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

Published date23 April 2019
Citation84 FR 16796
Record Number2019-08166
SectionProposed rules
CourtNational Credit Union Administration
Federal Register, Volume 84 Issue 78 (Tuesday, April 23, 2019)
[Federal Register Volume 84, Number 78 (Tuesday, April 23, 2019)]
                [Proposed Rules]
                [Pages 16796-16797]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2019-08166]
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                Proposed Rules
                 Federal Register
                ________________________________________________________________________
                This section of the FEDERAL REGISTER contains notices to the public of
                the proposed issuance of rules and regulations. The purpose of these
                notices is to give interested persons an opportunity to participate in
                the rule making prior to the adoption of the final rules.
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                Federal Register / Vol. 84, No. 78 / Tuesday, April 23, 2019 /
                Proposed Rules
                [[Page 16796]]
                NATIONAL CREDIT UNION ADMINISTRATION
                12 CFR Part 701
                RIN 3133-AE97
                Compensation in Connection With Loans to Members and Lines of
                Credit to Members
                AGENCY: National Credit Union Administration (NCUA).
                ACTION: Advance notice of proposed rulemaking.
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                SUMMARY: The NCUA Board (Board) is issuing this advance notice of
                proposed rulemaking (ANPR) to solicit comments on ways to improve the
                agency's regulations limiting a credit union official's and employee's
                compensation in connection with loans to members and lines of credit to
                members. These regulations have generated confusion and are likely
                outdated, burdensome, and at odds with industry standards. The Board is
                particularly interested in obtaining commenter feedback on how it can
                provide flexibility with respect to senior executive compensation plans
                that incorporate lending as part of a broad and balanced set of
                organizational goals and performance measures.
                DATES: Comments must be received on or before June 24, 2019.
                ADDRESSES: You may submit written comments by any of the following
                methods (Please send comments by one method only):
                 Federal eRulemaking Portal: http://www.regulations.gov.
                Follow the instructions for submitting comments.
                 NCUA website: https://www.ncua.gov/regulation-supervision/rules-regulations/proposed-pending-and-recently-final-regulations.
                Follow the instructions for submitting comments.
                 Email: Address to [email protected]. Include ``[Your
                name]--Comments on Advance Notice of Proposed Rulemaking: Compensation
                in Connection with Loans to Members and Lines of Credit to Members'' in
                the email subject line.
                 Fax: (703) 518-6319. Use the subject line described above
                for email.
                 Mail: Address to Gerard Poliquin, Secretary of the Board,
                National Credit Union Administration, 1775 Duke Street, Alexandria,
                Virginia 22314-3428.
                 Hand Delivery/Courier: Same as mail address.
                 Public Inspection: You can view all public comments on the NCUA's
                website at https://www.ncua.gov/regulation-supervision/rules-regulations/proposed-pending-and-recently-final-regulations as
                submitted, except for those we cannot post for technical reasons. The
                NCUA will not edit or remove any identifying or contact information
                from the public comments submitted. You may inspect paper copies of
                comments in the NCUA's law library at 1775 Duke Street, Alexandria,
                Virginia 22314, by appointment weekdays between 9:00 a.m. and 3:00 p.m.
                To make an appointment, call (703) 518-6546, or send an email to
                [email protected].
                FOR FURTHER INFORMATION CONTACT: Thomas I. Zells, Staff Attorney,
                Office of General Counsel, at 1775 Duke Street, Alexandria, VA 22314 or
                telephone: (703) 548-2478.
                SUPPLEMENTARY INFORMATION:
                I. Background
                II. Current Standards and Request for Comment
                III. Legal Authority
                I. Background
                 In August 2017,\1\ the Board published and sought comment on the
                NCUA Regulatory Reform Task Force's (Task Force) first report on
                implementing the agency's regulatory reform agenda (Agenda). The Agenda
                identifies those regulations the Board intends to amend or repeal
                because they are outdated, ineffective, or excessively burdensome.\2\
                The Board published the Task Force's second and final report in
                December 2018.\3\ The final report contains the Task Force's updated
                recommendations and a refined blueprint for implementing the Agenda.
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                 \1\ 82 FR 39702 (Aug. 22, 2017).
                 \2\ This is consistent with the spirit of the President's
                regulatory reform agenda and Executive Order 13777. Although the
                NCUA, as an independent agency, is not required to comply with
                Executive Order 13777, the Board chose to comply with it in spirit
                and reviewed all of the NCUA's regulations to that end.
                 \3\ 83 FR 65926 (Dec. 21, 2018).
