ALEXANDRIA, Va. — The ongoing dispute between state and federal regulators over NCUA's overhead transfer rate took yet another twist with the general counsel of NCUA writing a letter to the head of NASCUS that attempted to quash several of the trade group's arguments.

Credit Union Journal on Friday obtained a copy of the letter from Michael McKenna to Lucy Ito. The correspondence was dated July 30 and denotes it was sent from NCUA to NASCUS via certified mail.

Ito and NASCUS in recent months have repeatedly asserted that the overhead transfer rate — the percentage of funds NCUA shifts from the National Credit Union Share Insurance Fund (NCUSIF) to cover insurance-related expenses — has become an "inequitable distribution" that allegedly "favors" the federal credit union charter over the state charter.

In an opinion piece published by CU Journal, Ito wrote that NCUA's current overhead transfer rate "essentially" lowers federal credit union operating fees by "reallocating a significant portion of the expense related to FCU supervision from direct FCU operating fees to the NCUSIF, which is funded in part by state-chartered credit unions."

"And that favoritism must come to an end, if the dual-chartering system is to thrive," Ito declared.

In June, NASCUS had the Washington law firm Schwartz & Ballen LLP perform a legal analysis, which concluded the OTR "substantially affects" the dual chartering system of state and federal credit unions.

McKenna Strikes Back

In his July 30 letter to Ito, McKenna begins by noting NASCUS has made multiple requests for the release of all documents NCUA has produced on how it determines the overhead transfer rate.

"These requests continue despite the fact that NCUA has produced extensive data on this subject, probably more than any other federal regulator has on its budget process," McKenna wrote.

According to McKenna, the documents currently available to the public, "exhaustively disclose the process and methodology NCUA uses to calculate the OTR. Going forward, Chairman [Debbie] Matz has committed to do even more, pledging to soliciting and considering public comment on the methodology every three years."

McKenna then addresses Ito's call for a public evaluation of "differing legal conclusions" about whether the OTR or its methodology are subject to the notice and comment requirements under the Administrative Procedure Act. McKenna asserts the request is tantamount to NASCUS asking NCUA to release "confidential privileged materials."

"In my opinion such a public debate about the technical legal issues surrounding this matter is not about transparency and will certainly not resolve the differences of opinion on the subject," McKenna wrote, adding, "I have determined that written advice provided by this office to the Board on the applicability of APA notice and comment processes to the OTR be withheld."

The letter goes on to summarize several areas in which McKenna disagrees with the legal report that NASCUS had done on its behalf. He says the allegation in the report that NCUA "has never provided a reasoned, comprehensive explanation of its OTR methodology" is "significantly undermined" by the report itself. McKenna notes more than one-third of the 31-page report "meticulously describes the history and evolution of NCUA's OTR and its processes."

McKenna then adds, "the fact that NASCUS is unhappy with the allocation the OTR methodology produces does not lead to the conclusion that the OTR methodology or process is legally impermissible."

According to McKenna, the OTR is a "foundational part" of NCUA's management and budgeting process, and therefore "multiple exemptions from APA notice and comment rulemaking apply."

"NCUA has never waived any of these statutory exemptions and the cases cited in the NASCUS report are not controlling or persuasive with respect to the OTR," McKenna asserted.

The final argument presented in McKenna's letter is the statement, "the OTR is not a major rule." He states "major rule" designations apply under the Congressional Review Act, not the Administrative Procedure Act. McKenna says the Congressional Review Act "excludes from its coverage completely" any "rule that approves or prescribes for the future rates, wages, prices, services, or allowances therefor, corporate or financial structures, reorganizations, mergers, or acquisitions thereof, or accounting practices or disclosures bearing on any of the foregoing."

Ito: McKenna Letter Is 'Progress'

After CU Journal informed NASCUS it had obtained a copy of McKenna's letter, Ito provided a response to some of McKenna's assertions.

"We have been asking for insight into the agency’s legal conclusions regarding why the overhead transfer rate is not subject to the APA, and now we have it," Ito said. "In that respect, we consider this progress."

Ito said NASCUS respects the role of the NCUA Office of General Counsel and the confidentiality of its advice, but insisted the NCUA Board has a "public duty to justify its actions to stakeholders."

"The bottom line is state regulators and credit unions deserve the opportunity to voice their views about the allocation of resources by the agency via the OTR, and to have those views considered by the agency," Ito said. "The NCUA Office of General Counsel's conclusions do not erase the fundamental desire by our members, and we will keep pursuing every avenue to help them achieve their goal."

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