19690 Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Proposed Rules

Authority: 12 U.S.C. 248(i), 375a(10), 375b

(9) and (10), 1817(k)(3) and 1972(2)(G)(ii);

Pub. L. 102–242, 105 Stat. 2236.

2. Section 215.2 is amended as

follows:

a. The last sentence of paragraph (i)

introductory text is revised;

b. Paragraphs (i)(1) and (i)(2) are

revised; and

c. Paragraph (i)(3) is removed.

The revisions read as follows:

§ 215.2 Definitions.

* * * * *

(i) * * * A member bank’s

unimpaired capital and unimpaired

surplus equals:

(1) A bank’s Tier 1 and Tier 2 capital

included in the bank’s risk-based capital

under the capital guidelines of the

appropriate Federal banking agency,

based on the bank’s most recent

consolidated report of condition filed

under 12 U.S.C. 1817(a)(3); and

(2) The balance of a bank’s allowance

for loan and lease losses not included in

the bank’s Tier 2 capital for purposes of

the calculation of risk-based capital by

the appropriate Federal banking agency,

based on the bank’s most recent

consolidated report of condition filed

under 12 U.S.C. 1817(a)(3).

* * * * *

By order of the Board of Governors of the

Federal Reserve System, April 14, 1995.

William W. Wiles,

Secretary of the Board.

[FR Doc. 95–9737 Filed 4–19–95; 8:45 am]

BILLING CODE 6210–01–P

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 701

Organization and Operations of

Federal Credit Unions

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Proposed rule.

SUMMARY: National Credit Union

Administration (NCUA) Rules and

Regulations prohibit officials and

certain employees of federally insured

credit unions from receiving either

incentive pay or outside compensation

for certain activities related to credit

union lending. The regulations are

ambiguous in places and have proved

difficult to interpret. Further, the

regulations may be too restrictive in

some instances and too broad in others.

The NCUA Board is proposing to amend

the regulations to make them clearer, to

authorize lending-related compensation

in certain situations where it is

currently prohibited, and to prohibit it

in other situations. If amended as

proposed, it should be easier for credit

unions to determine when incentives

may be paid and easier for officials and

employees to determine whether they

may accept compensation for outside

activities.

DATES: Comments must be postmarked

or posted on NCUA’s electronic bulletin

board by June 19, 1995.

ADDRESSES: Mail comments to Becky

Baker, Secretary of the Board, National

Credit Union Administration, 1775

Duke Street, Alexandria, VA 22314–

3428. Send comments to Ms. Baker via

the bulletin board by dialing 703–518–

6480.

FOR FURTHER INFORMATION CONTACT: Lisa

Henderson, Staff Attorney, (703) 518–

6561, at the above address.

SUPPLEMENTARY INFORMATION:

Background

Section 701.21(c)(8) of the NCUA

Rules and Regulations, 12 CFR

701.21(c)(8), prohibits federal credit

unions from making a loan if, either

directly or indirectly, any commission,

fee, or other compensation is to be

received by the credit union’s directors,

committee members, senior

management employees, loan officers,

or any immediate family members of

such individuals, in connection with

underwriting, insuring, servicing, or

collecting the loan. However, noncommission salary may be paid to

employees. As a condition of federal

insurance pursuant to Section 741.3(a)

of the Regulations, 12 CFR 741.3(a), the

prohibition applies to federally insured

state-chartered credit unions. The

purpose of Section 701.21(c)(8) is to

ensure that an individual who is in a

position of authority in a credit union

does not put self-interest ahead of the

credit union’s interest in making good

loans and providing good service to its

members. The provision prohibits

compensation from third parties and

from the credit union itself, in the form

of commissions, incentive pay, or

bonuses.

Under the current regulation, a ‘‘loan

officer’’ is an individual who has the

authority to approve a loan. A loan

officer may or may not be involved in

taking and processing loan applications.

