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Join the Movement. Blog 4 Good

Beany & CECL – Episode 2

By Rick Jones & James Yoakum
July 29, 2019
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Just a few short months ago we took on the breathtakingly ill-conceived Current Expected Credit Loss (CECL) standard that the Financial Accounting Standards Board (FASB) proposed to implement starting in 2020.  CECL will require major shifts in the way lenders model, forecast and reserve for future losses.  It would materially drive up capital requirements, impair earnings and ultimately drive spreads higher to the borrowing community.  And by the way, it would be pro-cyclical.  If we were actually going to do these things (and we shouldn’t), an unelected financial standard setting committee is surely the wrong party to hold the pen.

The lending community screamed bloody murder, and for good reason.  Luckily, the small banking community was at the forefront on this cri de coeur.  While the money center banks may be one of our pols’ favorite whipping boys, everyone in politics loves the small banker (visions of Jimmy Stewart dancing in their reptilian brains) because those bankers made loans to their constituents, support their local community and, oh, by the way, made significant political contributions.

So, not surprisingly, last week, smaller public lenders and private lenders, received something of a reprieve as FASB proposed delaying CECL implementation until January of 2023.

At its July 17th meeting, FASB proposed simplifying the effective dates for CECL implementation into two ‘buckets’ (as opposed to the original three bucket setup).  One bucket would be for SEC filing public companies, excluding smaller reporting companies as currently defined by the SEC.  Companies in Bucket One will still be required to implement CECL by January 2020.  Companies in Bucket Two, which includes smaller public companies, non-SEC public companies and private companies, will have until January 2023 to adopt the CECL standard.  That represents two extra years for most of these companies and two years for the ‘big fish’ to work the kinks out of CECL and provide a framework for the smaller fry to follow.  Of course those companies that so desire may always implement CECL earlier than required.  The proposed changes are open for comment for 30 days – that is until Friday, August 16, 2019.

Along with pushing back the implementation date for certain companies, FASB also issued a helpful Q&A document last week that serves to answer a handful of basic questions around how CECL should be implemented.    If we have to actually do this thing, I guess a little bit of clarity is not a bad thing.  The real question is whether CECL should and will get a complete re-think.

Clearly it should.  Whether it does nor not is a different issue and may largely depend on the outcome of the 2020 elections as well.

It’s unfortunate that large swaths of the lending community have now spent a ton of time and money beavering away on coming up on implementation strategy, but frankly the loss of time and lucre is a relatively small tax to pay for pushing CECL out a couple of years.

And there is a realistic hope that all of this goes away, that a better view of risk management will prevail and CECL will join other really bad ideas on the trash heap of history.  But it’s not going to happen without continued engagement from the lending community and without continuing both technical and political engagement with our duly elected leaders.  The best friend of a truly bad idea is obscurity and inattention.  Sunlight is the best disinfectant.

So let’s not forget CECL and keep an eye out for Beany & CECL, Episode 3.  It could be a doozy.

Photo of Rick Jones Rick Jones

Richard D. Jones (“Rick”), co-chair of Dechert’s Finance and Real Estate group, focuses his practice on capital markets and mortgage finance. Mr. Jones was designated as a leading lawyer for real estate in the 2005-2009 editions of Chambers USA, a referral guide…

Richard D. Jones (“Rick”), co-chair of Dechert’s Finance and Real Estate group, focuses his practice on capital markets and mortgage finance. Mr. Jones was designated as a leading lawyer for real estate in the 2005-2009 editions of Chambers USA, a referral guide to leading lawyers in the United States based on the opinions of their clients and peers. Mr. Jones was described as “one of the savviest capital markets / mortgage finance lawyers in America’s real estate sector” in the 2007 edition of The Legal 500 (U.S.), which also named him one of New York’s top capital markets attorneys in its 2008 and 2009 editions. In addition he is listed in The Best Lawyers in America.

Mr. Jones recently received the Commercial Mortgage Securities Association’s (CMSA) Founders Award for his leadership. He has also received the Distinguished Service Award from the Mortgage Bankers Association of America (MBA) which is given annually to one person who has provided sustained and effective leadership to the industry.

Mr. Jones is past president of the CRE Finance Council; a founder of the Commercial Real Estate Institute (CRI); a member and past governor of the American College of Real Estate Lawyers and a former chair of its Capital Markets Committee; and a member of the Executive Committee of the Commercial Mortgage Board of Governors (COMBOG) of the MBA. Mr. Jones is a member of the Real Estate Roundtable, serving on its Capital and Credit Policy Advisory Committee. He also serves as the chairman of CRE Finance Council’s PAC as a member of the Commercial Real Estate Working Group of the Financial Services Roundtable, and on the MBA’s blue ribbon Council on Ensuring Mortgage Liquidity.

Mr. Jones is widely published and a frequent speaker on a wide range of issues affecting the capital markets and mortgage finance markets.

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Photo of James Yoakum James Yoakum

James Yoakum focuses his practice on finance and real estate matters, with an emphasis on commercial mortgage financings, securitization and real estate backed financing facilities.

Read more about James YoakumEmail
  • Posted in:
    Corporate & Commercial, Financial, Real Estate & Construction
  • Blog:
    Crunched Credit
  • Organization:
    Dechert LLP
  • Article: View Original Source

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