In recent public discussions about NCUA's Overhead Transfer Rate, some have questioned whether the agency has been sufficiently transparent about the methodology used to calculate the rate each year. This discussion could benefit from a look at the history of the OTR.
NCUA has used the OTR since 1973, beginning with the adoption of federal share insurance for credit unions. The OTR was designed to cover NCUA's costs of examining and supervising the risks to the Share Insurance Fund posed by all federally insured credit unions and the costs of administering the fund.
The OTR represents the percentage of NCUA's annual operating budget paid by a transfer from the fund. These transfers are made monthly, based on actual, incurred expenses, not budgeted amounts. Federally insured credit unions are not billed for and are not required to remit those amounts transferred for insurance-related activities.
In response to suggestions from trade associations, the NCUA Board in 2003 adopted
This is a critical point. To be equitable, the OTR methodology should be neutral with respect to charter choice. To achieve this, NCUA assigns an imputed value to the work done by state regulators supervising federally insured, state-chartered credit unions. In the methodology, the imputed state regulator value reduces the OTR, and the amount is calculated on the same cost basis as the work NCUA performs supervising federal credit unions.
Following the publication of the 2011 PricewaterhouseCoopers report, trade groups urged NCUA to further clarify and refine the definition of "insurance-related activities" and "non-insurance activities." They requested that NCUA provide more accuracy and consistency when examiners recorded their time.
NCUA conducted a regulation-by-regulation review in 2012 to make the application of the time survey definitions more explicit, and in 2013 again contracted with PricewaterhouseCoopers to independently review the refinements. The
Examiner time is the main driver in calculating the OTR, and examiners are spending the bulk of their examinations on insurance-related matters. As a result, the OTR has risen to 71.8% for 2015, because the definition refinements have resulted in more precise recording of examination time.
Keep in mind, even with the current OTR of 71.8%, federal credit unions are still covering 66.4% of NCUA's operating expenses for 2015. That's because federal credit unions hold a majority of insured shares. Thus, federal credit unions pay for a majority of the insurance activities covered by the OTR, and also for all non-insurance activities through an annual Operating Fee assessed by NCUA.
The table at the right compares the contributions of federal and state credit unions.
The NCUA Board approves the OTR each November as part of the annual budget process. Each year, agency staff prepares a Board Action Memorandum explaining in detail how the OTR was calculated, keeping in mind that the formula remains constant from one year to the next. These methodologies are available on the agency's
Chairman Matz has announced the OTR methodology will be put out for public comment in 2016 and considered alongside NCUA's next proposed Strategic Plan. This will permit stakeholders to provide input into the process. NCUA will carefully consider and respond to all comments received as part of this process.
Larry Fazio is NCUA Director of Examination and Insurance.
