular industry, it will ask how is that industry performing?" The proposed accounting stan- dard would require firms to col- lect information about a particular sector of the economy and other data points that go far beyond the usual analysis used to determine loan loss risk in advance. The problem is such factors are not always indicative of how risky a loan will be. Each borrower is unique, and assessing their risk without a more precise "trigger- ing event" lands credit unions in a vast desert, where they remain uncertain as to how flexible they can be when writing loans. The worst-case scenario is the stifling effect the rule could have on lending at the same credit unions and small banks that backed up the U.S. capital markets when giant players faced a liquidity squeeze during the recession. "I think that it is going to make institutions more cautious in mak- ing loans," Dunn said. If the proposal does take effect, it will be a blow to credit unions and small banks—all of which are still absorbing a stream of new lending regulations, including the 43-per- cent debt-to-income ratio required under the new qualified mortgage (QM) rule, Dunn explains. Renderos contends borrowers who rely on credit unions the most will feel the deepest impact. "We believe this will impact our effort to help credit-challenged consumers," she said. "It's also important to note that many credit unions are smaller fi- nancial institutions that have limited resources and cannot afford the investment in complex systems to support FASB's proposed Current Expected Credit Loss model," Renderos added. Another cause for concern is the allocation of capital. If smaller institutions and credit unions add surplus to their reserve accounts, less capital will be flowing into the community overall. Renderos shares this concern. "Requiring higher reserves imme- diately upon making a loan may encourage adverse selection of only higher credit quality loans that would require less reserves up front. This could limit the ability to offer credit options to credit-challenged consumers, and in some cases eliminate the competition that keeps market rates lower," she explained. The inability of regulators to create exceptions for credit unions and small banks in their propos- als early on shows Washington D.C.'s disconnect with Main Street banks, suggests Steve Scurlock, EVP of the Independent Bankers Association of Texas. From the get-go, credit unions and small banks have had to fight to ensure the medicine prescribed in Washington D.C. to fix prob- lems stemming from big banks didn't adversely impact smaller mom-and-pop players. "This is an overreaction," Scurlock asserted. "At every meet- ing, independent banks talk about how much time, energy, and money they're having to spend to comply with an increasing load of regulatory oversight. I appreciate this as a former regulator. The regulators do not want another blowup, but it has finally reached a breaking point. They need to just take a deep breath." From Scurlock's point of view, community banks and credit unions are taxed with deploying more intensive measures to ensure they maintain the right credit loss reserves. Yet, ironically, these same organizations are already known for their conservative nature in both lending and calculating loan losses. This is a point of contention for both Scurlock and CUNA's Dunn. Dunn is asking FASB to con- sider backing away from a one- size-fits-all model, while Scurlock sees a painful irony in the rules applying to organizations that already overestimate how much is needed for loan loss reserves. "We have issues with an in- curred loss model, where you don't recognize anything but the general reserve," Scurlock explained. "Many of our banks, when they went through their annual audits, were told they were over-reserved—or had too much in their loan loss reserves." He notes that when a bank is over-reserved, they then have to recapture those funds. Neither Dunn nor Spurlock fears the intentions of the FASB accounting rules, and they remain hopeful the organization will regroup and tweak its proposal. "I don't think FASB wants to take a step that will hurt financial institutions," Dunn said. "That is certainly not their goal. What they want is to have a more timely reflection of what credit losses may be. We understand that and appreciate it." The problem is credit unions are not publicly traded, and they do not fit the profile of larger, publicly traded firms that grow rapidly, Dunn explains. Therefore, she says they need to be handled on separate terms when making game-changing moves. Spurlock, a former regulator in the banking space, applauds efforts to ensure institutions possess enough capital to cover their losses. Still, he recognizes the process as a complex one that turns on the type of organization recording those loan losses. "We have been pushing for right- sized regulation, or even a bifur- cated regulatory structure, where it's recognized that the community bank business model is completely different than the business model that got these larger banks in trouble," Spurlock noted. "We see the discussion about derivatives and trading on your account, but our businesses don't do that. This is not where they live." If Dunn and Spurlock sound hopeful, it's because FASB has taken the time to listen, given all the pushback the proposal inspired in the marketplace. Renderos explains that FASB had a clear goal in mind with the proposal, but it is one that applies less to credit unions. "The Financial Accounting Standards Board's stated objective is to provide deci- sion-useful information to investors. Because credit unions are classified as nonpublic entities, we don't have investors as an audience for our financial statements," she noted. The good news is FASB seems open to discussing the issue, and no one has fired the final shot making the proposed changes definitive. In a statement to the MReport, Christine Klimek with FASB said Regulators' reluctance to consider the needs of smaller players when designing new accounting rules for the financial system is creating a market that will potentially be dominated by the very same lenders that created the credit crisis in the first place.