CECL implementation for consumer-based receivables - your questions answered

Key takeaways:

• Duration of the receivable is a key factor in methodology selection
• Segmentation is based on a group of assets with similar risk characteristics (by category, by age, by credit rating, etc.)
• Typically higher percentage of losses come from this segment, so documentation surrounding calculation and elections are important

Pros

• Often on the “simpler” side of the acceptable method scale
• Requires less historical data then longer-term counterparts
• Loss history is more readily available as more losses have typically occurred in these buckets

Cons

• Variety of products that have different risk levels
• Typically low balance categories thus calculation is often time consuming
• Challenge to incorporate forecasting into more basic models (aging, roll-rate, etc.)

Key takeaways:

• It is appropriate to group assets in a small pool with those in a larger pool if they still share similar risk characteristics
• Could they be assessed individually if they do not share any similar risk characteristics?

Key takeaways:

• Segmentation is key. Identify differentiating characteristics of credit cards: revolving vs transactors, new vs existing, credit score, etc.
• Hard to model term as no stated maturity date and expected renewals typically aren’t considered as agreement can be unconditionally cancellable by lender
• Look at historical data to determine balance attrition and timing of average life