During its April open meeting, the NCUA Board unanimously approved the following two items:
- A proposed joint-agency rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act to regulate in federally insured credit unions with assets of $1 billion or greater incentive-based compensation plans that encourage inappropriate risk-taking.
- A proposed rule to provide regulatory relief to federal credit unions by eliminating the full occupancy requirement in the current occupancy rule.
In addition, the agency's Chief Financial Officer briefed the Board on the performance of the National Credit Union Share Insurance Fund, which continued to show positive results for the first quarter of 2016.
Proposed Incentive Compensation Rule Exempts 96 Percent of Credit Unions
NCUA Board members approved a proposed rule (Parts 741 (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) and 751), mandated by section 956 of the Dodd-Frank Act, that would require federally insured credit unions with assets of $1 billion or more to provide NCUA with information about the structure of future incentive-based executive compensation programs.
The Dodd-Frank Act requires NCUA and five other federal financial regulators to act jointly to prohibit incentive-based compensation payment arrangements in financial institutions with $1 billion or more in assets that the agencies determine encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss.
"This proposed rule will not affect the vast majority of credit unions," then NCUA Board Chairman Debbie Matz said. "In fact, the proposed rule exempts 96 percent of credit unions because they have less than $1 billion in assets. Thus, most credit unions would experience no regulatory changes under the proposal."
The proposed rule supersedes an earlier rule proposed by regulators in 2011.
"It was challenging to develop a rule that both meets the mandate of the law and at the same time is focused and fair," Matz said. "NCUA responded to stakeholder comments after the first proposed rule, and we were able to make significant modifications to take into account the uniqueness of credit unions operating in the financial services marketplace."
The proposed rule creates a tiered system by dividing financial institutions covered under the rule into three categories, each with separate requirements:
- 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.
Only 258 federally insured credit unions have assets above $1 billion. Of those, only one federally insured credit union falls into Level 2. No federally insured credit union is classified as a Level 1 institution under the proposed rule.
The proposed rule does not affect base salary or base benefit plans. Incentive-based compensation plans that existed before the effective date of the final rule will not be affected. The rule would not affect newly created incentive compensation plans at a covered credit union until the first day of the first calendar quarter beginning 18 months after the final rule becomes effective.
Institutions covered by the proposed rule would be required to create records documenting the structure of all incentive-based compensation plans, retain those records for seven years, and provide them to NCUA upon the agency's request.
Boards of directors of covered credit unions or a committee thereof would be required to exercise oversight of such compensation plans. The proposed rule includes a provision to address equitable tax treatment for incentive-based compensation plans in covered credit unions.
For institutions that fall into the Level 1 and Level 2 categories, the proposed rule would require that a portion of the incentive-based compensation under such plans be deferred for up to four years, and in cases of employee fraud, intentional misrepresentation or misconduct resulting in significant financial or reputational harm to the institution, some or all of the compensation would be subject to claw-back recovery.
A summary of the applicability of the incentive-based compensation proposed rule to federally insured credit unions can be found on page 9 of this issue.
Comments on the proposed rule must be received by July 22. For more information on the proposed rule, go to (opens new window).
Proposed Occupancy Rule Change Provides Regulatory Relief
A proposed rule (Parts 701 (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) and 721 (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) ) unanimously approved by the NCUA Board would provide regulatory relief by eliminating the requirement in the occupancy rule that federal credit unions must plan for and eventually reach full occupancy of acquired premises.
"This proposal is an excellent example of how NCUA carefully listens and, where prudent, responds to stakeholders seeking regulatory relief," Matz said. "This proposed rule would remove an outdated regulatory requirement, cut unnecessary paperwork, and empower credit union boards to make their own business decisions."
The proposed rule retains the current regulatory timeframes for the partial occupancy of premises, but it modifies the definition of "partially occupy" to mean occupation and use, on a full-time basis, of at least 50 percent of a premises by a federal credit union or by a combination of the credit union and a credit union service organization in which the credit union has a controlling interest.
"In my travels during my two terms on the NCUA Board," Matz said, "I have seen businesses operating successfully in mixed-use buildings, where street-level space is used for retail operations and an upper floor is used for commercial rentals or private residences. As long as credit union officials have a plan to occupy at least half of each property, they should decide how to use the incidental portion."
Comments on the proposed rule must be received by June 27. For more information or to submit a comment, go to (opens new window).
Share Insurance Fund Continues Strong Positive Trends
The National Credit Union Share Insurance Fund was in a strong position during the first quarter of 2016, due to stable income and expenses, continued improvement in federally insured credit unions' performance and a decline in insurance and guarantee program liabilities.
For the first quarter of 2016, the Share Insurance Fund had an equity ratio of 1.29 percent. NCUA calculated the equity ratio on an insured share base of $961.3 billion. First-quarter investment and other income was $57.3 million. Operating expenses were $48 million. The provision for insurance losses was reduced by $14.7 million.
Backed by the full faith and credit of the United States, the Share Insurance Fund insures the deposits of more than 102 million account holders up to $250,000 in federally insured credit unions.
Overall, the amount of assets in CAMEL codes 3, 4 and 5 credit unions decreased 54.4 percent since reaching a high of $205.6 billion in September 2010. The continuation of these positive trends and other factors contributed to a net decrease of $12.7 million, or 7.7 percent, in the Share Insurance Fund's reserve for loan losses in the first quarter.
For the first quarter of 2016:
- The number of CAMEL codes 4 and 5 credit unions fell 15.5 percent from the first quarter of 2015 to 218 from 258.
- Assets in CAMEL codes 4 and 5 credit unions fell 32.8 percent from the first quarter of 2015 to $7.8 billion from $11.6 billion.
- The number of CAMEL code 3 credit unions declined 9.2 percent from the first quarter of 2015 to 1,212 from 1,335.
- Assets in CAMEL code 3 credit unions declined 6.3 percent from the first quarter of 2015 to $86 billion from $91.8 billion.
There were five involuntary liquidations and assisted mergers in the first quarter of 2016, compared to three in the first quarter of 2015. The total amount of losses associated with failures in the first quarter was $4.7 million, compared to $1.7 million in the first quarter of 2015. Fraud was a contributing factor in four of these five failures.
The first-quarter figures are preliminary and unaudited.