Interagency Response to CECL Comments

In October 2019, the OCC, Federal Reserve Board, FDIC and NCUA (the agencies) invited public comment on proposed guidance on credit risk review to update the 2006 Interagency Policy Statement. The “Loan Review Systems” document focuses on assessing loan risks under the Allowance for Loan and Lease Losses (ALLL) methodology, which will no longer be applicable under Current Expected Credit Losses (CECL).

Trade associations, banks, credit unions and members of the public submitted 19 comments. Most expressed general support for the guidance, while many also raised concerns including: a one-size-fits-all approach that would place a burden on smaller institutions; duplication of efforts due to overlap of responsibilities; the role of credit risk review and its relation to other functions such as internal audit; scope, frequency and internal responsibility; dispute resolution; and the use of technology and data.

After reviewing the comments, the agencies grouped their responses for the final rule into three general areas pending publication in the Federal Register:

Does the proposed guidance reflect sound practices?

Some commenters thought the guidance was too strict, excessively detailed and not aligned with current practices. The agencies replied that the final guidance describes a broad set of practices and principles that are consistent with safe and sound credit risk management practices to promptly identify loans with credit weaknesses and validate and adjust risk ratings.  They note, “The final guidance does not establish any requirements or rules, nor does it mandate implementation of a specific system or prescribe specific actions with which institutions must comply.” Each institution may set the scope and frequency of reviews (recommended annually, at a minimum) based on their specific circumstances.

Is the proposed guidance appropriate for institutions of differing sizes?

The agencies believe the final guidance provides small and large institutions with flexibility to tailor the credit review function, noting it can vary based on size, complexity, loan types, risk profile and risk management framework. For example, institutions can consider the nature, size and scope of their loan portfolio and overall risk profile, including their determination of high-risk indicators and exceptions to policy. 

Should the agencies should include additional factors to help credit risk review achieve a sufficient degree of independence?

In the “Independence of Credit Risk Review Personnel” section, smaller or less complex institutions may perform the credit risk review function using an independent committee of outside directors or qualified staff members, including senior management provided their involvement does not compromise independent analysis. The credit risk review function should to report directly to the board of directors or a designated board committee to provide the board with an independent assessment of the overall quality of loan portfolios and other areas of credit exposure. 

Click here to read the interagency statement.


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