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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello, this is Samantha Shares.
This episode covers Compensation
in Connection With Loans to Members
and Lines of Credit to Members.
The following is an audio
version of that document.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
upcoming, or in process N C U A
examination, reach out to learn how they
can assist at Mark Treichel dot com.
Also check out our other podcast called
With Flying Colors where we provide tips
on how to achieve success with N C U A.
And now the document.
Summary.
The N C U A Board is issuing for public
comment a proposal to amend the N C U
A's regulation that limits a federally
insured credit union, or F I C U,
official and employee compensation
in connection with loans to members
and lines of credit to members.
These regulations have generated
confusion and are unduly restrictive.
To provide clearer and more flexible
standards, the proposed rule would
expressly permit incentive and bonuses to
employees, including senior management,
to incorporate lending metrics as
part of compensation based on a credit
union's overall financial performance.
Comments must be received
by April 27, 2026.
Supplementary Information.
Introduction.
Background.
The Board recognizes that the N C U A's
regulations in this area, which were last
updated over 30 years ago, are unduly
restrictive, especially as applied to
senior executive compensation plans.
Accordingly, in April 2019, the Board
issued an advance notice of proposed
rulemaking, or A N P R, seeking comment
on how to update the regulations so that F
I C Us can offer competitive compensation
plans without encouraging inappropriate
risks, incentivizing bad loans, or
negatively affecting safety and soundness.
Now, as part of its deregulatory
efforts under pre-existing procedures
and in accordance with Executive Order
14219, the Board is proposing to update
the regulation to reduce regulatory
burden by providing greater clarity
and flexibility as to the compensation
plans F I C Us can offer employees.
These changes are intended to
reduce compliance burdens without
diminishing statutory protections or
the N C U A's supervisory authority.
Currently, section 701 point 21,
paragraph c 8 i, of the N C U A's
regulations establishes a blanket
prohibition on the direct or indirect
receipt of any commission, fee, or
other compensation by any F I C U
official or employee, or an immediate
family member of either, in connection
with any loan made by their F I C U.
However, section 701 point 21,
paragraph c 8 i i i, carves out four
exceptions to this blanket prohibition.
Specifically, that paragraph permits:
First, payment, by a credit
union, of salary to employees.
Second, payment, by a credit union,
of an incentive or bonus to an
employee based on the credit union's
overall financial performance.
Third, payment, by a 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.
And fourth, receipt of compensation
from a person outside a 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.
Section 701 point 21, paragraph c 8,
applies directly to federal credit
unions, or F C Us, and is applied to
federally insured, state-chartered
credit unions, or F I S C Us, by
section 741 point 203, paragraph a.
F I C Us have demonstrated confusion
about how to interpret the term overall
financial performance in section
701 point 21, paragraph c 8 i i i B.
As noted, section 701 point 21, paragraph
c 8, contains a general prohibition
against most credit union employees
and officials receiving compensation
made in connection with any loan an F
I C U makes, but provides exceptions,
including one that permits incentive
compensation to employees based on the
F I C U's overall financial performance.
F I C Us have expressed uncertainty
about whether the N C U A 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 N C U A's regions.
The N C U A received 27 comments on
the A N P R, representing a variety
of perspectives on how the N C U A
should improve the current regulations.
Generally, commenters overwhelmingly
supported changes, additional clarity, or
both in this area, describing the current
regulation as outdated and unclear.
The commenters differed in their
preferred approaches, with some favoring
changes to the current regulation and
others advocating flexible guidance.
Under either approach,
commenters generally favored
a principles-based approach.
Several commenters were concerned
about the N C U A defining overall
financial performance prescriptively
and preferred guidance or commentary
to clarify that credit unions may
consider lending as part of a broad
and balanced set of organizational
goals and performance measures.
Only one commenter opposed modernizing the
regulation, citing safety and soundness
and consumer protection concerns.
This commenter stated that loan-related
incentives are risky and opined
that loan incentives can easily
overrun any established guardrails.
Based on a review of the regulation
and the comments and the N C U A's
own experience in implementing the
regulation, the N C U A determined
limitations on compensation tied
to lending are still necessary.
Thus, section 701 point 21,
paragraph c 8, remains a general
prohibition with defined exceptions.
However, to provide F I C Us with
further clarity and increased flexibility
to provide compensation plans in
alignment with modern practices, the
proposed rule would clarify employees,
including senior management, can
receive incentives or bonuses related to
lending metrics as part of compensation,
provided they are based on an F I C
U's overall financial performance.
