WASHINGTON — Heeding industry outcry, outgoing National Credit Union Administration Chair Debbie Matz opened up the regulator's primary funding mechanism for comment.
The "overhead transfer rate" — the percentage of funds that NCUA annually transfers from the National Credit Union Share Insurance Fund to pay for insurance-related expenses has risen sharply from 52% in 2008 to 73.1% in 2016 while operating fees charged to federally chartered credit unions have declined.
In comment letters submitted to the NCUA and due April 26, stakeholders questioned whether the OTR, which is intended to fund insurance-related costs, should be increasing while the industry appears to be on more stable footing. Federally insured state chartered credit unions also contend they are subsidizing the oversight of their federally chartered counterparts.
"With the improving economy and the strengthening of credit union balance sheets, the dramatic increase in the transfer rate is still staggering and highlights the potential flaw in the fairness of the current methodology" wrote Andrew Price, senior director of advocacy and counsel at the Credit Union National Association, which represents both state and federally chartered credit unions. "Our goal is to ensure a fair distribution of the charges for the supervision of credit unions consistent with the Federal Credit Union Act."
Commenters also said using the NCUSIF to pay for safety and soundness examinations of federal credit unions is a flawed concept because protecting the health of the share insurance fund is a separate mandate from supervisory oversight.
"Contrary to the NCUA's fundamental premise that all safety and soundness is insurance, the[Federal Credit Union Act] states that 'regulators' (as in NCUA as chartering authority) are responsible for safety and soundness to protect the public and the economy," wrote Lucy Ito, president and chief executive officer of the National Association of State Credit Union Supervisors. However, she said the structure could be remedied.
"NCUA should internally segregate the functions of its chartering supervision of FCUs from its share insurance supervisory functions," Ito continued, adding that "In this way, NCUA's cost allocations would be clear: FCUs would pay an operating fee to support NCUA's supervision, including safety and soundness, and NCUA would transfer from the NCUSIF the costs of overseeing the share insurance supervision of both FCUs and FISCUs"
Harold Feeny, commissioner of the Texas Credit Union Department said the current structure creates "an imbalance of the allocation between the insurance fund and the declining fees collected from FCU's has an inadvertent discriminatory effect on state charters that pay into the insurance fund."
Bryan Schneider, secretary at the Illinois Department of Financial and Professional Regulation said, "it appears that NCUA has transferred all or nearly all its safety and soundness costs to the insurance fund, thus blurring what are supposed to be separate and distinct responsibilities that are clearly and separated delineated."
Paul Brucker, president of the Railway Credit Union in Bismarck, North Dakota also commented on the OTR moving from a soft target of 50% to more than 70% saying it has "created a cost advantage to a federal credit union charter vs. a state charter."
"This has happened through more money being allocated through this transfer thus requiring less annual assessments from [federal charters]," Brucker reasoned.
Linda Jekel director of credit unions in Washington State said, "we respectfully ask the FCU operating fee methodology be revised to fully fund the supervision and safety and soundness examinations of FCUs."
"In addition, we ask the OTR methodology be revised to rely on safety and soundness examinations for FCUs and FISCUs to the maximum extent feasible, as a cost savings to the insurance fund" Jekel added.
Price at CUNA also argued that costs could be reduced if the NCUA left more examination duties in the hands of state examiners.
"Our member state-chartered credit unions often report that there is significant overlap of state and federal examinations," Price said. "NCUA should go much further in utilizing and relying on other regulators' work product than it currently does."
Other commenters also said the NCUA budget has become bloated and should be more transparent when assessing the funding needed.
"NCUA's operating budget has dramatically increased with the increases in the OTR," wrote Parker Cann, senior vice president and general counsel of the Boeing Employees' Credit Union, arguing that the NCUA has gobbled up funding because of its access to the shared the insurance fund.
"The lack of budget discipline is a reflection of the lack of effective oversight," said Cann, who formerly was a state credit union regulator.
Ito at NASCUS called for "returning to a simple OTR of 50% of NCUA's annual operating budget" and said the inputs used to calculate the OTR should be approved by the board rather than allowing NCUA staff to have carte blanche.
"The NCUA Board's delegation of its final approval of the OTR to staff is an abdication of one of the most important functions of the board: oversight of the agency's and the NCUSIF's budget," Ito said.
Kevin Hagler, commissioner of Georgia Department of Banking and Finance also said that "If the NCUA, in its capacity as administrator of the NCUSIF, continues to make distributions from the NCUSIF to offset its costs of performing its safety and soundness responsibilities as the chartering authority for federal credit unions, then the same proportionate amount should be distributed to the state system to offset the costs of state regulators for performing their safety and soundness responsibilities for federally insured state chartered credit unions."
While the NCUA opened up the OTR for comment, in a statement at a November board meeting Matz that "setting the annual Overhead Transfer Rate has always been a thankless job for the NCUA Board and staff, because it is never possible to satisfy all stakeholders. If the Overhead Transfer Rate goes up, state charters complain the rate is too high. If the Overhead Transfer Rate goes down, federal charters complain the rate is too low."
