ALEXANDRIA, Va.–The NCUA board has voted 3-0 to put out for 60-day comment a proposal related to its operating fee schedule methodology for federal credit unions, including an increase in the asset threshold for FCUs to be exempt from paying the operating fee to $2 million from $1 million.
NCUA is funded primarily by two sources: the operating fee and the overhead transfer from the share insurance funds, which is used to cover costs related to examining state-chartered CUs.
Agency staff who presented the proposal to the board—Melissa Lowden, deputy CFO in the Office of the Chief Financial Officer, and Trey Damron, staff accountant in the Office of the CFO—outlined a few other sources of income/expense that affect the budget, and noted the current fee exemption for federal credit unions for less than $1 million has not been adjusted in 11 years, even though FCU assets have doubled over that time.
Credit unions are being asked for the feedback on two issues: the current three-tier fee structure, which is regressive; and specific suggestions for the equitable assessment of the operating fee across all FCUs.
Harper: ‘Vastly Different Today’
NCUA Chairman Todd Harper noted that when the boardlast considered the operating fee methodology in late 2020, it approved changes to account for pandemic response and relief programs — like the Small Business Administration’s Paycheck Protection Program and other federal fiscal stimulus programs — that resulted in large inflows of deposits into credit unions.
Harper noted the number of FCUs eligible for the exemption would increase to 225 from 128 under the proposal. The proposal would also allow the agency to annually adjust the exemption threshold for inflation.
“Under this proposal, the NCUA board is also trying to balance the resources the agency needs to operate and carry out its mission while ensuring equity across federal and state-chartered credit unions and the industry’s various asset classes,” Harper said. “In reaching these decisions, we must further recognize that the credit union system is vastly different today than when the three-tiered system was first created more than a decade ago.”
He noted that currently most credit unions have more than $10 million in assets, while in 2013 when it implemented the current operating fee methodology, there were 2,181 credit unions under that asset mark. Today there are some 950 credit unions with less than $10 million in assets.
‘Measure of Relief’
“Like a decade ago, small credit unions are still often the only federally insured depository institutions in under-resourced communities,” said Harper. “And they are frequently challenged by economies of scale, increasing technological demands, changing consumer behaviors, and growing competition. Raising the operating fee exemption threshold to $2 million and indexing that threshold for inflation will provide a measure of relief to these institutions, bring the threshold back into alignment with where it once was, and keep it there going forward.”
Harper further noted that the board is also seeking comment on other proposed changes to the operating fee methodology, including modifying the current three-tier schedule.
Growing Billion-Dollar CUs
Meanwhile, Harper pointed out there are now 178 federal credit unions with more than $1 billion in assets that “pose greater risks for the Share Insurance Fund” and, as a result, which require more time for examination and supervision.
“And we know that these large institutions generally have higher returns on average assets than credit unions below that threshold. Yet, the current operating fee methodology is regressive in that credit unions with greater assets generally pay a lower marginal rate than credit unions with fewer assets,” he said. “Why should credit unions with greater assets, greater earnings, and greater supervision needs pay a lower marginal rate than credit unions below $1 billion in assets, which are more likely to struggle with earnings? The NCUA is authorized to set the operating fee ‘at a rate consistent with a credit union’s ability to pay.’ So, we do have some flexibility to revise the operating fee methodology to make it less regressive or even, perhaps, progressive.”
Hauptman: ‘Death From a Thousand Cuts’
NCUA Vice Chairman Kyle Hauptman noted that since 2012, federal credit unions with average assets of $1 million or less during the preceding four quarters have been exempt from paying an operating fee, and that over the last 11 years the average assets of federal credit unions have approximately doubled.
“Raising the fee exemption level from $1 million to $2 million in average assets makes sense,” said Hauptman. “I appreciate the proposal to exclude certain assets from the base used to compute the operating fees. Currently, the fee charged to a federal credit union whose average assets are $1,000,001 is $164 – up from $0 when the same CU had assets of $999,999. That’s a marginal tax rate of nearly 6,000%. The new methodology is akin to the standard deduction in the tax code, which everyone gets an amount of tax-free income and then only pays taxes starting at the first dollar above the set amount.”
Hauptman said that during his two years on the NCUA board he has been “struck by the burden on small credit unions to keep their doors open,” describing it as “death from a thousand cuts.”
‘No Magic Bullet’
“There is no magic bullet. It’s not the small fee, it’s all the small fees to lots of people, not just to the NCUA,” Hauptman continued. “It’s not a single one-page form for compliance, it’s all the one-page forms. The proposed methodology to exclude certain assets and the proposed changes to the exemption levels are a move in the right direction. We must start somewhere. The goal here isn’t just to cut down on payments to the NCUA, it’s to cut down on someone’s to-do list. It’s to cut down on stress.”
In response to a question from Hauptman, staff said a presentation on the overhead transfer rate will occur before the end of the year.
Hood: Expresses Support, But Has Questions
Expressing his support for the proposal, NCUA Board Member Rodney Hood said he favors the idea of indexing the exemption threshold for inflation.
Hood did pose several questions to NCUA staff, including asking if there are any other fees or figures that that the board could use in considering indexing to inflation?
Staff said most other fees charged by the agency are “modest in nature” and are linked to the costs involved with the service provided.
Hood further asked, given the $10 million-in-assets CECL exemption, should this figure be used here as well?
Moving to $10 million would exempt about one-in-four credit unions, staff told Hood.