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                 One of the Agenda's recommendations specifically suggested that the
                Board modify its regulations to ``provide flexibility with respect to
                senior executive compensation plans that incorporate lending as part of
                a broad and balanced set of organizational goals and performance
                measures.'' The Board recognizes that the NCUA's regulations in this
                area, which were last updated over 20 years ago, are likely outdated,
                burdensome, and at odds with industry standards for senior executive
                compensation plans.\4\ As such, the Board is seeking comment on how to
                update the regulations so that credit unions can offer competitive
                compensation plans without encouraging inappropriate risks,
                incentivizing bad loans, or negatively effecting safety and soundness.
                While the Board is particularly interested in how the agency can update
                its regulations to provide flexibility with respect to senior executive
                compensation plans, it would also like comments on how the regulations
                governing compensation associated with lending can be modernized
                generally.
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                 \4\ 60 FR 51886 (Oct. 4, 1995).
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                II. Current Standards and Request for Comment
                 Currently, Sec. 701.21(c)(8)(i) of the NCUA's regulations
                establishes a blanket prohibition on the direct or indirect receipt of
                any commission, fee, or other compensation by any credit union official
                or employee, or an immediate family member of either, in connection
                with any loan made by their credit union.\5\ However, Sec.
                701.21(c)(8)(iii) carves out four exceptions to this blanket
                prohibition. Specifically, Sec. 701.21(c)(8)(iii) permits:
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                 \5\ 12 CFR 701.21(c)(8)(i).
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                 (A) Payment, by a federal credit union, of salary to employees;
                 (B) Payment, by a federal credit union, of an incentive or bonus to
                an employee based on the credit union's overall financial performance;
                 (C) Payment, by a federal credit union, of an incentive or bonus to
                an employee, other than a senior management employee, in connection
                with a loan or loans made by the credit union, provided that the board
                of directors of the credit union establishes written policies and
                internal controls in
                [[Page 16797]]
                connection with such incentive or bonus and monitors compliance with
                such policies and controls at least annually; and
                 (D) Receipt of compensation from a person outside a federal credit
                union by a volunteer official or non-senior-management employee of the
                credit union, or an immediate family member of a volunteer official or
                employee of the credit union, for a service or activity performed
                outside the credit union, provided that no referral has been made by
                the credit union or the official, employee, or family member.
                 In the past, credit unions have been confused about how to
                interpret the term ``overall financial performance'' in Sec.
                701.21(c)(8)(iii)(B). As noted, Sec. 701.21(c)(8) generally prohibits
                most credit union employees and officials from receiving compensation
                made ``in connection with any loan'' a credit union makes, but provides
                exceptions, including one that permits incentive compensation to
                employees based on the credit union's overall financial performance.
                Credit unions have expressed uncertainly about whether the NCUA permits
                loan metrics such as aggregate loan growth to be a factor in assessing
                overall financial performance. They also have asserted that the
                regulation is subject to varying interpretations and levels of
                enforcement across the NCUA's regions.
                 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.'' In addition, the Board specifically requests feedback
                addressing 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 Sec. 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?
                III. Legal Authority
                 The Board has issued this ANPR pursuant to its authority under the
                Federal Credit Union Act (FCU Act). Under the FCU Act, the NCUA is the
                chartering and supervisory authority for federal credit unions and the
                federal supervisory authority for federally insured credit unions
                (FICUs).\6\ The FCU Act grants NCUA a broad mandate to issue
                regulations governing both federal credit unions and all FICUs. Section
                120 of the FCU Act is a general grant of regulatory authority and
                authorizes the Board to prescribe rules and regulations for the
                administration of the FCU Act.\7\ Section 207 of the FCU Act is a
                specific grant of authority over share insurance coverage,
                conservatorships, and liquidations.\8\ Section 209 of the FCU Act is a
                plenary grant of regulatory authority to issue rules and regulations
                necessary or appropriate to carry out its role as share insurer for all
                FICUs.\9\ Accordingly, the FCU Act grants the Board broad rulemaking
                authority to ensure that the credit union industry and the NCUSIF
                remain safe and sound.
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                 \6\ 12 U.S.C. 1752-1775.
                 \7\ 12 U.S.C. 1766(a).
                 \8\ 12 U.S.C. 1787.
                 \9\ 12 U.S.C. 1789.
                 By the National Credit Union Administration Board on April 18,
                2019.
                Gerard Poliquin,
                Secretary of the Board.
                [FR Doc. 2019-08166 Filed 4-22-19; 8:45 am]
                BILLING CODE 7535-01-P
                

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