Compliance Blog

Posted by Anthony Demangone

Here are a few interesting tid-bits for your Wednesday. 

Warren  I've been hearing some very interesting chatter on Elizabeth Warren. On the heels of taking out Osama Bin Laden, President Obama has gained some serious political momentum.  Enough, perhaps, to push Elizabeth Warren through the CFPB senate nomination process. 

Schumer Box for Checking Accounts?  Perhaps I should bet the horses  The other day I was talking about how I think regulators will focus a bit more on share accounts, and now there's this.  Senator Schumer would love a new disclosure that clearly shows all checking account fees.  This could require legislators to amend the Truth In Savings Act.  And who knows what else might happen when that is cracked open. 

NCUA Opinion Letter on Conflicts.  Not too long ago, NCUA released Legal Opinion 11-0255.   Here's the "holding," if you will.

You have asked whether an FCU employee, who serves as the Director of Lending, has a conflict of interest when she disapproves member loans and then refers them to a mortgage banker that also compensates her. Yes, it is an impermissible conflict of interest for the FCU employee whether she receives a referral fee or a salary from the mortgage banker.

The legal opinion does a nice job of walking you through the conflict/compensation provisions of NCUA's lending regulation.  At the end of the day, NCUA's lending regulation simply does not permit someone who makes lending decisions to earn compensation from an outside party related to a credit union lending decision when that payment is based on a referral from the credit union. 

(Soapbox warning...soapbox warning.)

But one should take a step back and think about this for a moment.  Even if there were no clear NCUA rule on this matter, the situation still presents a conflict.  When an employee can make money by turning down a loan and referring it to a third party, you should hear the noise of red flags popping up.  Incentive-based compensation has the propensity to, well... incentivize people.  If I'm paid when I refer a loan to a third party, economists would tell you that, at the margin, some loans that should be made by the credit union may very well be turned down and referred.  I wonder how many credit unions ever lay out all of their incentive-based compensation practices on the table and look at them.  And I mean all of them.  Are you paying a loan executive based on loan growth and also paying a collections manager based on the level of delinquencies?  You might as well put a humidifier and dehumidifier in a room to see which wins.

The electric company wins, that's who.