[Federal Register Volume 60, Number 192 (Wednesday, October 4, 1995)]
[Rules and Regulations]
[Pages 51886-51889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24688]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
Organization and Operations of Federal Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule
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SUMMARY: Currently, NCUA Rules and Regulations prohibit officials and
certain employees of federally insured credit unions from receiving
either incentive pay or outside compensation for certain activities
related to credit union lending. To reduce regulatory burden, the NCUA
Board is amending the regulations to give member-elected credit union
boards more flexibility to determine compensation policies, including
the use of incentive pay.
EFFECTIVE DATE: October 4, 1995.
ADDRESSES: National Credit Union Administration, 1775 Duke Street,
Alexandria, VA 22314-3428.
FOR FURTHER INFORMATION CONTACT: Lisa Henderson, Staff Attorney, (703)
518-6561, at the above address.
SUPPLEMENTARY INFORMATION:
Background
Section 701.21(c)(8) of the NCUA Rules and Regulations, 12 CFR
701.21(c)(8), prohibits federal credit unions from making a loan if,
either directly or indirectly, any commission, fee, or other
compensation is to be received by the credit union's directors,
committee members, senior management employees, loan officers, or any
immediate family members of such individuals, in connection with
underwriting, insuring, servicing, or collecting the loan. However,
non-commission salary may be paid to employees. As a condition of
federal insurance pursuant to Sec. 741.3(a) of the Regulations, 12 CFR
741.3(a), the prohibition applies to federally insured state-chartered
credit unions. As a consequence of the regulation, federally insured
credit unions may not provide incentive compensation to officials and
loan officers.
Noting that credit union management had become increasingly
interested in implementing lending-related incentive pay programs, the
NCUA Board, on March 9, 1994, issued a Request for Comment on whether
Sec. 701.21(c)(8) should be amended to permit loan officers and/or
senior management to receive incentive pay for underwriting and
insuring loans. 59 FR 11937 (March 15, 1994). A total of 252 comments
was received, 177 of which expressed support for allowing incentive pay
for loan officers.
On April 13, 1995, the Board issued a proposed regulation which
would amend Sec. 701.21(c)(8) to authorize lending-related compensation
in certain situations where it is currently prohibited. 60 FR 19690
(April 20, 1995). A total of 105 comments was received, 48 from federal
credit unions, 29 from state-chartered credit unions, 19 from national
and state credit union leagues, 3 from insurance companies, 2 from
state credit union regulators, and 1 each from a banking trade
association, Member of Congress, law firm, and individual.
Seventy-four commenters felt that the proposed regulation was too
restrictive. Seven commenters expressed unqualified support for the
proposed regulation and nine expressed qualified support. Seven
commenters stated that credit unions should not be permitted to pay
incentives, period. Six commenters urged that the current regulation be
retained, expressing concern that additional authority to pay
incentives could create safety and soundness problems.
Final Rule
In response to the comments, and to reduce regulatory burden, the
Board has determined to give member-elected boards of directors more
flexibility in determining compensation policies for lending-related
activities, including the use of incentive pay. Accordingly, the final
rule will allow federal credit unions to pay: (1) To any employee,
including a senior management employee, an incentive or bonus based on
the overall financial performance of the credit union; and (2) to any
employee, except a senior management employee, an incentive based on a
loan made by the credit union, provided that the board of the credit
union has established written policies and internal controls in
connection with the incentive or bonus and monitors compliance with
them at least annually. In addition, the final rule will allow a credit
union's volunteer officials and non senior management employees, and
family members of officials and all employees, to receive compensation
from an outside party for a service or activity performed outside the
credit union, provided that neither the credit union nor the official,
employee, or family member has ``steered'' anyone to the other party.
This will allow for ``incidental'' situations resulting from the fact
that volunteer officials, non senior management employees, such as
part-time employees, and family members of employees, may have jobs
[[Page 51887]]
outside the credit union in areas such as insurance or real estate,
where customers of the outside business choose to obtain loans from the
credit union.
The Board wishes to make clear that this action is not intended to
encourage lending-related incentives. In the preamble to the proposed
rule, the Board expressed some of its concerns regarding incentive pay,
particularly for lending activities. However, this liberalization and
deregulation reflects the recognition that there are good arguments and
strongly held beliefs on both sides of the incentive pay issue. It is
the Board's determination, in light of those considerations and the
comments received, that NCUA should structure a rule that involves
basic controls and safety and soundness standards and that, beyond
that, allows a member-elected board of directors to decide whether to
use incentives. Of course, NCUA reserves the right to take exception to
any compensation plan for safety and soundness reasons.
