By Ray Birch
BIRMINGHAM, Ala.—One former NCUA chairman is calling NCUA’s new incentive-based comp proposal “over-zealous,” and expects the movement to react with a number of negative comment letters.
As CUToday.info reported, on July 18 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.
“While some type of action on reporting of incentive-based compensation at all financial institutions was required by the Dodd-Frank Act, this proposed rule seems to be over-zealous—after 14-plus years of all financial regulators doing nothing to implement this section of a 2010 law based on a financial crisis that was four presidents ago,” said former NCUA Chairman Dennis Dollar. “The financial crisis is long over, and credit unions did not cause it.”
Today’s issues— cybersecurity, crypto and capital—are much different, pointed out Dollar.
“Even (Chris) Dodd and (Barney) Frank are no longer in Congress, and the examples cited when the NCUA board took action earlier in July to propose this overreaching rule were losses from 16 years ago, in 2008,” Dollar noted.
The Dollar Associates principal believes the NCUA board could have approved a less onerous proposal based on the not-for-profit structure of credit unions that did not put a federal agency in the middle of the compensation decisions that have “historically and appropriately” been made by the fiduciaries of a financial institution.
‘Disregard’ for Input?
“I expect the comment letters will be overwhelmingly negative, but I will not be surprised if the final rule largely disregards the comments and tracks this proposal pretty closely,” Dollar said. “It seems that the board has elected, after a decade and a half, to take a more intrusive approach and using as justification a 14-year-old law that required some action that has been inexplicably delayed since 2010. It did not require, from my reading, this level of regulatory agency intrusion in how a credit union compensates its executives as long as it is safe, sound and poses no risk to the credit union. It could probably use another decade or two of study, if it needs to be addressed at all.”
Dollar observed that even though NCUA’s latest proposed rule been issued in conjunction with other federal banking regulatory agencies, NCUA has often issued separate rules—even when required by law—that reflect the structural differences of a not-for-profit, member-owned financial cooperative from a for-profit, stockholder-owned bank.
A ’Classic Instance’
“It seems that this would have been a classic instance of an issue that would have justified a different approach from NCUA for not-for-profit credit unions, than latching on word-for-word to what the FDIC and OCC are proposing for for-profit banks,” Dollar said.
Dennis Dollar
“The provision of Dodd-Frank this regulation stems from centered on those for-profit banks that gave huge bonuses to executives that drove those institutions into insolvency back in 2008-10,” continued Dollar. “It would follow that any prohibition against incentive bonuses should then apply—certainly 15 years later—only to institutions with lower CAMELS ratings and troubled capital that could result in the same type of losses and financial disaster today. But this rule would apply to all financial institutions above $1 billion in assets from the strongest to the weakest.
“You would think regulators would want to see executives who build safer and sounder institutions rewarded and not penalized,” Dollar continued. “A better approach would not have this rule, if it must be enacted, only kick in when a credit union’s CAMELS rating falls below 3 and its net worth is no longer well-capitalized.”
As CUToday.info reported, 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 an 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