ALEXANDRIA, Va.–The newly reconstituted NCUA board has put out for comment Advanced Notice of Proposed Rulemaking (ANPR) on Compensation in Connection with Loans to Members.
At the conclusion of a 12-minute meeting, the board voted 3-0 to publish the ANPR and solicit feedback from credit unions and trade groups on updating the current prohibition on credit union employees receiving bonuses/variable pay related to loans.
The proposal is now out for 60-day comment.
The meeting was the first since 2015 to include its full complement of three members, and the first to be led by new NCUA Chairman Rodney Hood. It was the first board meeting to include new member Todd Harper. Former Chairman J. Mark McWatters participated as a board member.
According to NCUA staff presenting to the board, the decision to publish the ANPR rather than first publishing a rule and soliciting feedback is due to the complexity of the issue. The rule prohibiting loan-related compensation has been in place for more than 20 years staff said, and is “outdated, burdensome and at odds with industry standards.”
Inconstent Standards
NCUA staff said credit unions have complained the prohibition has also been subject to varying and inconsistent interpretations by agency examiners.
“Currently, the regulation establishes blanket prohibition (but)…provides a number of exceptions to the blanket prohibition,” the board was told. “However, these exceptions have maybe caused more confusion than anything.”
There is one exception to the current prohibition in NCUA’s current rules, which is to allow for compensation tied to overall performance by the credit union, but even that has led to confusion, staff said.
“Credit unions have consistently expressed frustration with determining what factors, such as loan factors such as aggregate loan growth, can be factored into payments based on a credit union's overall financial performance,” NCUA staff said. “This is proved difficult in the context of executive compensation.”
Questions From Harper
Following the staff presentation, Harper said he is “disappointed that nearly a decade after passage, federal regulators have failed to fully implicate section 956, which prohibits any type of incentive-based payment or instrument that encourage and permit risks by financial institutions with more than $1 billion in assets. I am hoping that sometime in the near future we will be able to address that issue.”
Harper then asked agency staff is there is a single industry standard or methodology for developing executive compensation plans and whether or not NCUA is using the ANPR to seek best practices.
“We are asking what best practices are for credit unions, especially in light of the fact that many credit unions are using executive compensation firms that put these plans together,” staff responded. “We are trying to get our arms around what these plans look like if there are multiple standards.”
Harper said he is particularly interested in how credit union compensation plans will compare to other financial institutions’, the limitations that will need to be in place--if any--to prevent individuals from being incentivized to take inappropriate risks, what authorities credit unions need to enable them to compete for talented executives, and to what extent should NCUA permit loan metrics such as loan volume to be part of compensation plans.
NASCUS Statement
Following the vote, NASCUS CEO Lucy Ito issued a statement saying, "NASCUS appreciates the Board for soliciting stakeholder feedback on this complex issue. We were pleased to provide background information to the agency ahead of the ANPR and will closely examine the ANPR to supply additional comments on behalf of the state system. We look forward to engaging in a thorough examination of compensation related to loans to members by the fully impaneled NCUA Board.”