CRE Lenders Grapple with Latest FASB Rules
March 10, 2020 | Beth Mattson-Teig | National Real Estate Investor
Nearly a dozen years after the financial crisis, commercial real estate lenders are facing another new rule that aims to increase transparency and reduce risk in lending practices. But however well-intentioned the new rule might be, many lenders are worried about the added operational burden and potential ripple effects on borrowers and lending practices.
The Financial Accounting Standards Board (FASB) introduced the current expected credit losses methodology (CECL) for estimating allowances for credit losses back in 2016 to come into force this year. The new rules officially went into effect in January for publicly traded SEC filers, including major banks, publicly traded life insurance companies, mortgage REITs and the GSEs. Non-SEC filers have three more years to get their ducks in a row and processes in place to comply with their January 2023 implementation date.
Notably, CECL’s expected loss methodology requires institutions using Generally Accepted Accounting Principles (GAAP) to calculate and recognize the lifetime expected loss of the loan at origination. Prior to this update, there was an incurred loss methodology, meaning that institutions would recognize that loss on their balance sheet only when that loss occurred.
