Board Action Bulletin
Maintains 18-percent Loan Interest Rate Ceiling for Federal Credit Unions
ALEXANDRIA, Va. (July 18, 2024) – The National Credit Union Administration Board held its fifth open meeting of 2024 and approved a proposed rule on incentive-based compensation and a revised proposed rule on succession planning. The NCUA Board also approved maintaining the current interest rate ceiling for federal credit unions at 18 percent.
Board Approves Proposed Incentive-based Compensation Rule
The NCUA Board approved by a vote of 2–1 a proposed rule to address incentive-based compensation arrangements, as required under section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 956 requires federal financial institutions regulators, including the NCUA, to issue joint regulations or guidelines requiring disclosure and reporting of compensation at financial institutions with more than $1 billion in assets.
“In just three days, we will mark the fourteenth anniversary of the enactment into law of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” NCUA Chairman Todd H. 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 is a re-proposal of an earlier rule proposed by regulators in 2016. 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.
As of the end of the first quarter of 2024, there were no federally insured credit unions in Level 1, two credit unions in Level 2, and 441 credit unions in Level 3. Most federally insured credit unions would be exempt from this rule.
The rule was adopted by the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency on May 6. The Board of Governors of the Federal Reserve System and the U.S. Securities and Exchange Commission have not approved the joint rulemaking yet. 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.
Agencies will consider comments received in response to the 2016 proposed rule as well as any comments received in response to this re-proposal when determining how to implement section 956.
Board Approves Revised Proposal on Succession Planning
The NCUA Board approved by a vote of 2-1 a proposed rule that requires boards of directors at federally insured credit unions to establish and adhere to processes for succession planning. This new proposed rule modifies the 2022 proposal based on the public comments received and upon further consideration of the issues.
“Succession planning is vital to the long-term success of any institution, including credit unions,” Chairman Harper said. “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.”
Under the revised proposal, boards of directors at federally insured credit unions would be required to establish written succession plans that address specified executive and other positions. Additionally, each board of directors would be required to review the succession plan in accordance with a schedule it establishes, but no less than annually. The plan would be required to address the credit union’s strategy for recruiting candidates to assume each of the key positions and promote the credit union’s safe and sound operation.
The NCUA Board encourages all credit unions, regardless of asset size, to have a succession plan to fill key positions and ensure continuity of their operations. These succession plans should be consistent with the size and complexity of the credit union. The proposed rule includes a suggested succession plan template that may be appropriate for smaller credit unions.
Comments on the proposed rule must be received no later than 60 days following publication in the Federal Register.
Board Maintains Federal Credit Union Loan Interest Rate Ceiling at 18 Percent
The NCUA Board unanimously approved maintaining the current 18-percent interest rate ceiling for loans made by federal credit unions for a new 18-month period from September 11, 2024, through March 10, 2026.
The approval followed a briefing by the NCUA’s Office of Examination & Insurance. The briefing included a history of the interest rate ceiling, a summary of the consultations performed, the safety and soundness effects of changing the ceiling on individual federal credit unions.
An NCUA staff analysis concluded that, in the current interest rate environment, an 18-percent 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.
The Federal Credit Union Act caps the interest rate on federal credit union loans at 15 percent; however, 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. The 18-percent cap applies to all federal credit union lending, except originations made under NCUA’s payday alternative loan program, which are capped at 28 percent.
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