REGular Blog: NCUA Board Meeting Summary – July 18th, 2024

Board Briefing – Proposed Rulemaking

At Thursday's meeting, the NCUA reviewed proposed rules for succession planning, incentive-based compensation arrangements and the Federal Credit Union Loan Interest Rate Ceiling. Staff from the agency presented information about their proposed rules.

Chairman Harper opened the meeting with remarks about the events that occurred on July 13, 2024. Chairman Harper stated that violence is the never the answer and that discourse can improve the policy making.

Chairman Harper noted that NCUA staff would typically present a mid-year spending analysis to the Board in July to update the agency’s use of the 2024 budget. The CFO briefed the board offices individually about 2024 spending and is monitoring budget areas closely including the agency’s payroll, travel spending, contract awards, and training budget for state examiners. To date the 2024 spending budget is largely inline with the budget approved by the board, and there are no needed adjustments at this time. As such, the mid-year budget analysis will occur at the NCUA Board Meeting in September.

Both Vice Chair Hauptman and Board Member Otsuka used their opening remarks to highlight several new credit union charters and the benefits new credit unions bring to communities and to the mission of financial inclusion. The Vice Chairman highlighted Patrolman Benevolent Association FCU in New Jersey and Arise Community Credit Union in Minnesota. Board Member Otsuka highlighted Tri Federal Credit Union in Minnesota and Fair Break Federal Credit Union in Tennessee.

Succession Planning

In a 2-1 vote the Board approved the proposed Succession Planning rule. The NCUA has put out for 60-day comment a revised proposal that would require succession planning for all federally insured credit unions. A similar rule was set forth by the agency in 2022 but never made it to the Final Rule status. One change in the 2024 version of the rule is that it would now apply to both state and federally chartered credit unions, whereas the 2022 proposed rule was only for FCUs. The Board also included a template succession plan aimed at easing the burden on smaller credit unions. Under the proposed rule:

• The succession plan would be required to cover members of the board, members of the supervisory committee, management officials and assistant management officials, senior executive officers and any other credit union personnel the board of directors deems critical given the size, complexity and risk of operations.
• The succession plan would also be required to address the members of the credit committee and loan officers where such officials are involved in the daily review of loans
• The succession plan would be required to address the FICU’s strategy for recruiting candidates.
• The strategy must consider how the selection of diversity among the employees covered by the succession plan collectively and individually promote the safe and sound operation of the credit union.
• The board of directors would be required to review the succession plan in accordance with the schedule it establishes, but no less than annually, and recognizes that circumstances might require changes to the planning. In strategic plans it would be expected that the board would be informed of changes and the rationale for the changes and that it document them in its meeting minutes.
• The proposed rule would require that directors have a working familiarity with the succession plan no later than six months after appointment.
• · The expectation of the proposal for a federally insured credit union to develop a succession plan that is consistent with its size and its complexity.

Incentive Based Compensation

By a 2-1 vote, the NCUA board has put out for 60-day comment a proposal on incentive-based compensation arrangements for credit unions of $1 billion or more in assets, rules that have been in development since the financial crisis of nearly 15 years ago.

The newly issued proposal is a reissuance of the 2016 proposal. The proposal applies to three tiers:

• FIs of $250 billion or more in assets (no credit unions in this category)
• FIs of $50 billion to $250 billion in assets (two CUs qualify, Navy Federal and State Employees’ CU in North Carolina
• FIs of $1 billion to $50 billion in assets (approximately 447 CUs qualify)

The proposal contains six factors for determining whether compensation is excessive or unreasonable or disproportionate to the value of services performed by a covered person and include:

• The combined value of all compensation and fees or benefits provided to the covered person
• The compensation history of the covered person and others with comparable expertise at the credit union
• The financial condition of the credit union
• Compensation practices at comparable credit unions, based on such factors as asset size, geographic location and the complexity of that credit union’s operations
• For post-employment benefits, the projected total cost and benefit to the credit union
• Any connection the covered person has with any fraudulent act or omission breach of trust or insider abuse with regard to that credit union

Key Principles

The proposed rule also contains three key principles that must be considered with incentive-based compensation, according to NCUA staff, including:

• Whether the incentive-based compensation arrangement appropriately balances risk and financial reward
• Whether the incentive-based compensation arrangement is compatible with effective risk management and controls
• Whether the incentive based compensation arrangement is supported by effective governance

The proposal requires a CU’s board of directors or committee to be directly involved in the oversight of the incentive-based compensation program, and to approve all incentive-based compensation plans for senior executives.

Rules for Recordkeeping

Finally, staff said the last core requirement of the proposed rule involves record keeping. All covered institutions must:

• Document their incentive-based compensation plans
• Maintain them for seven years and provide them to their regulator upon request
• At a minimum records must include copies of all incentive-based compensation plans, a record of who is subject to the plan and a description of how the plan is consistent with effective risk management and controls

The Timeline

The proposal also includes claw back provisions.

The rule provides for an implementation timeline of 18 months, grandfathers existing plans for the life of those plans, and provides an 18 month window for institutions newly subject to the rule to comply.

Outlook Unclear

This is a joint rule issued by six banking regulators, of which the NCUA is one. In order to be officially published in the Federal Register, all six agencies must vote to adopt it. The SEC and the Federal Reserve have yet to do so, and the Fed in particular is opposed to this rule. As a result, it may not officially make it into the Federal Register this time around either.

Interest Rate Ceiling

By a 3-0 vote, the NCUA board has approved an 18-month temporary extension of the federal credit union interest rate ceiling of 18% , with staff noting that not extending the cap would affect the safety and soundness of more than a thousand CUs.

The current 18% rate is in place through September 10, 2024. After today’s vote, the interest rate cap will be 18% through at least March 10, 2026.