Last week’s approval of a new overhead transfer rate methodology by the National Credit Union Administration board is a victory for all federally insured credit unions — both state and federal charters alike. Yet, the credit union system must remain vigilant and engaged in which specific costs are allocated to the National Credit Union Share Insurance Fund.
The previous, cumbersome OTR methodology has been replaced with a simple, reasonable and understandable "principles-based" method. Fundamentally, the biggest change is that the new approach fully recognizes NCUA's safety and soundness responsibility as the chartering body and prudential regulator of federal credit unions. The second fundamental change is that NCUA will open the OTR to public notice and comment every three years or whenever the agency proposes a change to the methodology.
NCUA previously allocated 100 percent of safety and soundness costs to the NCUSIF and none to federal credit unions’ operating fees. Going forward, NCUA will allocate 50 percent of federal credit union exam costs to insurance-related concerns and 50 percent to its federal credit union prudential regulator role.
At long last, a decades' old debate between NCUA and the state credit union system has been resolved. For nearly 20 years — including a 2001 legal study and second legal analysis in 2015 — the National Association of State Credit Union Supervisors has advocated that NCUA (1) allocate its safety and soundness examination costs for federal credit unions fairly between the insurance fund and federal credit union operating fees, and (2) open the overhead transfer rate to periodic public notice and comment. After two decades of advocacy and both requests granted, this is a win for the state credit union system.
All CUs should all benefit from this, regardless of how they are chartered. The benefits for all federally insured credit unions, state supervisory agencies and NCUA include: simplicity, time savings, greater transparency, a fairer allocation of costs and less volatility in – and greater predictability of – the OTR (an expected narrow band of adjustment from year-to-year). Most significantly, it gives credit unions a voice in how agency costs will be allocated to the NCUSIF – which, after all, is credit unions’ money.
The bottom line: the 2018 OTR will be reduced to 61.5 percent from 67.7 percent in 2017 and a high of 73.1 percent in 2016.
CUs must be their own watchdog
Meanwhile, the federal operating fee credit unions pay will increase an estimated 15 percent in 2018, having already risen by 25 percent this year. A 40 percentage-point increase over two years sounds like a lot in a short amount of time — and it is, until one considers the last several years. From 2009-2016, the federal credit union operating fee decreased a cumulative 31.6 percent. Spread over 2009-2018 and including the prior decreases, the federal credit union operating fee will have effectively increased by only 8.4 percent since 2009 — far less than inflation over this 10-year period. Plus, the new OTR methodology promises to minimize wild swings in either the OTR or the federal credit union operating fee. Lastly, federally chartered institutions will directly benefit from a lower OTR, which will keep more credit union funds in the NCUSIF – making more money available to cover the equity ratio and to possibly go towards future dividends.
While NCUA’s new “principles-based” OTR methodology is simple, rational and fairer, all federally insured credit unions and state supervisory agencies need to remain vigilant over how the regulator allocates specific expenses. NASCUS will continue its historic role of ensuring that NCUA allocates costs reasonably and that the board takes seriously its fiduciary duty to responsibly manage the expenditure of NCUSIF monies.
All federally insured credit unions must remain watchful of how NCUSIF dollars are spent. Having secured public notice and comment on OTR, it is incumbent on the credit union system to be the watchdog of its own money.
NASCUS and the state system applaud and thank Chairman McWatters, Board Member Metsger and NCUA’s staff for their open dialogue with the state system, and for demonstrating their commitment to transparency and fairness.
With a 20-year debate finally resolved, NASCUS and the state credit union system look forward to working with NCUA and the broader credit union movement to ensure a safe and sound, innovative and robust dual charter system.