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NCUA maintains federal credit union interest rate despite calls for ‘floating’ rate

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Industry Regulation, Inside the Beltway
Tuesday, July 23, 2024

The National Credit Union Administration (NCUA) unanimously approved a federal credit union interest rate ceiling of 18 percent at its July 18 meeting, which also included votes on succession planning and incentive-based compensation arrangements.

The vote came after an analysis of the current interest rate environment concluded the 18-percent rate ceiling generally enables covered institutions to sufficiently manage liquidity, capital, earnings, and growth. It also protects member access to safe and affordable credit and does not require federal credit unions to take on any additional workloads or expenses associated with a change to the rate ceiling, according to a press release from the NCUA.

Ahead of the meeting, America’s Credit Unions (ACU) Head of Regulatory Advocacy Ann Petros urged the NCUA Board to consider adopting a floating interest rate to better accommodate the wide range of rate environments credits unions serve.

“We support an 18 percent interest rate ceiling, but ultimately there is no reasonable fixed permissible interest rate ceiling the NCUA could establish that would permanently resolve the issues unnecessarily imposed on federal credit unions and their communities by the Federal Credit Union Act’s arbitrarily low 15 percent rate,” Petros wrote in a letter to the three board members. 

Additionally, Petros asserted a floating interest rate would enable federal credit unions to “more fairly and fully serve their communities in every interest rate environment throughout economic cycles,” rather than maintaining the same rate cap that has been in place since May 1987.  

The board is required to revisit any interest rate exceeding 15 percent every 18 months. It has voted 23 times to maintain the 18 percent rate.

Incentive-based compensation

The NCUA also voted 2–1 to approve a proposed rule on incentive-based compensation arrangements. The proposed rule would establish a tiered system by dividing financial institutions covered under the rule into three categories 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.
  • Level 3: institutions with assets of at least $1 billion and below $50 billion.

Federally insured credit union boards of directors are required to establish succession planning processes for key positions and implement the incentive-based compensation requirements of section 956 of the Dodd-Frank Act. The agency is required to work with other financial regulators to issue joint regulations or guidelines requiring disclosure and reporting of compensation at financial institutions with more than $1 billion in assets.

Succession planning

The NCUA voted 2-1 to approve a proposed rule to require credit union boards of directors at federally insured credit unions to establish and adhere to processes for succession planning. This new rule modifies the agency’s 2022 proposal based on 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,” NCUA Chairman Todd Harper said in the release. “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 new rule, credit unions would be required to establish written succession plans addressing specified executive and other positions. Boards of directors also would have to conduct annual reviews of these succession plans in accordance with a board-established schedule. Such plans must address an institution’s strategy for recruiting candidates to assume key positions and promote the institution’s safe and sound operation.

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