e-Weekly

February 23, 2011

NCUA proposes enhanced incentive-compensation rules
The National Credit Union Administration (NCUA) recently issued for a 45-day comment period a plan that would require enhanced disclosure and reporting requirements for compensation arrangements, as well as prohibit incentive-based payment plans that can serve to encourage "inappropriate risk taking."

At the NCUA meeting Thursday, February 17, board members considered new rules for incentive-based compensation as required by the Dodd-Frank Wall Street Reform Act. The NCUA proposal seeks to implement a provision of the Dodd-Frank Wall Street Reform Act, which requires the federal financial institutions regulators to adopt a rule to weed out incentive-based compensation practices that could expose an institution to great losses. Dodd-Frank defines incentive-based compensation to mean any variable compensation, in any form, that serves as an incentive for performance.

Under the NCUA proposal, all credit unions with more than $1 billion in assets would have to disclose executive incentive plans annually. There are further requirements for credit unions with greater than $10 billion in assets, termed "larger covered financial institutions" by the NCUA. Larger-covered financial institutions must meet certain provisions on deferral of incentive-based compensation for executive officers. For instance, they must require a 50% deferral of all cash bonuses for at least three years. At the end of that period, the credit union must adjust the bonus to reflect any losses suffered by the institution.

Credit unions above $10 billion-in-assets also must identify additional personnel, other than executive officers, "who have the ability to expose the institution to possible losses that are substantial."

During the NCUA comment period, credit unions could conceivably focus on the lack of equal treatment the NCUA rule poses for credit unions compared to banks.

While the NCUA proposes to apply the deferral rules to $10-billion institutions, a Federal Deposit Insurance Corp. rule for banks, unveiled earlier this month, proposes to apply the stricter rules to institutions of $50 billion in assets or greater.

Credit Union National Association General Counsel Eric Richard said of the discrepancy, "This is an area that the NCUA needs to consider further. Credit unions are not known to have engaged in the kind of sketchy incentive-compensation practices that the Dodd-Frank law seeks to address. "Does it make sense then to hold credit unions, which represent greater adherence to safe and sound practice, to more stringent standards than the perpetrators of the problem?"

The NCUA, in its proposal document, maintained that the rule's burden would be minimized by granting "covered financial institutions" flexibility to use "a variety of means to mitigate the risks posed by their current incentive-based compensation programs." For more on the proposed rule, use this resource link: NCUA Draft Document.

FinCEN advisory warns of elder financial exploitation
The Financial Crimes Enforcement Network (FinCEN) released on Monday, February 21, a new advisory to help financial institutions spot and report on activities involving elder financial exploitation. The advisory, Advisory to Financial Institutions on Filing Suspicious Activity Reports Regarding Elder Financial Exploitation, contains red flags, or indicators that abuse may be occurring and specifically asks financial institutions to include the term "Elder Financial Exploitation" on filings of suspicious activity reports (SARs).

"Financial institutions care about their customers and in some cases may be uniquely placed to identify when customers are possible victims of elder financial exploitation," said James H. Freis, Jr., FinCEN director. "Elder abuse in any form is intolerable. Working with feedback from financial institutions, FinCEN developed this new red flags tool as a way for depository institutions in particular to combat elder financial exploitation."

FinCEN requests that financial institutions select the appropriate characterization of suspicious activity in the Suspicious Activity Information section of the SAR form and include the term "elder financial exploitation" in the narrative portion of all relevant SARs filed. Explicit mention of a particular term in the SAR greatly assists investigators in quickly identifying possible illicit activity.

The red flags noted in the advisory include both activity that may come to bank personnel attention through monitoring transaction activity and through interactions with customers or their caregivers:

• Frequent large withdrawals, including daily maximum currency withdrawals from an ATM, debit transactions that are inconsistent for an elder, or sudden non-sufficient fund activity.
• A caregiver or other individual shows excessive interest in the elder's finances or assets, does not allow the elder to speak for himself or herself, or is reluctant to leave the elder's side during conversations.

The advisory contains a more complete listing of various indicators of elder financial exploitation.
This reporting is meant to complement financial institutions' existing policies and procedures on reporting suspected elder financial exploitation to local and state authorities, to aid in the detection and deterrence by appropriate government authorities of criminal activities.

Click here to view the Advisory to Financial Institutions on Filing Suspicious Activity Reports Regarding Elder Financial Exploitation

U.S. bankruptcy rate declines in 4Q for sixth time
Bankruptcies filed in the U.S. rose 8% during calendar year 2010, according to data recently released by the Administrative Office of the U.S. Courts.

However, the rate of growth of bankruptcies filed during fourth quarter 2010 declined for the sixth consecutive quarter for business filings and for the second quarter in personal filings. During fourth quarter, roughly 370,080 bankruptcies were filed, down from 372,203 filed for the same period in 2009.

In 2010, 1.59 million bankruptcies were filed. That is a five-year high and up from 1.47 million filed in calendar year 2009.

"These bankruptcy filing numbers roughly track credit union loan loss data," said Bill Hampel, chief economist at the Credit Union National Association (CUNA). "Household financial conditions deteriorated dramatically from 2007 to the first part of 2010. Since then, conditions have stabilized with the result that although high, bankruptcy filings are at least beginning to recede," he said. "We have a way to go, and it will take quite a while to get there, but at least we are moving in the right direction," Hampel told News Now.

Filings have increased steadily since 2006, when they totaled 617,000 for the first 12-month period after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect. In 2005 more than 2 million bankruptcies were filed in the rush to beat the more restrictive requirements from the act.

Most of the 2010 filings involve non-business debts, which totaled 1.536 million, up 9% from 1.4 million filed in 2009. Business filings totaled 56,282, down 7% from 60,837 in 2009.

Chapter 7 bankruptcy filings totaled 1.139 million in 2010, with Chapter 13 the next highest, at 438,913 filings, followed by 13,713 under Chapter 11, and 723 under Chapter 12.

The recession's end is finally bringing the expected improvement in consumer and business finances, said Moody's Economy.com.

For more detail, use this link: U.S. Courts bankruptcy data.