New Accounting Standards Might Affect Your Ability to Get a Loan
Are you planning on applying for a loan in the next couple of years? If so, you had better take some measures to work on improving your credit score. There are some new accounting standards coming down the pike that could have the potential to negatively affect whether lenders are willing to lend you the money you need.
However, if you are aware of these new standards, it will definitely help you to be more prepared. Being aware of these new standards and some of the things that caused these standards to come about will prevent you from potentially being blindsided when you talk to your loan officer in the future. Consider the following events as a start.
The 2008 Financial Crisis
The 2008 Financial Crisis is one of the reasons for the new regulations as well as one of the reasons why banks are a bit gun-shy to lend out money now. In a sense, it is a double whammy; banks would be hesitant to make loans even without this crisis hanging over their heads simply because of the new laws. Of course, a little understanding of the contributing factors of this crisis are in order.
In a nutshell, this economic crisis was caused by deregulation in the financial and banking industry. After this occurred, banks decided to trade in hedge funds that were loaded with derivatives. The banks also demanded that more mortgages be made in order to finance the sale of these derivatives, and that resulted in trillions of dollars loaned out in interest-only subprime mortgages. As a result, many individuals found themselves in “underwater” mortgages, meaning they could not afford their payments but could not sell their home either. This led to the great recession of 2008.
What is CECL?
The CECL is another set of designations that could have an effect on the lending practices of financial institutions. CECL stands for Current Expected Credit Loss. Basically, this means that lenders should be holding more in reserve to cover losses on bad debt. This should (in theory) help mitigate the risk of another financial crisis. CECL is currently in the beginning stages, and many banking organizations are working diligently to meet the CECL release date of December 2019. Throughout the years, banks have made a regular practice of estimating losses anyway. They have always called this practice the Allowance for Loan and Lease Losses model, or ALLL. Of course, with implementation of the CECL, many financial institutions are going to revisit how they approach this model.
What This Means for You
Of course, the one thing you would want to know is if the implementation of these new CECL policies are going to make it easier or harder for you to obtain the credit and loans you desire. You might still be able to get the loans you need, but the terms of the note might be significantly reduced. First of all, financial institutions are required to post loss estimates, and this would have the greatest effect on longer-term loans such as mortgages and student loans. This means that financial institutions might emphasize shorter terms for these larger loans.
Moreover, there will probably still be lenders who will engage in high-risk loans, however, the cost to the lender of offering this loan will be higher because the risk of default is greater. Thus, available credit on risky loans might be reduced as a result of the 2008 Financial Crisis. Basically, this means that lenders should be holding more in reserve to cover losses on bad debt. This should in theory help mitigate the risk of another financial crisis.
The new rules of the CECL will behoove everyone to do their homework so they can remain compliant when extending or receiving credit. Consumers had better get ready for banks trying to prevent another economic collapse such as 2008. There very well could be less credit available; time will tell.
For all your financial needs, let JA Financial Group help!