[Federal Register Volume 59, Number 50 (Tuesday, March 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5949]


[[Page Unknown]]

[Federal Register: March 15, 1994]


                                                    VOL. 59, NO. 50

                                            Tuesday, March 15, 1994
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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

 

Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration.

ACTION: Request for comment.

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SUMMARY: Under National Credit Union Administration (NCUA) Rules and 
Regulations, federally insured credit unions are prohibited from 
providing incentive pay plans to certain employees related to the 
credit union's lending activities. NCUA is soliciting public comment on 
whether this prohibition should be changed. NCUA also invites comment 
on other changes to its lending regulations that would facilitate 
increased lending and improved loan-to-share ratios in credit unions. 
Information from interested parties will assist NCUA in determining 
whether to issue proposed amendments to its lending regulations.

DATES: Comments must be postmarked by May 16, 1994.

ADDRESSES: Send comments to Becky Baker, Secretary of the Board, 
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 any loan or 
extending any line of credit if, either directly or indirectly, and 
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 or line of credit. For the purposes of the provision, ``senior 
management employees'' means the credit union's chief executive 
officer, any assistant chief executive officers, and the chief 
financial officer, and ``immediate family member'' means a spouse or 
other family member living in the same household. The regulation does 
not restrict the payment of non-commission salary to employees. Through 
the insurance provisions at Sec. 741.3(a) of the Regulations, 12 CFR 
741.3(a), the Sec. 701.21(c)(8) prohibition applies to federally 
insured state-chartered credit unions.
    The purpose of Sec. 701.21(c)(8) is to ensure that an individual 
who is in a position of authority in a credit union does not put self-
interest ahead of the credit union's interest in making good loans and 
providing good service to its members. The provision prohibits 
compensation from third parties and from the credit union itself, in 
the form of commissions, incentive pay, or bonuses.
    Under the regulation, a ``loan officer'' is an individual who has 
the authority to approve a loan. A loan officer may or may not be 
involved in taking and processing loan applications. ``Underwriting the 
loan'' means approving or disapproving it. It does not mean processing 
the loan. Thus, the prohibition against a federal credit union making a 
loan if a commission or fee is to be received by a loan officer in 
connection with underwriting the loan means that an individual may not 
receive incentive pay if he or she has any part in finally approving 
the loan. Individuals who are involved in processing loans, but who 
have no role in their approval or disapproval, may receive incentive 
pay.
    The prohibition against making a loan if a commission or fee is to 
be received by a loan officer in connection with insuring the loan 
means, for example, that the individual who has the authority to 
approve a loan may not receive an incentives for selling credit life or 
disability insurance on it.

Amending the Regulation

    It has come to NCUA's attention that credit union management is 
increasingly interested in implementing incentive pay programs that, 
among other things, provide incentives to loan officers for 
underwriting and insuring loans. In this period of soft loan demand and 
historically low loan-to-share ratios, concerns have been expressed 
that credit unions are losing market share to lenders that can reward 
employees for working extra hard to close a loan. Some interested 
parties have suggested that with sufficient controls, incentive pay 
programs can benefit credit unions. However, others fear that providing 
loan officers with an incentive to generate loans will lead to poor 
quality loans, threatening the safety and soundness of the credit 
union.
    To assist in the resolution of this issue, NCUA seeks comment on 
the general question of whether the regulation should be amended to 
permit loan officers to receive incentive pay for underwriting and 
insuring loans. Comments from individuals who have had experience with 
incentive plans would be particularly helpful.
    The NCUA Board notes that while the receipt of incentive pay by 
loan officers is the primary focus of the debate, the issue is not 
limited to loan officers. Under the regulation, a federal credit union 
may not make a loan if a commission or fee is to be received by a 
senior management employee in connection with underwriting or insuring 
the loan. Thus, for example, a credit union's vice president for 
lending may not receive compensation based on the volume of loans 
generated by the loan department. The NCUA Board seeks comment on 
whether the regulation should be amended to permit senior management 
employees to receive incentive pay based on loan activities. The Board 
notes that it is wary of making such a change, however, because of 
concern that if senior management is allowed to receive loan-related 
incentive pay, control over the activities of loan officers and other 
non-senior employees could be compromised.
    The NCUA Board also notes that while a vice president for lending 
may not receive compensation tied to the performance of the loan 
department, the agency has taken the position that a chief executive 
officer's compensation may be tied to the overall performance of the 
credit union, part of which is based on its loan activities. The 
rationale for the distinction is that compensation tied to the overall 
performance of the credit union takes into account so many factors that 
it cannot be said to be ``in connection with'' the underwriting, 
insuring, servicing, or collecting of a loan.

