Compliance Blog

The members of a credit union’s board of directors are often referred to as volunteers, and for good reason. The FCU Act and NCUA regulations – specifically section 701.33 – prohibit federal credit unions (FCUs) from compensating their directors, which means credit union directors are not paid for the work they do. There is one exception to this prohibition: one director may be compensated if provided for in the credit union’s bylaws.

Section 701.33(b)(2) provides some items that are not considered to be compensation, and which therefore can be provided to the directors without violating the “no compensation” rule. The provision we’ll focus on today is found in section 701.33(b)(2)(i), which allows a credit union to pay or reimburse “reasonable and proper costs”  incurred by a director “in carrying out the responsibilities of the position.” Such expenses may be covered for any “official,” which includes associate directors and committee members.

The regulation states that, for such costs to be paid, they should be “in accordance with written policies and procedures, including documentation requirements, established by the board of directors” (emphasis added). The NCUA has stated that FCUs are given “the flexibility to establish reimbursement programs that meet an FCU's unique needs.” Once the policy is in place, it will be up to the board to determine if specific expenses fit the policy and procedures. The NCUA discussed the process in this 1991 legal opinion letter and this 1996 legal opinion letter. According to those letters, the first step is to determine if the costs were incurred during official business. Then, the board should consider whether the costs were “reasonable and proper.” Finally, the board should determine if payment would be “necessary and appropriate.”

The NCUA has issued a number of legal opinion letters over the years on the topic of expenses incurred by the board. Generally speaking, the NCUA has said reimbursement of travel and lodging expenses incurred while attending FCU meetings or trainings are proper, under the right facts and circumstances. The NCUA has also said meals during travel or meetings could be proper, but the propriety of meals eaten before or after meetings should be decided on a case-by-case basis. Interestingly, a 2003 legal opinion letter noted that expenses to provide a computer or cellphone, or to reimburse officials who use their own computers or cellphones, could be proper. Credit union officials might be more likely to incur such expenses during the COVID-19 pandemic, given the restrictions on non-essential travel and the need to hold meetings remotely. As for expenses that are improper, the NCUA has stated both costs for babysitters and childcare are not proper. Finally, the NCUA has stated that reimbursing  vacation time or wages a volunteer loses at their paid job due to attending credit union meetings are also improper, as that would amount to compensation.

The 1991 letter states that the permissibility of reimbursement will be based on the facts and circumstances of the expense, and is “best decided on a case-by-case basis.” The NCUA grants fairly broad discretion in this area. The 1996 letter states: "The NCUA Board believes that as long as expenditures are reasonable and safety and soundness concerns are met, FCU payment for an official…  should be within the discretion of the individual FCU." (emphasis added).

However, that discretion does not mean FCUs have carte blanche to approve any proposed expense. The 1991 letter also noted an FCU’s discretion is not unlimited, and the opinion of examiners could matter in determining if certain expenses go too far: “Examiners have first hand experience in dealing with particular boards of directors and may respond to what they see as abusive practices.”

For credit unions, this becomes a balancing act. Credit unions want to reimburse costs for volunteers – otherwise, the costs of serving the credit union could be too great or could deter people from serving. On the other hand, the NCUA letters indicate that some expenses can cross the line into becoming  compensation, or could stray into areas that are not “reasonable and proper” given the official’s responsibilities. Credit unions may want to write their business expense policies and conduct their board review of expenses carefully to balance those considerations.