The clock is starting to tick for community banks that must adopt the CECL standard by January 1, 2023. It’s mid-August and many banks still have not picked a software or consulting partner to assist them on this journey. Banks in this situation have no reason to panic, as there is still sufficient time to execute a successful implementation by the deadline. However, it is critical that banks pick the right partner, which makes their due diligence a critical step in this process.

Banks with assets greater than $1 billion do not have the luxury of using the Federal Reserve’s SCALE model, which is basically a model that piggy backs on the reserves of other banks.  Most community banks are considering a software as a service (SaaS) solution to CECL. Unfortunately, SaaS solutions have a host of potential pitfalls that could leave your bank in a nightmare situation with little margin for error at this stage of the game.

This doesn’t mean that any consulting business is the right choice, either. Whether you are leaning toward the SaaS route, considering hiring a consultant, or both, here are 10 essential questions that you should ask before signing on the dotted line:

1. What method do you recommend for CECL for my bank? Why and what are the trade-offs I am making?
2. How will you help me derive critical assumptions and help me support and document those assumptions?
3. What documents do I need, how should I customize them to my bank, and how will you help me figure all this out?
4. I hear that the “forecast adjustment” is where all the action is for CECL. How will you help me figure out how to approach this and implement it?
5. Banks often get strange results the first few times around, with the results for certain pools seeming too high and others seeming too low. How will you help me work through that to figure out what adjustments I need to make?
6. Trick question: Is your model validated and/ or do I need a validation? (If a vendor tells you that their model is validated and that you do not need one, they are either ill-informed or disingenuous. The truth is that a software company CANNOT have its model validated. It can only have the model certified, which means that the code is working as intended. Only banks can have their model validated since each bank must configure the software service for its own specifications. A software company having a model certification does NOT free your bank from the need to have a model validation. And by the way, a model certification is only necessary if the software is a black box! Banks should always be wary of black box models, making sure they can re-create the calculation themselves without the efficiencies enabled by software.)
7. How should I expect my loan loss reserve to change under CECL? How will you help me reconcile and make sense of these changes relative to my incurred loss model calculation?
8. Is your goal to provide me with a model or provide me with a path to a successful implementation? If the latter, elaborate on how you will be doing this. (There is nothing wrong with a vendor only providing a model. The key is knowing what you are buying. Don’t let a sales rep trick you into thinking you have purchased a complete solution when all you are purchasing is a model, and you are on your own to figure out how to use the model to create a CECL plan.) 
9. How much of my reserve should I expect to be qual? What level of support do you provide for the qual portion of the calculation?
10. The most important question of all: How many consulting hours do you expect that I will need to successfully implement and defend my calculation using your model and what is the hourly rate? (Recognize that the annual subscription cost for the software is not your only cost. If you are like most banks, take whatever estimate you are given and triple it for your actual out-of-pocket expense.) 

If you are a community bank that has yet to decide on a partner for CECL, use these questions as a cheat sheet to whittle down your list and find the partner that is right for you. Remember, the key to most of these questions is how, not will.

By Adam Mustafa, Invictus Group CEO

Adam Mustafa is the Chief Executive Officer and Co-founder for Invictus Group. Invictus provides community banks with a complete CECL solution that combines consulting and technology, ensuring a successful implementation.