Current Expected Credit Losses, or CECL, is a standard upon which all lending institutions must abide. The standard is about to change again on January 1, 2020. The goal of the upcoming change is to provide an increase in transparency for credit risk. Institutions will need to provide the Securities and Exchange Commission (SEC) with more detailed financial statement disclosures. This will affect anyone who plans to take out a loan in 2020.
CECL is a New Way to Evaluate People for Loans
CECL is a new way of evaluating people who are applying for big loans, including mortgages. Because of the housing and financial crisis in 2007, which lead to the Great Recession, the government sought to put stricter standards in place about who could qualify to borrow money. During that time, people took out loans that they could not afford. Flexible interest rates caused increases in mortgage payments, and many borrowers defaulted. The foreclosure rate skyrocketed, and many banks had to be bailed out. In a post-CECL world, individual review still applies but only under certain circumstances. The increase in time and financial burden on banks to impose these standards could mean more banking consolidations.
What Does This Mean for Loans?
Most families and heads of households get their loans from a small community bank or a local branch of a regional bank. These new standards could be burdensome for the banks. The process of securing the loan could take more time. Meanwhile, any time-dependent purchases such buying as a house could be negatively affected. The costs to banks will also increase, which costs will in turn get passed on to you when you apply for a loan. The increased fees could be an expense you did not expect, and that could impact the amount that you are able to borrow. As a result, you might have to wait longer in order to save up the money to pay for those fees as well as the down payment.
Now that you have more information about the changes that are coming for 2020, you can plan ahead. You might want to get your loan in 2019 if you want to avoid these changes for new origination of loans. If you feel like these changes could be helpful for you, you might want to postpone your purchase of a home or other loan type until 2020 when the new standard will be in place.