‘‘Underwriting the loan’’ means

approving or disapproving it. Thus, an

individual who has any part in

approving a loan is prohibited for

receiving incentive pay in connection

with that loan. An individual who is

involved in processing a loan, but who

has no role in its approval or

disapproval, may receive incentive pay

in connection with the loan.

The prohibition against making a loan

if a commission or fee is to be received

by a loan officer in connection with

insuring the loan means, for example,

that the individual who has the

authority to approve a loan may not

receive an incentive for selling credit

life or disability insurance on it.

Noting that credit union management

had become increasingly interested in

implementing lending-related incentive

pay programs, the NCUA Board, on

March 9, 1994, issued a Request for

Comment on whether § 701.21(c)(8)

should be amended to permit loan

officers and/or senior management to

receive incentive pay for underwriting

and insuring loans, 59 FR 11937 (March

15, 1994). A total of 252 comments was

received, 177 of which expressed

support for allowing incentive pay for

loan officers. Most of the latter

suggested that incentive pay be

permitted only with controls in place.

A number of commenters described

the success their credit unions had had

with incentive programs involving

employees other than loan officers; they

argued that even greater benefits would

accrue from paying incentives to loan

officers. Most of these programs seem to

have been implemented in the past few

years, however, and some of the

information submitted to the Board

raises questions about whether they will

be successful in the long run.

For example, information submitted

by one commenter cites research which

has shown that incentive programs can

fail in the long term because employees

become preoccupied with meeting goals

and fail to carry out their normal

routines. When management sets a

specific goal, and offers a reward for

meeting it, work or problems that do not

relate to that goal are ignored.

Cooperative spirit between people often

diminishes because each has different

goals and becomes wrapped up in his or

her own work. Incentive pay can

actually work to undermine an

employee’s internal motivation to

perform well, as employees end up

working for the incentive rather than the

satisfaction of the work itself.

Employees can also be demoralized by

the underlying assumption that they are

not working hard and need incentives to

perform.

One credit union commenter learned

about the risks of incentive programs

the hard way. He reported that his credit

union’s incentive program for loan

officers was unsuccessful for the

following reasons: (1) Despite controls

being in place, some loan officers

exceed their authority in approving
Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Proposed Rules 19691

1Other legal restrictions would apply, however.

For example, common law principles would require

that the transaction be at arms length and in the

credit union’s best interest, and the standard FCU

Bylaws would require that the interested director

recuse himself or herself from the decision to

purchase the forms.

loans. The commenter noted that even

if a loan officer can be disciplined for

poor judgment, ‘‘once a loan is made,

you can’t take it back.’’; (2) Incentives

caused disputes among loan officers,

each of whom thought the others were

receiving more favorable treatment from

management by having more

creditworthy loans routed to them; and

(3) Incentives caused some animosity

between employees who were eligible

for incentive pay, such as those in the

loan department, and those who were

not.

Other commenters argued that

incentives are not necessary for

successful loan programs. One

commenter provided details of how his

credit union had dramatically improved

productivity after eliminating all

incentives. He reported that the credit

union’s consumer loan approval ratio

had increased from 62% to 84% as a

result of centralizing the origination

function and implementing a credit

scoring system. The credit union also

improved service to members by

providing loan decisions within 24

hours and making the terms and pricing

of its products more competitive. In two

years, the consumer loan portfolio

increased by 38% while loan

delinquencies and charge-off ratios

remained better than the credit union’s

peer group. As a result of improved

terms and pricing of mortgage products,

originations increased from $62 million

in 1991 to $161 million in 1993.

Despite misgivings about incentive

pay, the Board recognizes the strong

arguments made by many commenters

that if incentive pay can be offered in a

manner that protects against abuses, the

decision whether to do so should be a

management decision, not one that is

precluded by an overly restrictive

regulation. Therefore, the Board is

proposing to allow credit unions to

provide incentive pay to some

employees, including loan officers, in

certain circumstances, as described

below.

