In the past couple of years, credit unions have been inundated with the onset of the new FASB CECL standard. Planning process elements include: developing an understanding of the new standard, engaging the necessary credit union team members, assessing the data requirements, deciding what model/methodology to incorporate, and implementation, to name a few. In this process, many credit unions will come across the decision to either use an in-house solution or to outsource.

During this process, the credit union may determine that it has the ability and resources to develop and/or run the CECL model in-house. The credit union could develop a spreadsheet that performs the calculation or purchase a software solution to maintain and manage in-house. However, does having the ability and resource necessarily mean that it is the best answer for the credit union? As with many in-house versus outsourcing decisions, there are numerous other considerations. Having the ability and resource may still not make it the best decision for the credit union.

In performing an assessment of in-house versus outsource, the credit union first needs to determine if it has the ability and available resources to run an in-house model. The ability should first be evaluated with respect to an understanding of the new FASB CECL standard and then with development and/or maintenance of a methodology that is the right fit for the credit union. The resource assessment should include available personnel capacity as well as the right expertise. In today’s world, most credit union management personnel wear several hats already, and finding the time to add another function could be a challenge. However, if it is determined that the credit union has the available resource and expertise to maintain an in-house CECL model/methodology, it does not necessarily mean it is the best course of action for the credit union.

Following an assessment of the ability and resource to perform the function, the next step should be to determine if the “all-in” cost of developing and/or running the model in-house is a lower cost than an outsourced solution. The “all-in” cost assessment should include a review of personnel allocation, software (if applicable), and data storage/maintenance at a minimum. In addition, consider time spent with auditors and regulatory examiners in explaining the solution. Remember the methodology, including setup variables such as forecast assumptions, need to be reasonable and supportable. Furthermore, the credit union will need to establish proper controls to ensure data integrity, modeling accuracy, and consistency. This may eventually include a back-testing process following a reasonable time period past the implementation date. All of these costs should be considered in this assessment relative to the cost of an outsourced solution. An outsourced solution may ultimately be more cost-effective with a vendor that provides a solution that is the right fit for the credit union, even if the credit union has the expertise and resource to run the model in-house.

In addition to the “all-in” cost assessment, consideration should also be given to other pros and cons of an in-house versus an outsourced solution. An in-house solution certainly gives the credit union more control over the methodology including timing consideration. However, this can be addressed with the right outsourced solution. There will be a cost with an outsourced solution, but this should be assessed in comparing the “all-in” costs of both options as explained above. The credit union should also consider that an outsourced vendor solution could provide additional value-added benefits such as more than one model for comparison purposes (i.e. parallel model runs), peer data comparisons, alternative/sensitivity testing scenarios and functionalities, auditor and regulatory support, well supported assumptions (examples include prepayment speeds and economic forecast assumptions), and prepackaged reports to name a few. In addition, since the credit union is capturing and analyzing loan data for CECL, the opportunities for further loan analysis to improve performance and risk management should be considered. This is becoming more common among all sizes of credit unions due to technological advances and many regulators are encouraging credit unions of all sizes to perform additional loan portfolio analysis.

Regardless of the in-house versus outsource solution decision, the credit union should have a good understanding of the new FASB CECL standard. However, deciding whether to perform the CECL analysis in-house or outsource to a third-party vendor should be thoroughly evaluated. The right outsourced solution for the credit union could make compliance with the new standard much easier than previously anticipated, more affordable/cost effective than an in-house solution, and provide value added benefits for the credit union.
For a broader assessment in finding the right CECL solution for your credit union, please see the Mark H. Smith, Inc. White Paper – CECL Model Selection: What’s the right solution for your credit union?