The proposal would achieve this by
adopting a regulatory definition of
overall financial performance that
supersedes the N C U A's current
understanding of the term and
simultaneously provides F I C Us with
more flexibility and a clearer framework.
The proposed definition would provide
broader standards that would allow F I
C Us to consider lending as part of a
broad and balanced set of organizational
goals and performance measures.
Legal Authority.
The Board is issuing this proposal
pursuant to its authority under the
Federal Credit Union Act, or F C U Act.
Under the F C U Act, the N C U A is the
chartering and supervisory authority for
federal credit unions and the federal
supervisory authority for F I C Us.
The F C U Act grants the N C U A a
broad mandate to issue regulations
governing both F C Us and all F I C Us.
Section 120 of the F C U Act is
a general grant of regulatory
authority and authorizes the Board to
prescribe rules and regulations for
the administration of the F C U Act.
Section 207 of the F C U Act is
a specific grant of authority
over share insurance coverage,
conservatorships, and liquidations.
Section 209 of the F C U 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 F I C Us.
Accordingly, the F C U Act grants the
Board broad rulemaking authority to
ensure that the credit union industry
and the National Credit Union Share
Insurance Fund remain safe and sound.
Proposed Rule.
Section 701 point 21, paragraph c 8,
generally prohibits most credit union
employees and officials from receiving
compensation made in connection
with any loan an F I C U makes, but
provides exceptions, including one
that permits incentive compensation
to employees based on the F I C
U's overall financial performance.
The Board is proposing to amend section
701 point 21, paragraph c 8, by adopting
a broad definition of overall financial
performance that provides regulatory
clarity and additional flexibility
for the types of bonus or incentive
payments that can be made to an F
I C U employee, including a senior
management employee, based on the F I
C U's overall financial performance.
Specifically, the Board proposes
to adopt the following definition.
Overall financial performance means a
quantifiable metric or set of metrics, set
by a credit union's board of directors,
used to measure a credit union's
achievement of targeted performance goals.
No compensation plan may permit any unsafe
or unsound practice or any unsafe or
unsound reliance on individual metrics
which may include, but not be limited
to, lending-related goals and metrics.
No compensation plan may
permit compensation in conflict
with other applicable laws.
In proposing this definition, the
Board is aiming to clarify that F I
C Us have the flexibility to provide
compensation plans that incorporate
lending as part of a broad and balanced
set of organizational goals and
performance measures that reflect the F
I C U's overall financial performance.
This could include, for example, aggregate
loan growth or loan performance metrics
such as loan delinquency or loss rates.
The Board recognizes that F I
C Us need flexibility to adapt
compensation to reflect their
organizational goals and market demands.
The proposed definition is
intended to allow F I C Us to offer
competitive compensation plans without
encouraging inappropriate risks,
incentivizing bad loans, or negatively
affecting safety and soundness.
The Board considered whether to include
examples of metrics in the definition
of overall financial performance but
felt that a broad and principles-based
definition would provide F I C Us the
most latitude to execute their business
judgment as to their own financial
performance goals and the appropriate
compensation for meeting them.
While the Board is proposing this
principles-based definition, the
Board does stress that F I C Us
are always expected to operate
in a safe and sound manner and in
compliance with all applicable laws.
Accordingly, the proposed definition
explicitly states that no compensation
plan may permit any unsafe or unsound
practice or any unsafe or unsound
reliance on individual metrics.
In reviewing compensation plans based
on an F I C U's overall financial
performance, the N C U A would expect F
I C Us to demonstrate that their boards
have fully considered how the compensation
plans incentivize the goals of the F I C
U and that the metrics do not incentivize
any unsafe or unsound practices, either
individually or in the aggregate.
The proposed definition also states
that no compensation plan may
permit compensation in conflict
with other applicable laws.
The Board is also proposing to amend
the exception provided in section 701
point 21, paragraph c 8 i i i B, for
providing an employee with compensation
based on the F I C U's overall
financial performance to explicitly
include senior management employees.
The Board solicits comments on
all aspects of this proposal.
The Board is particularly interested
in input as to whether reference
to lending-related metrics should
be included in the definition of
overall financial performance.
This concludes the document.
If your credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn or at Mark Treichel dot com.
This is Samantha Shares, and
we thank you for listening.