While the banking industry gets to grips with a controversial new accounting standard, one congressman is on a mission to neutralize the rule with legislation.
Rep. Blaine Luetkemeyer, R-Mo.
Source: U.S. House of Representatives
Rep. Blaine Luetkemeyer, R-Mo., wants to kill the current expected credit loss standard, known as CECL, before it takes effect for many institutions in early 2020.
In an interview, the five-term congressman said he is intent on building a portfolio of evidence about how CECL will affect parts of the economy as it will likely require banks, insurers and other lenders to stash billions in reserves.
"When all of this information comes in, it's going to amount to a huge cost to the consumer, it's going to be a huge hit to the economy and I think that's when Financial Accounting Standards Board is going to have to rethink what they're doing," Luetkemeyer said.
Luetkemeyer, the ranking member of the Subcommittee on Consumer Protection and Financial Institutions of the House Financial Services Committee, introduced a bill late in the last congressional session that would have prohibited federal financial regulators from enforcing the new standard. The bill expired before it could move through the legislative process.
The congressman said he wants to wait to reintroduce the bill until he gathers enough research to prove to committee chair Rep. Maxine Waters, D-Calif., and the rest of the panel how detrimental the rule will be. Luetkemeyer said the chair of the subcommittee, Rep. Gregory Meeks, D-N.Y., has signaled support for his CECL efforts.
CECL aims to speed up the recognition of losses, requiring institutions to set aside reserves for lifetime expected losses on loans, available-for-sale debt securities and other amortized assets and recognize them at origination.
The Financial Accounting Standards Board, or FASB, which finalized the standard in 2016, said the new rule would provide investors with greater insight into potential losses on bank balance sheets. FASB finalized the rule after years of hearings, industry input and research.
During the rulemaking process, FASB said that many banks were overwhelmed with impaired loans following the financial crisis and were forced to quickly increase reserves. The organization argued that reserve levels are too light in positive economic times and then swing to being painfully heavy during downturns under the current, incurred-loss model. CECL aims to eliminate those swings by forcing institutions to reserve for loans at the beginning.
Yet Luetkemeyer criticized FASB, saying the organization failed to consider the downstream effects of the rule on various industries.
"I'm just asking for FASB to actually do their job, which is to do due diligence before they issue a rule like that," Luetkemeyer said. "Which they did not do."
FASB declined to comment.
Luetkemeyer said the accounting change will do more harm than good as industries pass the cost of reserving onto consumers, affecting the broader economy as financial institutions book capital reserves for their loans.
The congressman has held a hearing, hosted meetings and fielded dozens of phone calls with credit card companies, banks, credit unions, financial regulators and other lending institutions.
While he said most companies have pledged to supply him with their internal estimates, one credit card company that Luetkemeyer declined to name said it will need to "build reserves well into the billions," which will almost certainly be pushed onto consumers, according to the congressman.
Luetkemeyer is also gathering evidence about the potential impact of CECL on government-sponsored enterprises Freddie Mac and Fannie Mae. According to some analysts' projections, the GSEs may need to reserve for cumulative losses of about $10 billion to $12 billion collectively; Luetkemeyer said he has heard a range from $50 billion to $100 billion.
In February Luetkemeyer sent a letter to Joseph Otting, then the acting director of the Federal Housing Finance Agency, requesting that information. The congressman said Otting told him over the phone on Friday, March 29, that the agency would deliver the information "later on this year."
"I told him that was unacceptable," Luetkemeyer said.
"We need something quickly so we know if we have a problem or not," the congressman said. "Waiting until the end of the year ... it allows [CECL] to be implemented, and then you have to study it after the fact, which is not the way to do things."
If Luetkemeyer cannot compile a report in time, he may introduce another bill that would delay CECL's implementation for one or two years in order to give FASB, Congress and industry stakeholders time to study its broad effects.
"When we put together the information, it lends itself to showing we have a reason for doing this," Luetkemeyer said. "That we're not whistling in the wind here, we really have a serious situation that needs to be addressed."