The experience of updating systems and overhauling workflows that mortgage lenders gleaned from implementing the TILA-RESPA integrated disclosures could prove useful to portfolio lenders as they implement a similarly complex accounting rule for reporting credit losses.
The Financial Accounting Standards Board approved in late April the new Current Expected Credit Loss standard. The new standard dictates how banks and credit unions compute their loan loss provisions, requiring them to calculate an estimate for the lifetime losses of a loan when it goes on the books rather than simply incurring the loss when it happens.
"In short, it changes timing and the amount of credit," Jill Streit, senior vice president and portfolio management finance director at EverBank told National Mortgage News, following a session on portfolio lending at the Mortgage Bankers Association's National Secondary Market Conference.
"It has a prospective look to it," she added. "Today's model has no impact on what's going to happen in the future, so how entities interpret that could create a lot of volatility and subjectivity."
A major change like this requires significant upfront preparation. Data gathering takes on a renewed importance under the new model, and Streit reiterated that lenders must ensure that their systems and infrastructure are prepared. In many ways, those efforts mimic what lenders have faced preparing for TRID.
"If anything, TRID's been a good lesson because of the system overhaul and all of the things required in the process changes," Streit said. "To some extent, we can leverage that process and experience to help prepare for the implementation of CECL."
The CECL-related concerns though are just beginning to mount as lenders are finding themselves "through the worst of it" where TRID is concerned, Streit said. Residual issues persist because of the regulation, with
"A lot of people are trying to grasp at any additional changes and minimize the exposure from the TRID impact," Maxham said, following the portfolio lending panel. "We've probably had a handful of loans or more that have had some TRID implications. We'll just put them on the balance, and as we progress there should be minimized impact" from TRID.
TRID-related concerns are not the only headwinds facing portfolio lenders. Refinancing activity is expected to decline, meaning that
"You'll see more competition and margins will continue to be compressed," Maxham said. "It's going to be a lot more challenging."
Plus, most lenders expect that the current low-interest rate environment will persist for years to come. And if rates are still low when the CECL deadline rolls around, some portfolio lenders could begin to re-evaluate their positions, though Streit doubted that the change would have a wholesale impact on the sector.
"It'll be interesting to see the rate environment that we're in," Streit said. "Having to estimate out a 30-year asset and the potential credit over that period of time, you may not like the answer of that estimate. So it could make people shift."
Lenders did get an initial reprieve last month when
"The good news is that FASB is taking forever and a day," Streit said. "They're giving us a long runway to work with."
