[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]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 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outdated, burdensome, and at odds with industry standards.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