The overhead transfer rate — the percentage of funds that the NCUA shifts from the National Credit Union Share Insurance Fund (NCUSIF) to cover "insurance-related expenses" — is a long-standing issue for state-chartered credit unions, and particularly the National Association of State Credit Union Supervisors (NASCUS).
In our view, the overhead transfer rate (OTR) has become an inequitable distribution, which favors the federal credit union charter over the state charter by essentially lowering FCU 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.
A New Approach
Last month, we injected into this extended debate a new approach that can be instrumental in shifting the action from words to deeds. If our hopes are realized, this new method can give the credit union movement the opportunity to weigh in on the rate's future adjustments by NCUA, and correct the inequitable distribution of funds transferred from the insurance fund to cover agency expenses.
NASCUS released in June the details of a new legal analysis — performed by experts in the field of financial institution law and regulation — which concluded that the overhead transfer rate is a "major rule" subject to "notice and comment" requirements under the federal Administrative Procedure Act (APA).
That's no small thing. It's true that NCUA now makes additional information about OTR reports, reviews and decisions publicly available in the budget section of the agency's website. But publishing information on a website is not comparable to following an orderly, timely and disciplined process — under force of law.
Rather, meaningful transparency requires allowing stakeholders to weigh in on the legal and policy determinations that shape the NCUA's expense allocation — which, we believe, will ultimately allow for more equitable and deliberate decisions by the Board.
To more keenly illustrate the inequality that results for state-chartered CUs from the current method of determining the OTR, consider the 2014 results. For that year, the NCUA Board adopted new mapping of agency regulations that classified virtually all activities related to safety and soundness as "insurance-related." By shifting the entire safety and soundness program of the agency to the share insurance fund, NCUA minimized direct out-of-pocket examination costs for federal credit unions.
That effectively subsidizes the federal charter (see table).
By increasing the OTR in 2014, NCUA was able to shift a substantial portion of its expenses to the insurance fund, thereby enabling NCUA to reduce 2014 FCU operating fees by $10.5 million despite an increase of $26.5 million in its 2014 operating budget.How could that be?
That question, and others, could be addressed (and hopefully answered) if the NCUA Board adopted a clear process, through a notice and comment procedure as required under the APA.
And there is precedent, of course, for the agency to take this approach. NCUA's sister federal bank regulatory agencies (FDIC, OCC, the Fed) all publish their proposed assessments in the Federal Register for public comment pursuant to the APA.
When all is said and done, our collective concern about the OTR is not an academic exercise saddled in bureaucratic legalese. This is about dollars and cents, with NCUA cutting federal operating fees by tapping the money contributed by both federal and state charters.
Let's open the OTR methodology to public comment, to assure both transparency in the process, equity in the costs borne by federal and state credit unions — and a continuing, strong dual chartering system.
Lucy Ito is president of the National Association of State Credit Union Supervisors.