Proposed Regulation

The proposed rule changes the

structure of the regulation to a broad

prohibition, with specific exceptions,

against an official or employee receiving

compensation in connection with any

loan made by the credit union. The

Board believes that this structure will be

easier to interpret and administer. It has

proved difficult to determine, in the

current regulation, whether certain

activities are part of ‘‘underwriting,

insuring, servicing, or collecting’’ a

loan, particularly ‘‘underwriting’’ and

‘‘insuring.’’ Proposed paragraph 8(i)

only requires that an activity be

determined to be ‘‘in connection with’’

a loan. NCUA would take a

reasonableness approach to that

determination.

For example, suppose an official owns

a company that manufactures forms. In

this example, a credit union could

purchase loan application forms from

the company, even if it resulted in

compensation to the official, since the

purchase of loan application forms is

not reasonably ‘‘in connection with’’

making a loan.1 On the other hand, if an

official owned a credit bureau, a credit

union could not obtain credit reports

from the company, resulting in

compensation to the official, because

providing credit reports is reasonably

‘‘in connection with’’ making a loan.

Similarly, a credit union could

finance a home built by a construction

company owned by an official, as long

as the credit union was not financing

the construction of the home, as

building a home is not reasonably in

connection with making a loan.

However, a credit union would be

prohibited from referring a member to

the construction company to have a

home built, as in that case, the

construction would be in connection

with making a loan.

In the context of incentive pay, rather

than outside compensation, loan

processing and making credit decisions

on loans are clearly activities in

connection with making loans. Thus, an

employee would be prohibited from

receiving incentive pay for performing

those activities unless covered by an

exception.

Exception (A) would allow credit

unions to pay salary to employees who

perform activities in connection with

making loans. This is in the current

regulation and needs no discussion.

Exception (B) would clarify that an

incentive may be paid to an employee

based on the overall financial

performance of the credit union, which

of course depends in part on its lending

activities. While it could be argued that

such an incentive is not truly ‘‘in

connection with’’ a loan made by the

credit union, the Board has included the

exemption to avoid confusion. The

Board believes that this type of

incentive presents fewer problems than

does an incentive based on the

performance of a single individual, as it

is focused on the interests of the credit

union as a whole. However, incentives

based on an organization’s overall

performance must still be monitored

closely to avoid the problems discussed

above. NCUA of course reserves the

right to take exception to overall

performance related incentive plans for

safety and soundness reasons, for

example, and plans where incentive pay

is based on asset growth with no

consideration of factors such as capital

and asset quality.

Despite the concerns raised about

incentives based on an individual’s

performance, the Board is proposing to

allow credit unions to develop incentive

programs with that feature. The Board is

responsive to the significant interest on

the part of credit unions to implement

such programs. Proposed exceptions (C),

(D), and (E) would allow credit unions

to make incentive payments to

employees for processing loans, making

recommended or final decisions to

approve or disapprove loans, and

collecting loans, respectively. In order

for an employee to be eligible for an

incentive, there must be a supervisory

level above the employee that does not

receive incentive pay for the activity in

question. Furthermore, a senior

management employee may not receive

incentive pay for any of the activities.

Supervisors and senior management

employees are excluded from direct

incentive pay in the interests of sound

internal control. However, the proposed

rule would allow such employees to

receive bonuses based on broad

measures of management skill, such as

profitability.

Credit unions already have the

authority to provide incentive pay for

processing and collecting loans. The

real change is the proposal to allow loan

officers to receive incentive pay. To

address the concern regarding loan

quality, the proposed rule provides that

incentives for making recommended or

final decisions to approve or disapprove

loans may not be based on the number

or dollar amount of loans approved. The

Board requests comment on this

restriction. Commenters who believe

that it is not necessary should provide

evidence to that effect.

The proposed rule also requires that

there be sufficient controls in place to

prevent an increase in problem loans. A

credit union would have the

responsibility of structuring its

incentive pay program to meet this

requirement.

