ARLINGTON, Va.–The trade group representing state regulators has filed a comment letter with NCUA in which it offers recommendations and suggested changes in the agency’s proposals related to administering the Overhead Transfer Rate (OTR) and determining its annual operating fee.
The National Association of State Credit Union Supervisors (NASCUS), for which both issues have long been a priority, said that after reviewing NCUA’s proposal in detail, said it agrees it is appropriate to re-evaluate the treatment of capital expenditures and miscellaneous revenue for purposes of calculating FCU operating fees and the OTR.
“We are however concerned with the increase in the OTR as reflected by the current proposal,” NASCUS said. “In addition to discussing those concerns, NASCUS also offers comments regarding the four OTR principles, the notice and comment process and NCUA’s statutory authority and obligations.”
According to NASCUS, the OTR methodology, and the allocation of NCUA’s expenses take on particular importance against the backdrop of the ongoing pandemic in the United States and resulting economic dislocation.
‘The Incontrovertible Truth’
“The incontrovertible truth is that every dollar transferred from the NCUSIF to fund NCUA expenses is one dollar not available to cover the losses in the system and subsequently a dollar that may need to be replenished in the NCUSIF by the charging of a premium,” NASCUS wrote.
“Furthermore, the allocation of NCUA’s operating expenses and the corresponding effect on FCU chartering fees has the potential to imbalance the dual chartering system by disadvantaging the state system in an inequitable and inorganic manner.” NASCUS told the agency that for over 20 years, a majority of NCUA’s annual budget has been paid by the OTR, reaching a high of nearly 75% of NCUA’s 2016 budget.
“This is significant because FISCUs shoulder an inordinate cost of supervising the safety and soundness of the credit union system. By number of individual credit unions, FISCUs make up only 37% of the total number of FICUs,” the state regulators told the agency. “However, since FISCUs make up nearly 50% of all insured shares, the cost of the OTR is borne equally from the funds of both FISCUs and FCUs, even though there are more FCUs whose examination costs are being charged to the NCUSIF. Put another way, FISCUs pay half the NCUSIF’s costs but are only 37% of the work.”
Assertion ‘Ignores Facts’
Noting some may assert FCUs pay an aggregate greater amount of NCUA’s overall budget when the total expense to FCUs of the operating fee and OTR are aggregated, NASCUS argued that assertion ignores the fact that “the NCUSIF is NOT expending resources to conduct examinations on a majority of FISCUs because it relies on the exam work conducted by the states. Exam work which is paid for entirely by FISCUs.”
NASCUS noted Oregon, Kentucky, Texas, Michigan, Iowa, Georgia, Connecticut, and Washington alone sent examiners to more than 6,793 hours of non-NCUSIF funded training.
“All those examinations, and all of that training, was paid for by state credit union fees: Over $25.2 million for examination and supervision in those nine states alone,” NASCUS said. “A similar story can be told in the remaining 36 state regulatory agencies.”
NASCUS went on to write that because FISCUs pay the full cost of their state examinations, and then through the OTR 100% of NCUSIF insurance reviews of FISCUs, 50% of FCU examination costs, 100% of CUSO and vendor supervision and other costs, the OTR is borne by FISCUs in lost NCUSIF dividend opportunity or as additional NCUSIF premium costs as may be the case in 2021.
“For FCUs however, the OTR carries an inverse benefit. The larger the OTR, the more modest the FCU operating fee. That inequitable result is one reason why the OTR methodology is so important to the state system,” NASCUS said.
The trade group said that in 2017, NASCUS acknowledged it was an improvement over the then existing methodology, “albeit an imperfect improvement.”
But “as more NCUA annual budget expenditure categories are allocated to the NCUSIF, the 2017 compromise becomes less tenable for the state system.
Proposed Change to Treatment of the Capital Budget
NASCUs said it agrees with the NCUA proposal to include the budget for capital projects within the annual budget subject to the OTR. “The NCUSIF should bear the capital budget costs of its operations,” NASCUS said. “However, as discussed above, the allocation of the capital budget pursuant to the four principles might be convenient but may not be equitable as the percentages are currently defined for the methodology.
“For example, included in NCUA’s capital budget are the costs related to acquisition and maintenance of laptops for NCUA examiners. It is not entirely clear why the NCUSIF would carry that cost going forward. While there was a time the NCUSIF provided laptops to state examiners with NCUA’s examination software installed, today 30 of the 45 state regulatory agencies acquire and maintain their own state computers,” NASCUS continued. “For the remaining 15 states, the NCUSIF will end its computer lease program in 2021, and those states have begun the process of acquiring their own computers at state expense. States and state credit unions alone will bear the capital cost of computers and computer software. It would seem that the NCUSIF should carry a much smaller percentage of NCUA’s computer, software and other capital charges than NCUA allocates to its role as the FCU chartering authority.”
Additional Feedback
NASCUS also offered feedback on:
Proposed Change to Treatment of Miscellaneous Revenue
NASCUS noted that each year, NCUA generates revenue from the sale of reports and publications, rent from agency facilities and income from its ownership of the parking garage at Duke Street. “Historically, NCUA has used this Miscellaneous Revenue to offset the portion of its annual budget funded by FCU operating fees. NCUA is proposing changing that apportionment to credit Miscellaneous Revenue to the portion of the annual budget charged against the NCUSIF. NASCUS supports the proposed change in treatment of Miscellaneous Revenue.
Classification of CUSO and Third-Party Examination and Supervision Expenses
NASCUS noted NCUA’s 2017 OTR Methodology classifies all “time and costs the NCUA spends supervising or evaluating the risks posed by FISCUs or other entities the NCUA does not charter or regulate (e.g., third-party vendors and credit union service organizations)” as 100% insurance related. NASCUS said it disagrees that allocating NCUA work related to CUSOs and other third-party vendors as solely related to the NCUSIF is consistent with the principles of the methodology or with the practical reality of a chartering authority. “As we noted in 2017, while it is true that NCUA does not charter or supervise CUSOs or vendors, it is not entirely the point. NCUA, as the chartering authority of FCUs, has an obligation to ensure that FCU CUSOs and other third parties are operating safely and within compliance of applicable rules and regulations.
Voluntary Self-Assessment Incentive
Noting NCUA is soliciting comment on whether the agency should provide a financial incentive for FCUs that complete the annual voluntary diversity self-assessment, NASCUS said should any incentive program NCUA implements affect the OTR or the NCUSIF, such program should be explained in detail and subject to formal notice and comment.