Preparing for CECL Compliance: Validate Your Models and Software

The previous post about preparing for CECL compliance looked at how to assess data, human, credit management, and technology resource capabilities and needs. It’s a critical step that documents how your institution collects, stores, measures, and manages loan portfolio data, and includes a review of future requirements, warehousing and automation capabilities, and probable risks in your loan portfolio.

The insights you establish during this phase should inform the composition of your CECL steering committee. This group represents team members from across the institution and management team. They exist to liaise with their respective departments to keep information about all details of your compliance efforts flowing in both directions. In addition to identifying the human resources, you also will earmark the infrastructure, architecture, and applications you need to centralize data management.

Provided your institution is following a careful implementation process, you have:

1. Analyzed the concentration exposure risks within your loan portfolio
2. Clarified the credit quality indicators (CQIs)
3. Selected the appropriate CECL model(s) for each loan pool
4. Assessed your resource needs and capabilities

It’s likely that you also will have identified your software provider at this point, and put in place benchmarks and checkpoints necessary to evaluate its ongoing efficacy and ROI.

At this point, you will begin the validation process. During this phase, you will be tasked with confirming that your chosen CECL model(s) and software selections are appropriate and reliable to your loan portfolio, risk factors, governance, and data management requirements.

Performing CECL Model Simulations

You will run and test your CECL models to confirm that they are performing as expected, and that your institution is positioned to capture the most relevant, useful loan portfolio data.

A model can be deemed ‘reasonable’ only once it has been researched, calculated, and tested fully with respect to past performance and future calculations. Data should be qualified as accurate and trustworthy. You need to enlist a qualified, independent third party and any validation efforts should occur across individual business units to support shared accountability for compliance.

Evaluating Software

The most important thing you are looking for your software to do is to ensure data integrity. The intent is to affirm that you can employ reliable, thorough insights to your sound judgment. In addition, you will want to assess that the solution is continually producing the benefits necessary to justify the investment.

In both cases, validation is an ongoing endeavor, not a one-and-done effort. Engage your CECL steering committee in a regular cadence of evaluating and documenting performance, risk, CQI, and other key factors in the loan portfolio to stay ahead of any potential issues with the model or technology in place.

As we have noted in this series, FASB set required CECL implementation dates several years out. Compliance demands a long-term, multi-faceted approach, which your institution should have underway. Next week, we will conclude the CECL series with an action plan to help you prepare formal policies and procedures, and set your implementation timeline. We encourage you to review the first six steps and get in touch with a member of our team with any questions you have at this point in the lead up to compliance.

HORNE has offered a series of resources, including a webinar and visual eight step timeline with the intent to educate you about the CECL standard, its impact on the banking industry, and what you need to do to prepare for the changes. Over the past month, we have dedicated this blog to looking more closely at each of the individual steps. These are posts you will want to bookmark for reference so you can refer to the information as you get farther into the process.

Remember that you can access our complimentary one-hour webinar anytime for more help with the steps and tactics involved in working toward compliance. Watch the CECL: Turn Compliance into Opportunity on demand.

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