Incentive Program

Trace Ledbetter, VP Marketing & Administration
State National Companies
P.O. Box 24622
Forth Worth, Texas 76124

Re: Incentive Program, Your letter dated October 21, 1997.

Dear Mr. Ledbetter:

State National Companies wants to establish an incentive program for loan officers at credit unions offering insured balloon loans for automobiles. You have asked whether such a program would be permissible. No, NCUA regulations do not allow parties outside the credit union to pay incentives or bonuses to credit union employees for activities performed within the credit union.

BACKGROUND

A Collateral Enhancement Insurance policy from State National Companies protects a credit union granting balloon loans against certain risks, namely, repossession, total loss, and decline in residual value. When a member finances an automobile using a balloon loan, a credit union will purchase the policy, paying a premium based on the residual value of the automobile, and is the insured. You state that the appropriate departments in each state where you offer the policy have approved it.

State National Companies wants to establish an incentive program for loan officers at credit unions offering insured balloon loans. Under the program, a loan officer would receive a point each time a member finances an automobile with a balloon loan and, as a result, the credit union purchases a policy enrolling the automobile. You state that before a loan officer receives a point, his or her supervisor would have to review the balloon loan to ensure the safety and soundness of the incentive program. A loan officer may redeem points for selected gift items, not including cash, by notifying his or her supervisor. You contend that this review by a supervisor sufficiently addresses §701.21(c) of NCUA's regulations.

ANALYSIS

NCUA regulations provide that no employee of a federal credit union may receive, directly or indirectly, any commission, fee, or other compensation in connection with a loan made by the credit union. 12 C.F.R. §701.21(c)(8)(i). The purpose of §701.21(c)(8)(i), called the prohibited fees regulation, is to ensure that an individual, who is in a position of authority at a credit union, does not put his or her self-interest ahead of the credit union's interest in making good loans. The proposed program provides an incentive to loan officers to approve balloon loans instead of conventional loans. The incentive or bonus that a loan officer would receive from State National Companies would be considered compensation in connection with a loan made by the credit union and would violate §701.21(c)(8).

While the prohibited fees regulation contains certain exceptions, none allow for an outside party, such as State National Companies, to provide an incentive or bonus to credit union employees for the performance of credit union activities. 12 C.F.R. §701.21(c)(8)(iii). Accordingly, State National Companies would not be permitted to establish an incentive or bonus program for credit union loan officers.