Summary: NCUA July Board Meeting
The NCUA Board met July 18, 2024 to discuss three items:
- Proposed Rule – Succession Planning under Parts 701 and 741 of NCUA’s Rules and Regulations;
- Proposed Rule – Incentive-Based Compensation Arrangements under Parts 741 and 751; and
- Federal Credit Union Loan Interest Rate Ceiling
The meeting opened with the acknowledgment of four new credit union charters, two of which are the first under the NCUA’s new provisional chartering program.
Succession Planning
The Board approved, 2 to 1 vote, with Vice Chair Hauptman voting against, a proposed rule under Part 701 and 741 that would require federally insured credit unions (FICUs), including federally insured state-chartered credit unions (FISCUs) boards of directors to establish succession planning processes for key positions.
The key provision of the proposed rule would require that a credit union board of directors establish a written succession plan addressing specified positions and at a minimum, the plan would be required to cover:
- The board of directors
- The supervisory committee
- Management officials and assistant management officials, if the credit union has provided for such positions in its bylaws; and
- Any other credit union personnel the board of directors deems critical given the credit union’s size, complexity, or risk of operations.
- The plan would also be required to address the members of the credit committee and loan officers, where such officials are involved in the daily review of loans.
The board would be required to review the plan in accordance with a schedule it establishes, but not less than annually. In addition, the plan would be required to address the credit union’s strategy for recruiting candidates with the potential to assume each position. This strategy must consider how the selection and diversity among employees covered by the succession plan collectively and individually promotes the safe and sound operation of the credit union. The proposal indicates that each plan will be consistent with the size and complexity of the credit union.
The proposed rule also includes a sample template for a succession plan to assist credit unions, particularly smaller credit unions, in development of their plan.
Chair Harper and Board Member Otsuka stated they wish to hear from the industry on the proposal and are very open to changes to the proposal. Additionally, each board member expressed they do not wish to continue to see consolidation in the industry and each recognizes the need to maintain small credit unions serving niche markets. Comments on the proposed rule will be due 60-days upon publication in the Federal Register.
Incentive Based Compensation
The second item for discussion on the agenda was a proposed rule addressing Incentive Based Compensation. The proposed rule was approved in by a 2 to 1 vote of the NCUA Board, with Vice Chair Hauptman voting against the proposed rule.
Section 956 requires the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Securities and Exchange Commission (SEC), and Federal Housing Finance Agency (FHFA) (collectively “the Agencies”) to jointly prescribe regulations or guidelines prohibiting incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss.
Under the proposed regulation, covered institutions would be divided into three categories based on assets: $250 billion and above (Level 1); $50 billion to $250 billion (Level 2), and $1 billion to $50 billion (Level 3). Much of the proposed rule addresses requirements for the structure of incentive-based compensation arrangements for senior executive officers and significant risk-takers at Level 1 and Level 2 institutions. In addition, all covered institutions must annually create and retain for 7 years records documenting the structure of incentive-based compensation arrangements and receive appropriate oversight of the institution’s incentive-based compensation arrangements from its board of directors.
At this time, approximately 10 percent of credit unions would be impacted by the proposed rule based on asset size.
To date, the Agencies have issued two proposed rules to implement Section 956, neither of which were finalized
The proposed rule is being jointly issued by the OCC, FDIC, NCUA, and FHFA. The proposed rule would not be published in the Federal Register until such time as the FRB and the SEC are ready to proceed with the rulemaking. Public comments, however, would be accepted prior to publication in the Federal Register.
Federal Credit Union Loan Interest Rate Ceiling
The final item on the agenda addressed the Federal Credit Union Loan Interest Rate Ceiling.
The Federal Credit Union Act limits the interest rate federal credit unions can charge on loans to 15 percent,1 and provides the NCUA Board with the ability to set a higher interest rate if “after consultation with the appropriate committees of the Congress, the Department of Treasury, and the Federal financial institution regulatory agencies, an interest rate ceiling exceeding such 15 per centum per annum rate, for periods not to exceed 18 months.
As required, the NCUA sent consultation letters in April 2024 to the appropriate committees of the Congress, the Department of Treasury, and the Federal financial institution regulatory agencies. To date, the NCUA did not receive any responses.
If the Board did not approve an extension of the temporary maximum loan interest rate ceiling of 18 percent for an additional 18-month period, as approved in 2023, the maximum interest rate for federal credit unions would default to 15 percent as required under the Federal Credit Union Act as of September 11, 2024.
The Board subsequently approved the temporary rate ceiling of 18 percent for an additional 18-month period, effective September 11, 2024, through March 10, 2026, as recommended by NCUA staff.