Analysis
The supplementary information section of the preamble stated that
the structure of the regulation had been changed to make it easier to
interpret and administer. The preamble noted that it had been difficult
to determine, in the current regulation, whether an activity was part
of ``underwriting, insuring, servicing, or collecting'' a loan. The
proposed regulation only required that an activity be ``in connection
with'' a loan. The preamble stated that NCUA would take a
reasonableness approach to that determination.
In an effort to illustrate the distinction between activities in
connection and not in connection with lending, the preamble provided
examples. The following were presented as being not in connection with
lending: (1) Purchasing loan application forms from a company owned by
an official; and (2) Financing a home (already) built by a construction
company owned by an official. In contrast, the following were presented
as being in connection with lending: (1) Obtaining a credit report from
a credit bureau owned by an official; and (2) Referring a member to a
construction company owned by an official to have a home built and
financing the construction of the home.
Eleven commenters stated that the phrase ``in connection with'' was
too broad or too vague. Two commenters stated that the examples
provided did little to clarify the scope of coverage of the regulation.
The Board continues to believe that the proposed prohibition would
be easier to administer than the current regulation and has therefore
retained it in the final rule. The Board acknowledges, however, that
the examples provided were not helpful. Rather than trying to determine
whether an activity is significant enough to be considered ``in
connection with'' a loan, the Board has concluded that any activity
that is directly linked to lending should be considered to be ``in
connection with'' a loan. Under that analysis, each of the four
examples discussed above involves an activity that is in connection
with a loan.-
Proposed paragraph (8)(ii) set forth definitions, only three of
which elicited comment. The proposed regulation defined
``compensation'' as including non monetary items, and a few commenters
stated that items of nominal value should be excluded. The Board
agrees, and has changed the definition accordingly. Items of nominal
value are those with a value so small as to make accounting for them
unreasonable or administratively impracticable. The board of directors
of a credit union may look to Internal Revenue Service law regarding
income and de minimus fringe benefits, 26 USC 132, for guidance in this
area.
The proposed regulation defined ``employee'' to include independent
contractor. The intent was to prevent credit unions from evading the
rule by calling an individual who is essentially an employee an
independent contractor. Several commenters objected to including
independent contractors in the definition of employee. They said that
it would have the effect of prohibiting any lending-related
compensation to any independent contractors or third parties. The Board
agrees and has deleted the term ``independent contractor'' from the
final rule. The Board notes, however, that NCUA will treat an
individual functioning as an employee as such for the purposes of
Sec. 701.21(c)(8).
The proposed regulation defined ``senior management employee'' as
it is defined elsewhere in the NCUA regulations (the chief executive
officer, any assistant chief executive officers, and the chief
financial officer) but added the phrase, ``and any other employee who
sets policy for the credit union.'' Several commenters objected to this
addition, arguing that it was too broad and muddied the distinction
between senior management and other employees. The Board agrees and has
deleted the phrase from the final rule.
Finally, in the final rule the Board has deleted the definition of
``workout loan'' as unnecessary and added a definition for ``volunteer
official.'' A volunteer official is a director or committee member who
is not compensated as such. Federal credit unions are permitted to
compensate one director solely for his or her service on the board, and
many state-chartered credit unions are permitted by state law to
compensate one or more directors for such service. Under the final
rule, a director so compensated would not be considered a volunteer
official.
Paragraph (8)(iii) of the proposed regulation set forth five
exceptions to the prohibition against lending-related compensation.
Exception (A), salary for employees, was met with universal approval
from the commenters. Exception (B) was an incentive or bonus to an
employee, including a senior management employee, based on the credit
unions overall financial performance. This codified a position that had
been taken in an opinion letter from NCUA and also was supported by the
commenters. Accordingly, exceptions (A) and (B) have been retained in
the final rule.
Exceptions (C), (D), and (E) authorized payment of an incentive to
an employee in connection with processing a loan, making a decision to
approve or disapprove a loan, and collecting a loan, respectively,
provided that no incentive or bonus was paid to a supervisor of the
employee, a senior management employee, or an immediate family member
of a supervisor or senior management employee. Exception (D)
additionally required that an incentive paid in connection with making
a loan decision not be based on the number or dollar amount of loans
approved and be structured in a manner that demonstrably protected
against an increase in problem loans.
Sixteen commenters said that non senior management should be
permitted to receive incentives. Many said that the prohibition against
payment of incentives to supervisors would disproportionately affect
large credit unions. They argued that lower level supervisors would be
caught between senior management, who receive bonuses based on overall
performance, and front-line employees, who are eligible for incentive
pay. In response to the comments, the Board has removed the prohibition
against supervisors receiving incentive pay from the final rule.
