NCUA Board Approves Proposed Rules: Incentive-Based Compensation & Succession Planning

In the first meeting since May, NCUA Board members gathered Thursday to approve a number of items, including the approval of proposed rules for incentive-based compensation and a revised proposed rule concerning credit union succession planning.

The Board cancelled June’s meeting after Chairman Todd Harper announced in mid-May that he was taking a leave of absence to undergo and recover from back surgery. Thursday’s meeting was Harper’s first Board meeting since his return.

In a 2-1 vote, Board members approved a proposed rule addressing incentive-based compensation, as required by the Dodd-Frank Act which requires the NCUA, and other federal financial regulators, to issue guidelines requiring the disclosure and reporting of compensation at credit unions with more than $1 billion in assets.

According to the NCUA, the proposed rule divides financial institutions into three tiers, each with separate requirements. The tiers include:

• Level 1: institutions with assets of $250 billion and above;
• Level 2: institutions with assets of at least $50 billion and below $250 billion; and
• Level 3: institutions with assets of at least $1 billion and below $50 billion.

NCUA data showed there are no credit unions in Level 1, two credit unions in Level 2 and 441 in Level 3.

Chairman Harper said, “This rulemaking effort is about providing transparency and accountability. This regulatory effort will better focus the leaders of financial firms on the long-term health of the company instead of just their short-term personal gain. That’s good for the credit union system, and it’s good for our financial markets.”

The rule has been adopted by the FDIC, the Federal Housing Finance Agency and the Office of the Comptroller of the Currency. The Board of Governors of the Federal Reserve System and the U.S. Securities and Exchange Commission have not approved the joint rulemaking, according to the NCUA. “Once the notice of proposed rulemaking is adopted by all six agencies, it will be published in the Federal Register with a comment period of 60 days following publication. Until then, each agency acting on the proposed rule will make it available on their respective websites and accept comments,” the NCUA stated.

Succession Planning

In another 2-1 vote, Board members approved the proposed rule requiring federally insured credit unions’ boards of directors to “establish and adhere to processes for succession planning” and those boards “would be required to review the succession plan in accordance with a schedule it establishes, but no less than annually.”

Boards “at federally insured credit unions would be required to establish written succession plans that address specified executive and other positions,” according to the NCUA.

Of the proposed rule, Harper said, “Succession planning is vital to the long-term success of any institution, including credit unions. A credit union board’s failure to plan for the transition of its management and key decision-makers could come with high costs, including the potential for an unanticipated merger of the credit union when key personnel depart. In my view, it’s better to maintain many small credit unions serving a wide variety of purposes and niche markets than continuing to consolidate credit unions into ever larger institutions.”

Comments on the proposed rule must be received no later than 60 days following publication in the Federal Register.

FCU Loan Interest Rate Ceiling

NCUA Board members, in a 3-0 vote, approved to maintain the current 18% interest rate ceiling of federal credit union loans for another 18-month period, from Sept. 11, 2024 through March 10, 2026.

The Federal Credit Union Act caps the interest rate on federal credit union loans at 15%. But, the NCUA Board “has the discretion to raise that limit for 18-month periods if interest-rate levels could threaten the safety and soundness of individual credit unions.”

According to a study done by the NCUA, the current interest rate environment is such that “an 18% interest rate ceiling provides federal credit unions with sufficient ability to manage liquidity, capital, earnings and growth; protects member access to safe and affordable credit; and does not require federal credit unions to incur any additional workload or costs associated with a change to the rate ceiling.”