Finally, proposed paragraph (8)(iv) of

the regulation would require that the

board of directors establish written

policies and controls for any incentive

plan and monitor compliance on at least

a quarterly basis.
19692 Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Proposed Rules

Policy Changes

In addition to allowing incentive pay

for loan officers under certain

circumstances, the proposed rule would

make additional policy changes. The

current regulation has been interpreted

to permit a credit union official or

employee to receive compensation for

acting as an agent in the sale of property

securing a loan made by a credit union,

on the rationale that listing or selling a

property on which a loan is granted is

not included in underwriting, insuring,

servicing, or collecting the loan. Under

this interpretation, an official or

employee not only could receive a

commission from an outside party for

selling property financed by the credit

union, he or she could also act as listing

agent for the credit union’s sale of

foreclosed properties financed by the

credit union. While listing or selling

property financed by a credit union is

not included in underwriting, insuring,

etc., it is reasonably ‘‘in connection

with’’ a loan made by the credit union.

Thus, compensation for such activity

would be prohibited unless the activity

is covered by an exception. Since

compensating an official or employee

for listing or selling property financed

by the credit union presents potential

conflicts of interest, no exception is

provided.

The current regulation also permits

employees who are not senior managers

or loan officers to receive incentives,

from either the credit union or an

insurance company, for selling credit

life and disability insurance. Senior

managers and loan officers may not

receive such incentives because of the

prohibition against compensation for

‘‘insuring’’ a loan. Since selling credit

insurance is an activity reasonably ‘‘in

connection with’’ a loan, the proposed

rule prohibits all employees from

receiving compensation for the activity,

unless it is covered by an exception.

The Board believes members should be

allowed to make their own informed

decisions about credit insurance and

should not be pressured into purchasing

it by employees who are motivated by

incentive pay. Accordingly, no

exception is provided. Lest there be any

misunderstanding, however, credit

unions are allowed to sell credit

insurance and to generate income for

the credit union from the activity.

The proposed regulation also clarifies

another issue related to insuring loans.

The current regulation has always been

interpreted to prohibit, for example, a

credit union official from owning an

insurance company that sells car

insurance to members who finance their

cars at the credit union. Recently, it has

been argued that the regulatory language

prohibits compensation in connection

with insuring the loan but not in

connection with insuring collateral

securing the loan. Under this argument,

the regulation clearly would apply to

credit life and disability insurance but

would not appear to apply to ordinary

car or homeowners insurance. NCUA is

concerned about the inherent conflict

that arises if an owner of an insurance

agency that insures collateral securing

loans made by a credit union serves as

a credit union official, because of the

opportunity to ‘‘steer’’ members to the

official’s agency. Since insuring

collateral is reasonably ‘‘in connection

with’’ a loan, the proposed regulation

continues the prohibition against a

director receiving compensation for

such activity.

The Board also notes that ‘‘insuring

the loan’’ recently has been interpreted

to include the sale of vehicle warranties

(also called insured vehicle service

contracts and mechanical breakdown

insurance) in states in which such

products are considered insurance.

Thus, credit union employees have been

prohibited from receiving incentive pay

for selling vehicle warranties in those

states. Since such products generally are

sold at the time a loan is made, they are

reasonably ‘‘in connection with’’ a loan.

Therefore, the proposed regulation

would prohibit the payment of

incentives to employees for the sale of

these products, regardless of whether

they are considered insurance in a

particular state.

Regulatory Procedures

Regulatory Flexibility Act

The NCUA Board certifies that this

final rule will not have a significant

impact on a substantial number of small

credit unions (those under $1 million in

assets). Accordingly, a Regulatory

Flexibility Analysis is not required.

Paperwork Reduction Act

This proposed rule, if adopted, will

impose no additional collection

requirements and, therefore, need not be

sent to the Office of Management and

Budget for approval.