Thirty-eight commenters objected to the prohibition against basing
incentives on the number or dollar amount of loans approved. Most said
there were no other reasonable measures on which to base incentives for
loan officers. As
[[Page 51888]]
discussed above, the Board has determined to deregulate this issue and
allow credit unions to structure their own incentive plans. This is
provided for in Exception (C) in the final rule, which simply provides
that a federal credit union may pay an incentive or bonus to a non
senior management employee in connection with a loan made by the credit
union. This includes incentives for any activity connected with
lending, including processing and collecting loans, making credit
decisions, and selling credit life, credit disability, and mechanical
breakdown insurance. The only limitation is that the board of directors
of the credit union must have established written policies and internal
controls in connection with the incentive or bonus and must monitor
those policies and controls annually.
The final rule's requirement of annual monitoring of policies and
controls is a change from paragraph (8)(iv) of the proposed regulation,
which required quarterly monitoring. Thirteen commenters said that
quarterly review was too frequent, arguing that it would put the board
of the credit union in the role of micro-managing the credit union. In
response to the comments, the change was made. The Board notes,
however, that the supervisory committee, or internal auditor in larger
credit unions, should consider reviewing the effectiveness of incentive
pay policies and controls more frequently than annually.
Paragraph 8(iv) of the proposed rule also required that
documentation of the monitoring be made available to the supervisory
committee and NCUA. There was some confusion about this requirement.
Several commenters asked whether documentation should be made available
to examiners during exams or sent to NCUA. There also was a question as
to whether state-chartered credit unions should provide documentation
to the state regulator. The Board has deleted this requirement as
unnecessary. Under the final rule, a credit union wishing to provide
incentive pay must establish written policies. These are by definition
part of the books and records of the credit union, which are open to
the supervisory committee of the credit union and to NCUA examiners.
The preamble to the proposed rule discussed a number of policy
changes the regulation would make. It first noted that the current
regulation had been interpreted to permit a credit union official or
employee to receive compensation for acting as an agent in the sale of
property securing a loan made by a credit union, on the rationale that
listing or selling a property on which a loan is granted is not
included in underwriting, insuring, servicing, or collecting the loan.
Since listing or selling property financed by the credit union is ``in
connection with'' the loan, however, the proposed rule would prohibit
compensation for such activity.
The preamble also noted that the current regulation had been
interpreted to prohibit a credit union official or employee from, for
example, owning an insurance company that sells car insurance to
members who finance their cars at the credit union. An argument had
been made, however, that the regulatory language prohibited the receipt
of compensation in connection with insuring the loan but not in
connection with insuring collateral securing the loan. The preamble
stated that NCUA was concerned about the opportunity for credit union
officials and employees to steer members to a particular insurance
agency and that the proposed regulation therefore would prohibit all
officials and employees from receiving compensation for insuring
collateral securing a loan made by the credit union.
A number of commenters stated that the prohibition against
receiving compensation for outside activities might restrict members
from volunteering to serve on a credit unions board. The NCUA Board
shares that concern and has determined to permit volunteer officials
and non senior management employees of a federal credit union, and the
family members of officials and all employees, to receive compensation
from an outside party for an activity performed outside the credit
union, as long as neither the credit union nor the official, employee,
or family member refers any person to the other party. Thus, the
borrower's receipt of a loan from the credit union should be
unconnected to his or her participation in the outside activity of the
official, employee, or family member. The Board believes the
prohibition should remain in effect for senior management employees in
order to prevent situations where subordinate employees feel pressure
to make loans to customers of the outside business interest of the
senior management employee. The exception will ensure, at the same
time, that NCUA's rules do not interfere with the livelihoods of
volunteer officials, non senior management employees, such as part-time
employees, and the family members of officials and employees. This is
set forth in Exception (D) of the final rule. -
Regulatory Procedures
Regulatory Flexibility Act
The NCUA Board certifies that this rule will not have a significant
impact on a substantial number of small credit unions (those under $1
million in assets). Accordingly, a Regulatory Flexibility Analysis is
not required.
Paperwork Reduction Act
NCUA has determined that the requirement to establish a written
policy in connection with the payment of lending-related incentives
does constitute a collection of information under the Paperwork
Reduction Act. The Paperwork Reduction Act of 1995 and regulations of
the Office of Management and Budget (OMB) require that the public be
provided an opportunity to comment on information collection
requirements, including an agency's estimate of the burden of the
collection of information. NCUA estimates that no more than 1000
federally insured credit unions will seek to implement lending-related
incentive compensation policies. It is NCUA's view that the time a
credit union spends developing a responsible policy is not a burden
created by this regulation but rather is necessary to the safe and
sound payment of lending-related incentives. The paperwork burden
created by this rule is the requirement that such policy be put in
writing. NCUA estimates that it should take at most one hour to put an
incentive policy in written form. Therefore, 1000 total burden hours
are required to comply with the collection requirement.
