Voting 3-0, NCUA Board issues ANPR on how to modernize credit union loan-related compensation rules

In its first open meeting featuring a full complement of three members since 2016, the NCUA Board on Thursday issued an advance notice of proposed rulemaking (ANPR) that seeks comments on how current rules could be updated to permit credit unions to offer competitive compensation plans without encouraging inappropriate risk in the lending operation.

The ANPR follows a final report issued in December by the NCUA Regulatory Reform Rask Force on rules the agency intends to amend or repeal because they are outdated, ineffective, or excessively burdensome (and consistent with the spirit of regulatory reform agenda released by President Donald Trump early in his term). The final report retained an earlier recommendation that the rules be revised to offer flexibility regarding senior executive compensation plans “that incorporate lending as part of a broad and balanced set of organizational goals and performance measures.” It also moved this issue from the Tier 2 list of recommendations to Tier 1, for which action was recommended by May of this year.

Issued Thursday for a 60-day comment period, the ANPR states that the board is specifically looking at how to update the regulations so credit unions can offer competitive compensation plans without encouraging inappropriate risks, incentivizing bad loans, or negatively effecting safety and soundness. The board also seeks input on how its regulations governing loan-related compensation can be modernized generally.

“Given the degree of confusion and uncertainty this regulation has caused, the Board seeks comment as to how the NCUA should modernize its regulations generally governing the compensation of credit union officials and employees in connection with loans made by credit unions and specifically with respect to defining ‘overall financial performance,’” the board added in its draft Federal Register notice on the ANPR.

Besides modernizing current rules, the ANPR also aimed at generating information for NCUA on current industry standards in this area. To that end, the board is asking for input on the following:

  • Is there a single industry standard or methodology for developing executive compensation plans? Are there multiple standards or methodologies for credit unions of different asset sizes?
  • Are the terms and conditions of executive compensation plans developed by credit unions themselves or are the plans crafted by third-party vendors?
  • What do these plans look like? Are there specific formulas employed to determine terms and conditions? If so, what are the formulas?
  • Is the current structure of § 701.21(c)(8), namely a broad prohibition with specific exceptions, the best format for regulating this area?
  • Do commenters prefer a bright line test for permissible compensation to regulations that make a more holistic evaluation of individual compensation plans and the incentives they provide? Is a bright line test even possible in this highly fact determinative area? If so, where is that line?
  • 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?
  • What limitations, if any, are necessary to prevent individuals from being incentivized to take inappropriate risks that endanger their credit unions? What authorities do credit unions need to enable them to compete for talented executives?
  • To what extent should the NCUA permit loan metrics, such as loan volume, to be a part of compensation plans? How would those metrics be incorporated into the overall plan?
  • 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?

The ANPR, titled Compensation in Connection with Loans to Members and Lines of Credit to Members, was released by the board – Chairman Rodney Hood, Board Member J. Mark McWatters, and Board Member Todd Harper – on a vote of 3-0.

Compensation in Connection with Loans to Members and Lines of Credit to Members

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