Summary: Part 701.21(c)(8) & § 741.203(a)
Compensation in Connection
with Loans to Members and Lines of Credit to Members

Prepared by NASCUS Legislative & Regulatory Affairs Department
April 2019

NCUA has issued an advance notice of proposed rulemaking (ANPR) regarding its limitations on federally insured credit union (FICU) officials’ and employees’ compensation in connection with loans to members and lines of credit to members incorporated in Part 701.21(c)(8). These incentive-based compensation prohibitions apply to federally insured state credit unions (FISCUs) by reference in Part 741.203(a).

NCUA is seeking input on how it may provide flexibility with respect to senior executive compensation plans that incorporate lending as part of a set of organizational goals and performance measures. NCUA now views these limitations on executive compensation as out-of-step with common industry practice. NCUA seeks to update the rules to allow credit unions to offer competitive compensation without encouraging inappropriate risks, incentivizing bad loans, or negatively effecting safety and soundness.

NCUA’s proposed rule may be read here. Comments are due by June 24 (60 days after publication in the Federal Register).
 
Summary

Prohibited Fees & Commissions & Incentive-Based Compensation

Part 701.21(c)(8)(i) of the NCUA’s regulations prohibits the direct or indirect receipt of any commission, fee, or other compensation by any credit union official or employee (or their immediate family members1) in connection with any loan made by their credit union. There are 4 exceptions to this prohibition:

  1. Payment of salary to employees;
  2. Payment of incentives/bonuses based on the credit union's financial performance;
  3. Payment of employee incentives/bonuses (other than a senior management employee) in connection with loans made by the credit union, provided that the credit union board establishes written policies and internal controls related to the bonus program and monitors compliance with such policies annually; and
  4. Receipt of “outside” compensation by a credit union “volunteer official”2 or non-senior-management employee (or their immediate family members) for a service or activity performed outside of the credit union, provided that no referral has been made by the credit union or the official, employee, or family member.

See § 701.21(c)(8)(iii)

Part 741.203(a) and FISCUs

NCUA’s limitation on incentive compensation tied to loans covers FISCUs because it is specifically cited in Part 741.203(a), which reads in relevant part that “[a]ny credit union which is insured pursuant to title II of the Act must… [a]dhere to the requirements stated in part 723 of this chapter concerning commercial lending and member business loans, §701.21(c)(8) of this chapter concerning prohibited fees, and §701.21(d)(5) of this chapter concerning non-preferential loans…”

However, Part 741.203(a) also contains an exemption for FISCUs in states where the state has promulgated substantially similar rules and those state specific rules have been approved by the NCUA board. In those cases, NCUA’s loan based incentive compensation limitation does not apply (the state limitations would apply) and naturally, any changes to NCUA’s rule would not apply going forward.

NCUA’s Loan-Based Incentive Based Compensation Prohibitions Cause Confusion

NCUA acknowledges in the ANPR that its rule has confused credit unions with respect to interpreting the exception to the loan-based incentive compensation related to “overall financial performance” in § 701.21(c)(8)(iii)(B).  Credit unions are unsure whether loan metrics such as aggregate loan growth may be a factor in assessing overall financial performance for determining incentive-based compensation.

NCUA Seeks Comment

  1. How might NCUA modernize its rules governing the compensation of credit union officials and employees in connection with loans made by credit unions with respect to defining “overall financial performance?”
  2. Is there a single industry standard/methodology for developing executive compensation plans or are there multiple standards/methodologies for credit unions of different asset sizes?
  3. Are the terms and conditions of executive compensation plans developed by credit unions themselves or are the plans crafted by third-party vendors?
  4. What do executive compensation plans “look like” in credit unions today?
  5. Is the current structure of § 701.21(c)(8), namely a broad prohibition with specific exceptions, the best format for regulating executive compensation?
  6. Would credit unions rather have a bright line rule for incentive-based compensation tied to loans or do credit unions prefer a more nuanced rule tha looks at individual compensation plans?
  7. Is a bright line test even possible in this area? If so, where is that line?
  8. Are current credit union compensation plans similar to, and competitive with, those provided at other financial institutions? If not, how do they differ and what, if anything, in the NCUA’s regulations contributes to those differences?
  9. What limitations, if any, are necessary to prevent individuals from being incentivized to take inappropriate risks that endanger their credit unions?
  10. What powers do credit unions need to compete for talented executives?
  11. To what extent should the NCUA permit loan metrics, such as loan volume, to be a part of compensation plans? How would metrics be incorporated into the overall plan?
  12. Should the NCUA provide additional requirements for compensation related to a line of business that is new for the credit union or one in which the credit union lacks substantial experience or expertise?

NASCUS Notes:

  1. As a point of reference, see FDIC incentive-based compensation guidance: https://www.fdic.gov/regulations/laws/rules/5000-5350.html.
  2. The OCC regulation:
    1. § 160.130 Prohibition on loan procurement fees. If you are a director, officer, or other natural person having the power to direct the management or policies of a Federal savings association, you must not receive, directly or indirectly, any commission, fee, or other compensation in connection with the procurement of any loan made by the savings association or a subsidiary of the savings association.
  3. Consider whether NCUA should be limiting compensation by regulation at all.
  4. If NCUA is going to limit compensation, should those rules be co-located with the loan rules, as they are now, are located somewhere else?

NOTES:

1. Defined as a spouse or other family member living in the same household.

2. While the rule applies to FISCUs, note the use of the term “volunteer” here with respect to FCU boards. It is unclear in the rule whether this would prohibit compensated directors from using this exception.