The NCUA Board invites comment on: (1) Whether the collection of
information is necessary for the proper performance of the functions of
NCUA, including whether the information will have practical utility;
(2) The accuracy of NCUA's estimate of the burden of the collection of
information; (3) Ways to enhance the quality, utility, and clarity of
the information to be collected; and (4) Ways to minimize the burden of
the collection of information. Send comments to Suzanne Beauchesne,
National Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314-3428. Comments should be postmarked by December 4, 1995.
After 60 days, NCUA will submit the paperwork requirement to OMB
for review under the Paperwork Reduction Act and will publish a notice
to that effect in the Federal Register. NCUA will also publish a notice
in the Federal Register once OMB takes action on the submitted request.
Until NCUA receives an OMB control number indicating approval of the
requirement that
[[Page 51889]]
incentive policies be put in writing, a credit union is not required to
comply with that requirement.
Regulatory Burden--
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 requires the federal regulators of banks and
savings associations to make all regulations that impose new
requirements take effect on the first date of the calendar quarter
following publication of the rule unless good reason exists for some
other effective date. Although NCUA is not formally subject to this
requirement, Letter to Credit Unions #158 stated that the requirement
would be beneficial to credit unions and that NCUA planned to implement
it whenever practicable. NCUA believes that an immediate effective date
is appropriate since the final rule relieves a regulatory burden on
credit unions that wish to implement lending-related incentive
compensation programs by permitting them to do so. Although the final
rule also imposes a recordkeeping requirement, the primary effect of
the rule is to relieve regulatory burden.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. The preamble to the proposed rule
acknowledged that the proposed rule would impose some requirements on
state-chartered, federally insured credit unions but stated that any
effect on the distribution of power and responsibilities among the
various levels of government was justified by the potential risk to the
NCUSIF. Several commenters argued that no risk to the NCUSIF had been
demonstrated and that, for state-chartered credit unions, the matter
should be left to state regulators to determine.
The final rule imposes significantly less regulatory burden on
credit unions than either the proposed rule or the currently effective
rule. Therefore, the effect on state regulatory authority is
considerably diminished. The Board continues to believe, however, that
any remaining effect on that authority is justified by the potential
risk to the NCUSIF without such a rule.
The Board notes that this rule is not intended to expand the
authority of state-chartered credit unions. If state law imposes
greater restrictions on lending-related compensation than does this
rule, state-chartered credit unions must comply with state law.
List of Subjects in 12 CFR Part 701
Federal credit unions, Organization and operations.
By the National Credit Union Administration Board on September
28, 1995.
Becky Baker,
Secretary of the Board.
For the reasons set forth in the preamble, NCUA amends 12 CFR part
701 as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
1. The authority citation for part 701 continues to read as
follows:
Authority: 12 USC 1752(5), 1755, 1756, 1757, 1759, 1761a, 1761b,
1766, 1767, 1782, 1784, 1787, 1789, and Pub. L. 101-73. Section
701.6 is also authorized by 31 USC 3717. Section 701.31 is also
authorized by 15 USC 1601, et seq., 42 USC 1981, and 42 USC 3601-
3610. Section 701.35 is also authorized by 12 USC 4311-4312.
Sec. 701.21 [Amended]
2. Section 701.21(c)(8) is revised to read as follows:
* * * * *
(c) * * *
(8)(i) Except as otherwise provided herein, no official or employee
of a Federal credit union, or immediate family member of an official or
employee of a Federal credit union, may receive, directly or
indirectly, any commission, fee, or other compensation in connection
with any loan made by the credit union.
(ii) For the purposes of this section:
Compensation includes non monetary items, except those of nominal
value.
Immediate family member means a spouse or other family member
living in the same household.
Loan includes line of credit. -
Official means any member of the board of directors or a volunteer
committee.
Person means an individual or an organization.--- -
Senior management employee means the credit union's chief executive
officer (typically, this individual holds the title of President or
Treasurer/Manager), any assistant chief executive officers (e.g.,
Assistant President, Vice President, or Assistant Treasurer/Manager),
and the chief financial officer (Comptroller).
Volunteer official means an official of a credit union who does not
receive compensation from the credit union solely for his or her
service as an official.
(iii) This section does not prohibit:
(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 connection with such incentive or bonus and
monitors compliance with such policies and controls at least annually.
(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.
* * * * *
[FR Doc. 95-24688 Filed 10-3-95; 8:45 am]
BILLING CODE 7535-01-P
