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Federal Register / Vol. 86, No. 124 / Thursday, July 1, 2021 / Rules and Regulations
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left to the regulatory discretion of the Board. The Board has elected to exercise this discretion and defined total assets in part 702. Specifically, the regulations provide that a FICUs total assets may be measured by either its 1
average quarterly balance; 2 average monthly balance; 3 average daily balance; or 4 quarter-end balance.14 As an alternative to the phase-in that would be provided by this final rule, the Board could have elected to revise the definition of total assets in a manner enabling FICUs to effect the CECL dayone adjustments without undue adverse consequences. The Board opted for the phase-in given its simplicity and ease of administration. Nonetheless, the Board acknowledges that an alternative legal basis exists for rulemaking to mitigate the consequences of CECL
implementation.
C. Small FICU Charges for Loan Losses Section 202 of the FCU Act requires that, in general, applicable reports and statements required to be filed with the Board shall be uniform and consistent with GAAP.15 The statute, however, also provides an exception to GAAP
compliance for FICUs with total assets of less than $10,000,000, unless prescribed by the Board or an appropriate State credit union supervisor. 16
The Boards regulations in 702.402
require that charges for loan losses be made in accordance with GAAP and does not distinguish based on the asset size of FICUs. In effect, 702.402
exercises the Boards discretion under section 202 of the FCU Act to override the exception for smaller FICUs by prescribing regulations. The Board has elected to once again exercise its statutory discretion under section 202 of the FCU Act. The Boards regulations will no longer require that FICUs with total assets less than $10 million make charges for loan losses in accordance with GAAP. Instead the regulations will allow these FICUs to make such charges under any reasonable reserve methodology incurred loss provided it adequately covers known and probable loan losses. The transition provisions described above apply to FICUs adopting CECL. Accordingly, smaller FICUs that elect to use a non-GAAP
measure are not eligible for the phasein.
The Board also notes that section 202
of the FCU Act could also potentially, as an alternative to the provisions discussed above, authorize the Board to 14 12

CFR 702.2k.
U.S.C. 1782b6Ci.
16 12 U.S.C. 1782b6Ciii.
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provide a transition of the day-one effects of CECL implementation. This provision authorizes the Board to prescribe an accounting principle for application to any FICU if the Board determines that the application of a GAAP principle is not appropriate.
Because the Board has clear authority to effect the transition to CECL under section 216, it is not necessary to rely on section 202.
IV. Discussion of the Public Comments on the August 19, 2020, Proposed Rule A. The Comments, Generally The public comment period on the proposed rule closed on October 19, 2020. The NCUA received 18 public comments on the proposal. Comments were received from individual FICUs, as well as from national, state, and regional organizations representing FICUs.
Thirteen of the commenters objected to FASBs application of CECL to FICUs, largely due to the anticipated negative impact of the day-one adjustment. The commenters wrote that FICUs building reserves to meet the CECL benchmark will be diverting funds that could otherwise be used to provide credit to members and communities during the ongoing COVID19 event. They urged the NCUA to continue exploring all avenues, including working with FASB, to exempt FICUs from the CECL
requirements.
While believing CECL should not apply to FICUs at all, the commenters unanimously supported the proposed rule. The commenters commended the Boards efforts to assist FICUs with the transition to the CECL methodology.
Several of these commenters, however, also offered suggested changes to the proposed rule.
NCUA Response: The Board appreciates the support expressed by the commenters, as well as the specific questions and concerns raised in their individual comments. The Board has addressed these specific comments below. The Board reiterates its belief that, given the unique characteristics of the credit union industry, the CECL
accounting standards should not apply to FICUs. The Board will continue to work with FASB, the other banking agencies, and appropriate stakeholders to exempt FICU from these standards.
B. Comments Regarding Transition Phase-In Comment: Mandatory opt-in for transition phase-in. Under the proposed rule, FICUs would not have the option of electing whether to opt into or out of the transition provisions. Several commenters urged the NCUA to
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reconsider this automatic approach and provide a FICU with the ability to opt into or out of the transition provisions based on its financial condition. The commenters wrote that, for strategic reasons, some FICUs may wish to recognize the full cost and adverse effect on their capital of CECL in one year rather than phasing in the adverse effects over a prolonged period. The commenters wrote that if the NCUA
decides it must determine eligibility, the agency should expand the factors upon which the determination is made beyond a reduction in earnings caused by the application of CECL. For example, the NCUA might consider additional factors, such as asset quality and overall risk in the loan portfolio, current financial condition of the credit union, and the current state of the economy at the time of the determination. Alternatively, the NCUA
could limit the mandatory opt-in for FICUs with a lower CAMEL rating.
NCUA Response: The Board has declined to adopt these comments. As the commenters note, it is true that some FICUs will have a business rationale for recognizing the day-one effects of CECL on their capital ratios.
This final rule does not compel any FICU to make use of the transition phase-in. A FICU that determines adoption of CECL is in its best interests has the option to do so, and is free to make this decision at any time until the effective date established by FASB for CECL implementation fiscal years beginning after December 15, 2022. The Board continues to believe, however, that requiring an affirmative opt-in from the majority of FICUs that require the phase-in would constitute an unnecessary administrative exercise.
Automatic implementation of the phasein by the NCUA will help to ensure its uniform application and that its benefits are provided to the greatest possible number of eligible FICUs.
Comment: Option for longer phase-in.
Two commenters suggested that the NCUA consider granting longer phase-in requests when a FICUs projected capital level after three years is expected to remain below normal. According to the commenters, such flexibility would allow FICUs to focus on restoring capital levels during an appropriately tailored phase-in timeframe rather than bracing for adverse supervisory consequences or the administrative burden of heightened examiner scrutiny.
NCUA Response: The Board believes that the three-year period will suffice to alleviate the most detrimental impacts on a FICUs capital ratios resulting from adoption of CECL. Further, and as noted
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