Keeping up with CECL can be fun and challenging, or it can be like pulling off a scab slowly not knowing what you’ll find underneath.
We prefer fun and challenging.
P360 was driven to simplify expected loss almost 8 years ago with a loan level, forward-looking model. This type of live modeling has proven to help credit unions and other lenders migrate from their historic ALLL methodologies to a CECL solution. Regression analysis with discounted cash flows at the loan level address loans in all phases of their life cycle. Individual charge off, recovery, impairment, delinquency and credit score data helps fine-tune expected loss by institution, and supports all CECL methods.
Here’s how we look at modeling for expected loss: Mosaic is a live, loan level model that provides a number of risk outputs for each loan, including Probability of Default (PD), Loss Severity (LS), Life of Loan, Unexpected Loss and Loan Grading. The model incorporates a number of inputs including external data sources which address Q&E factors. The power and simplicity with this type of modeling provides flexibility to Portfolio Managers to explore unlimited methodologies.
We have had many discussions with CFO’s and other lending executives who plan on utilizing multiple methods, or at least explore multiple methods in order to fine tune their ALLL. Common methodologies as discussed in the industry include: Discounted Cash Flow, Average Charge Off, Vintage and other Static Pool Analysis, Roll rate, Probability of Default and Regression Analysis.
7 Models - FASB/AICPA
One Model. 7 Methods. Mosaic seems to simplify the process by providing a model that delivers Expected Loss, plus additional loan level risk data giving portfolio managers the option to explore reporting methods. Remember to aggregate and warehouse your loan information. All methods rely on secure and accurate data.