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CECL stands for current expected credit loss. Banks have been using this system for calculating risk allowances for several years. The CECL standards are about to change on January 1, 2020. While banks are getting ready and updating their systems in order to accommodate the changes, it is also important for prospective borrowers to know about the changes. Low-income and single-income households could be disproportionately affected by the updated standards.
What is CECL?
In essence, CECL is a set of accounting standards that American banks must follow. When borrowers take out a loan, banks calculate the risk of the borrower defaulting. Those loss calculation standards are being updated as a part of CECL. Standardizing these calculations should lower the risk of banks going bankrupt or needing a bailout from the government, which was a large part of the 2007-08 “great recession.”
What’s the Same?
The general process of applying for a loan will stay the same. You still need to provide documentation such as proof of your income. You will have a credit check performed by the lender. Individual review still applies in CECL, so if you have special circumstances, they can take a look at it. For now, the best thing to do is save money. This ensures that you have enough cash on hand to pay for the origination fees and other expenses that are associated with taking out a mortgage or similar type of loan.
What Changes?
There will be some changes when you go to a bank and apply for a loan. The biggest change is that underwriting your loan will take more time. As banks become more familiar with the CECL implementation, the increased processing time might decrease a little. Another big change that you need to be aware of is that loan origination fees will increase at most lending institutions. If you have fair credit, your loan might be denied. Some financial experts believe that CECL could cause some lenders to only give loans to the most qualified applicants.
Now that you are more familiar with CECL, you can take action in order to improve your chances of getting the loan you need. Or maybe now that you’ve had a chance to think it over, maybe you don’t need to buy that expensive thing after all. But if you’re planning to buy a home next year, now is the time to make sure that your credit report is accurate. Don’t forget to save money for the loan’s fees, too!
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