Home Mortgage Finance

Beginning December 15, 2019, many different loan institutions will have to start practicing current expected credit loss (CECL) accounting practices. This will be a fundamental change in the way that they do business, resulting in a huge impact on what you need to do to get a loan, the types of loans that will be available, and your terms.

What is CECL Anyway?

The Financial Accounting Standards Board established the CECL standards on June 16, 2016. The new standards require the lender to set money aside in their portfolio to cover defaulted loans based on the percent of those loans that normally fail. Currently, they do not have to set aside this money until it is probable or expected that you will fail to make your loan payments. Those institutions who must file paperwork with the United States Security Commission will be the first affected. A year later, public companies who loan money will be affected. Finally, two years later private companies who lend money will be affected. Congress passed the new law to hopefully stop another financial meltdown like what happened in 2008. Very similar laws are being passed globally. Under CECL you can still be individually reviewed in some circumstances. You will turn in paperwork to lenders who will assess the probability that you are a great borrower based on your past. If you want your loan to undergo individual review, then you can expect to have to prove that it is unlike any other loan that the lender currently has in their portfolio.

How Will This Affect You?

Lenders will be expected to group most loans together by type under this new plan. Then, they will be expected to foresee the total loss on that type of loan. In order to get individual reviews, you must prove that your loan does not fit into any of the common categories. Under CECL you can still be individually reviewed in some circumstances.

How Will CECL Affect Mortgages?

One of the largest impacts of CECL will come in the area of mortgages. Long-term mortgages will probably have a higher interest rate because lenders will have to set aside more money to cover these loans because it is very difficult to see what might happen 15 to 30 years from now. You may discover that you need better credit to qualify for these loans as lenders struggle to create a portfolio large enough to cover losses if you fail to pay the loan. Also, there is an increased cost to the variable and short-term mortgages, but not as much as with loans for a longer period. Short term and variable rate loan availability and interest rates may become more tightly tied to short-term projected unemployment rates and news from the United States Federal Reserve. Lenders will have to create a portfolio that is big enough to cover all types of losses should they occur. You can expect the lender to consider several different factors when they consider giving your young family a loan.

What Other Types of Loans May Be Affected?

You may see the impact of CECL any time that you borrow money. Another large area where you may see an impact is on auto loans. You can expect to see auto loan companies raise interest rates as they need to build a larger portfolio to cover expected losses. Autos and homes will not be the only thing impacted, however, as any company who lends money will have to come under the new law. Therefore, consumers who are buying their mobile devices on loans may also see an impact. As a young family, you may want to make major purchases before CECL starts or you may have to pay more for your item.

Loans may be harder to get and be costlier under CECL. You may also expect to see price increases across many different products as lenders struggle to raise the value of their portfolios. All the implications are not clear because this is a fundamental change that will affect everyone.

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