By Ray Birch
WASHINGTON—With debate swirling around whether any rules are even needed for incentive-based compensation plans in credit unions, one expert is predicting a wave of comment letters could push a final rule to at least a year away—and that’s only if the results of the November elections don’t table this matter for good.
As CUToday.info reported, last month the NCUA board put out for 60-day comment a proposal on incentive-based compensation arrangements for credit unions of $1 billion or more in assets, rules that have been in development since the financial crisis of nearly 15 years ago.
“Whether this is necessary or not, in the wake of the financial crisis, Congress determined there was some need to address executive compensation encouraging certain risk-taking behaviors,” said Brandy Bruyere, a partner at Honigman, LLP. “There are some good arguments that the kinds of incentive packages that led to the housing crisis are not as common in the market anymore, and rules went into effect over 10 years ago to limit loan originator compensation that incentivizes riskier mortgages.”
Fresh Ammunition
But that concern got some new air with the 2023 failure of Silicon Valley Bank and others, which were largely attributed to a lack of appropriate risk management, which Bruyere noted has given proponents of compensation rules fresh ammunition.
“In other words, even if the kinds of compensation that may have encouraged excessive risk taking pre-2008 are less common, perhaps there are new structures that are worth limiting or regulating in the market,” she said.
As other analysts have pointed out to CUToday.info, Bruyere said this proposal is another example where credit unions find themselves being lumped in with Wall Street financial institutions when it comes to regulation.
Credit unions, Bruyere reminded, are an industry “where the risk-taking options on the table are very different, as credit unions are limited in their investment authorities and held to general safety and soundness expectations in their business operations.”
The Timeline
Bruyere reminded the Trump administration did not prioritize finalizing this rule, and since a number of regulators must jointly finalize the rules, it has taken some time for the proposal to be re-published.
Now, Bruyere anticipates another factor to require even more time.
Brandy Bruyere
“I expect a significant number of comments from the various sectors of the financial services industry that are impacted will seek to more narrowly tailor a final rule,” she said. “This will take time for all of the regulators to consider and then work to find consensus around, which makes the finish line to a final rule likely at least 12 months ahead, if not longer. The results of the election this year will determine whether this keeps moving, or is returned to the back burner.”
The agencies first proposed such rules in 2011 with a follow-up in 2016. The newly issued proposal is a reissuance of the 2016 proposal for public comment:
Three Tiers
The proposal applies to three tiers of institution:
- FIs of $250 billion or more in assets (no credit unions in this category)
- FIs of $50 billion to $250 billion in assets (two CUs qualify, Navy Federal and State Employees’ CU in North Carolina
- FIs of $1 billion to $50 billion in assets (approximately 447 CUs qualify)
Six Factors
The proposal contains six factors for determining whether compensation is excessive or unreasonable or disproportionate to the value of services performed by a covered person and include:
- The combined value of all compensation and fees or benefits provided to the covered person
- The compensation history of the covered person and others with comparable expertise at the credit union
- The financial condition of the credit union
- Compensation practices at comparable credit unions, based on such factors as asset size, geographic location and the complexity of that credit union’s operations
- For post-employment benefits, the projected total cost and benefit to the credit union
- Any connection the covered person has with any fraudulent act or omission breach of trust or insider abuse with regard to that credit union