ARLINGTON, Va. — The "overhead transfer rate" — the percentage of funds that NCUA annually transfers to its operating budget from the National Credit Union Share Insurance Fund to cover expenses of the agency — is subject to notice and comment requirements under federal law, according to a
Lucy Ito, president and CEO of NASCUS, said the analysis, which was performed by Schwartz & Ballen LLP, confirms the overhead transfer rate (OTR) "substantially affects" the dual chartering system of state and federal credit unions.
"As the analysis points out, by shifting a portion of federal credit unions' share of NCUA expenses to the NCUSIF, the OTR reduces out-of-pocket expenses incurred by federal credit unions," Ito said. "Our fundamental point is that the resulting reduction in federal credit union operating fees provides a singular advantage to those credit unions, and adversely affects the competitive position of state charters relative to federal charters."
Using OTR To Cover Expenses
The overhead transfer rate is a process in which the NCUA uses the resources of the insurance fund to cover the agency's annual "insurance-related" expenses. The percentage of annual expenses the agency uses to determine the amount it will take from the insurance fund to cover the agency's annual expenses is referred to as the OTR.
NASCUS noted it has consistently questioned NCUA's calculation of the OTR. Since 1986, the OTR has mostly fluctuated at approximately 50% to 60% of NCUA's annual budget. However, NASCUS asserted, in recent years OTR has grown "dramatically," accounting now for 71.8% of the agency's total budget.
According to Schwartz & Ballen, the firm's analysis finds NCUA's adoption of the OTR constitutes a "major rule" subject to the Administrative Procedure Act (APA) notice and comment requirements. A "major rule" indicates the agency action will have a substantial impact on costs, prices, or competition in the industry, and specifically requires the agency to consider the costs and benefits of the rule, and any possible alternatives.
"The NCUA Board has never published a proposed OTR in the Federal Register for public comment, nor has it requested in the Federal Register public comment on its methodology for calculating the OTR or any change to its methodology," the analysis states. "Accordingly, we believe the process the NCUA Board uses to implement the OTR violates the APA."
NCUA Will 'Consider' Study
John Fairbanks, NCUA spokesman, said the regulator recognizes the setting of the Overhead Transfer Rate is an "important" issue for all federally insured credit unions. "We, therefore, have regularly reviewed and received stakeholder input and independent third-party analysis on the OTR methodology since the current methodology was adopted in 2001 and most recently in 2011. NCUA also is in compliance with the Administrative Procedure Act.
"Nevertheless," Fairbanks continued, "NCUA will carefully consider the NASCUS study’s conclusions to determine whether more formalized stakeholder input about the OTR methodology is warranted."
Additional information about OTR reports, reviews and decisions is publicly available in the budget section of NCUA’s website, Fairbanks noted.
Supporting Legislation
Earlier this month, NASCUS wrote of its support for
The 29-page analysis — which NASCUS says is the first to link OTR to the APA requirements of public notice and comment related — states an APA-compliant notice and comment process would require the NCUA Board to explain and demonstrate the reasonableness of the OTR and the methodology it uses to calculate the OTR.
According to Ito, publication of the analysis is a "watershed event" in the long history of state regulators' desire to provide more input into the development of the annual OTR from the insurance fund to the NCUA's annual budget.
"Opening the OTR to public notice and comment will give all stakeholders — whether state or federally chartered — the opportunity to evaluate and respond to NCUA's allocation of expenses across the industry," she said.