How the Regulation Should Be Amended

    There are many ways the regulation could be amended. For example, 
the term ``loan officers'' could simply be deleted from the provision. 
This would preserve the prohibition for directors, committee members, 
and senior management employees, but allow credit unions to design any 
type of incentive program for loan officers. With such authority, a 
credit union could implement a plan in which loan officers receive a 
certain dollar amount for each loan closed, regardless of the ultimate 
performance of the loan. If the regulation were amended in this manner, 
it would be up to the business judgment of a credit union's management 
to design an incentive program that contains the necessary controls. 
Through the supervision process, NCUA could take exception to programs 
without such controls.
    Amending the regulation in such a manner might reach beyond its 
intended effect, however, and present serious safety and soundness 
concerns. For example, it would remove the prohibition against a loan 
officer receiving compensation from third parties for activities 
relating to underwriting, insuring, servicing, or collecting a loan 
made by the credit union. Thus, for example, a loan officer could have 
an ownership interest in a collection company used by the credit union 
or receive a payment from a real estate agent for approving a loan on 
property sold by the agent.
    A loan officer in a federal credit union would still be subject to 
Article XIX, Section 4, of the Federal Credit Union Bylaws, which 
provides that no director, committee member, officer, agent or employee 
of a credit union shall participate in the deliberation upon or the 
determination of any question affecting his pecuniary interest or the 
pecuniary interest of any corporation, partnership, or association in 
which he or she is interested. While the bylaw would prohibit a loan 
officer from approving a loan if he were to receive a momentary benefit 
from that decision, bylaws serve as a contract between the members and 
the credit union and their enforcement is generally left up to the 
members. NCUA action is predicated on a violation of law, regulation, 
Board order, or safety and soundness. Accordingly, the NCUA Board would 
be concerned about the implications of simply deleting ``loan 
officers'' from the regulation.
    As an alternative to simply deleting the term ``loan officer,'' the 
Board could insert language to clarify that loan production personnel 
may receive incentive pay (from the credit union) so long as they are 
not involved in the credit granting decision. This would preserve the 
integrity of the rule--those who make the loan decision do not get 
extra pay for saying yes--while eliminating a possible misunderstanding 
that may be preventing credit unions from implementing incentive plans 
that are permissible under the current rule.
    As another alternative, the regulation could be amended by adding 
language permitting incentive pay plans and instructing credit unions 
on the kinds of controls that must be in place for a plan to be 
permissible. These controls could include: (1) Requiring the credit 
union to have written policies and procedures to ensure that personnel 
making final decisions to approve or disapprove loans are accountable 
for making safe and sound decisions for the credit union; (2) 
permitting loan officers to receive incentive pay only when 
underwriting standards are firm; (3) requiring two loan officers' 
signatures on any loan where incentives are involved; (4) excluding 
business loans and loans to officials or family members; (5) requiring 
that a sample of each loan officer's loans be reviewed as part of the 
credit union's internal audit; (6) requiring the loan officer's 
adherence to performance standards be documented; (7) requiring that 
incentives be tied to loan quality, rather that quantity; and (8) 
requiring that loan officer incentives be part of an overall employee 
incentive program. NCUA could continue to take exception to specific 
plans based on safety and soundness concerns.
    The above controls have been suggested by NCUA staff and some 
members of the credit union community. It is by no means an exclusive 
list. From those commenters who believe the regulation should be 
amended, NCUA seeks suggestions on how it should be done and whether 
and what kinds of controls should be imposed. In addition to the 
incentive pay issue, NCUA welcomes comment on any other changes to its 
lending regulations that would facilitate increased lending and 
improved loan-to-share ratios without compromising safety and 
soundness.

    By the National Credit Union Administration Board on March 9, 
1994.
Becky Baker,
Secretary of the Board.
[FR Doc. 94-5949 Filed 3-14-94; 8:45 am]
BILLING CODE 7535-01-M