Executive Order 12612

Executive Order 12612 requires

NCUA to consider the effect of its

actions on state interests. It states that:

‘‘Federal action limiting the policymaking discretion of the states should

be taken only where constitutional

authority for the action is clear and

certain, and the national activity is

necessitated by the presence of a

problem of national scope.’’ The risks to

federally insured credit unions are

concerns of national scope. The NCUA

Board believes that the protection of the

NCUSIF warrants this rule. It will not

unduly burden federally insured statechartered credit unions. This rule does

not impose additional costs or burdens

on the state, nor does it affect the states’

ability to discharge traditional state

government functions.

The benefits provided and protection

afforded by the NCUSIF are the same for

federally insured state-chartered credit

unions as for federally chartered credit

unions. It is protection afforded through

a federal system. The responsibility for

administering that system lies with the

NCUA Board. The NCUA Board believes

that all federally insured credit unions

should continue to be subject to the

same conflict provisions in the area of

lending. The NCUA Board, pursuant to

Executive Order 12612, has determined

that this rule may have an occasional

direct effect on the states, on the

relationship between the national

government and the states, or on the

distribution of power and

responsibilities among the various

levels of government. However, the

potential risk to the NCUSIF without

these changes justifies them.

List of Subjects in 12 CFR Part 701

Credit unions.

By the National Credit Union

Administration Board on April 13, 1995.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the

preamble, NCUA proposes to amend 12

CFR part 701 as follows:

PART 701—ORGANIZATION AND

OPERATION OF FEDERAL CREDIT

UNIONS

1. The authority citation for part 701

continues to read as follows:

Authority: 12 USC 1752(5), 1755, 1756,

1757, 1759, 1761a, 1761b, 1766, 1767, 1782,

1784, 1787, 1789, and Public Law 101–73.

Section 701.6 is also authorized by 31 USC

3717. Section 701.31 is also authorized by 15

USC 1601, et seq., 42 USC 1981, and 42 USC

3601–3610. Section 701.35 is also authorized

by 12 USC 4311–4312.

2. Section 701.21(c)(8) is revised to

read as follows:

§ 701.21 Loans to members and lines of

credit to members.

* * * * *

(c) * * *

(8) Prohibited fees; exceptions.

(i) Except as otherwise provided in

this section, no official or employee of

a Federal credit union, or immediate

family member of an official or
Federal Register / Vol. 60, No. 76 / Thursday, April 20, 1995 / Proposed Rules 19693

employee of a Federal credit union, may

receive, directly or indirectly, from an

outside party or the credit union, any

commission, fee, or other compensation

in connection with any loan made by

the credit union.

(ii) For the purposes of this section:

(A) Compensation includes non

monetary items.

(B) Employee includes an

independent contractor.

(C) Immediate family member means

a spouse or other family member living

in the same household.

(D) Loan includes line of credit and

workout loan.

(E) Official means any member of the

board of directors or a volunteer

committee.

(F) Senior management employee

means the credit union’s chief executive

officer (typically, this individual holds

the title of President or Treasurer/

Manager), any assistant chief executive

officers (e.g., Assistant President, Vice

President, or Assistant Treasurer/

Manager), the chief financial officer

(Comptroller), and any other employee

who sets policy for the credit union.

(G) Workout loan means a loan which

has had its original terms changed due

to nonperformance or anticipated

nonperformance.

(iii) This section does not prohibit a

Federal credit union from paying:

(A) Salary to employees;

(B) An incentive or bonus to an

employee based on the credit union’s

overall financial performance;

(C) An incentive or bonus to an

employee in connection with processing

loans, provided that no such incentive

or bonus is paid to a supervisor of the

employee, a senior management

employee, or an immediate family

member of a supervisor or senior

management employee;

(D) An incentive or bonus to an

employee in connection with making

recommended or final decisions to

approve or disapprove loans, provided

that:

(1) No such incentive or bonus is paid

to a supervisor of the employee, a senior

management employee, or an immediate

family member of a supervisor or senior

management employee; and

(2) The incentive or bonus may not be

based on the number or dollar amount

of loans approved and must be

structured in a manner that

demonstrably protects against an

increase in problem loans;

(E) An incentive or bonus to an

employee in connection with collecting

loans, provided that no such incentive

or bonus is paid to a supervisor of the

employee, a senior management

employee, or an immediate family

member of a supervisor or senior

management employee.

(iv) The board of directors of a Federal

credit union shall establish and

implement written policies, procedures,

and internal controls for any payment of

incentives or bonuses to employees in

connection with loans made by the

credit union. At least quarterly, the

board shall monitor compliance with

such policies, procedures, and controls.

Documentation of such monitoring shall

be made available to the supervisory

committee and NCUA.

* * * * *

[FR Doc. 95–9616 Filed 4–19–95; 8:45 am]

BILLING CODE 7535–01–U

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 94–NM–131–AD]

Airworthiness Directives; British

Aerospace Model BAe 146–100A,

–200A, and –300A Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

adoption of a new airworthiness

directive (AD) that is applicable to all

British Aerospace Model BAe 146–

100A, –200A, and –300A airplanes. This

proposal would require repetitive

inspections for cracking of fuselage

frame 29, and repair, if necessary. This

proposal is prompted by testing that

revealed fatigue cracking in the web and

inboard flange of frame 29. The actions

specified by the proposed AD are

intended to prevent reduced structural

integrity of the fuselage, due to fatigue

cracking in frame 29.

DATES: Comments must be received by

May 31, 1995.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), Transport

Airplane Directorate, ANM–103,

Attention: Rules Docket No. 94–NM–

131–AD, 1601 Lind Avenue, SW.,

Renton, Washington 98055–4056.

Comments may be inspected at this

location between 9:00 a.m. and 3:00

p.m., Monday through Friday, except

Federal holidays.

The service information referenced in

the proposed rule may be obtained from

Avro International Aerospace, Inc.,

22111 Pacific Blvd., Sterling, Virginia

20166. This information may be

examined at the FAA, Transport

Airplane Directorate, 1601 Lind

Avenue, SW., Renton, Washington.

FOR FURTHER INFORMATION CONTACT:

William Schroeder, Aerospace Engineer,

Standardization Branch, ANM–113,

FAA, Transport Airplane Directorate,

1601 Lind Avenue, SW., Renton,

Washington 98055–4056; telephone

(206) 227–2148; fax (206) 227–1320.

SUPPLEMENTARY INFORMATION:

Comments Invited

Interested persons are invited to

participate in the making of the

proposed rule by submitting such

written data, views, or arguments as

they may desire. Communications shall

identify the Rules Docket number and

be submitted in triplicate to the address

specified above. All communications

received on or before the closing date

for comments, specified above, will be

considered before taking action on the

proposed rule. The proposals contained

in this notice may be changed in light

of the comments received.

Comments are specifically invited on

the overall regulatory, economic,

environmental, and energy aspects of

the proposed rule. All comments

submitted will be available, both before

and after the closing date for comments,

in the Rules Docket for examination by

interested persons. A report

summarizing each FAA-public contact

concerned with the substance of this

proposal will be filed in the Rules

Docket.

Commenters wishing the FAA to

acknowledge receipt of their comments

submitted in response to this notice

must submit a self-addressed, stamped

postcard on which the following

statement is made: ‘‘Comments to

Docket Number 94–NM–131–AD.’’ The

postcard will be date stamped and

returned to the commenter.

Availability of NPRMs

Any person may obtain a copy of this

NPRM by submitting a request to the

FAA, Transport Airplane Directorate,

ANM–103, Attention: Rules Docket No.

94–NM–131–AD, 1601 Lind Avenue

SW., Renton, Washington 98055–4056.

Discussion

The Civil Aviation Authority (CAA),

which is the airworthiness authority for

the United Kingdom, recently notified

the FAA that an unsafe condition may

exist on all British Aerospace Model

BAe 146–100A, –200A, and –300A

airplanes. The CAA advises that, during

fatigue testing of the fuselage, cracking

was discovered in the web and inboard

flange of frame 29 between stringers 12