Comments by NCUA Board Member J. Mark McWatters, Nov. 19, 2015, re: Overhead Transfer Rate (OTR)
Following is the segment from Board Member McWatters' comments focusing on the Overhead Transfer Rate (OTR), from the Nov. 19 opening meeting of the NCUA Board in Alexandria, Va.
Change the Approach to Setting the Overhead Transfer Rate
Regarding the OTR, I reiterate that the NCUA should draft and submit a formal OTR rule for a 90-day public comment period in accordance with the Administrative Procedure Act (APA).16 In that document, the agency should unpack the OTR methodology with cross-references to all sources employed in the process.17
There is little doubt that the determination of the OTR is of material consequence to both federal and state-chartered credit unions and it is surprising that the NCUA has drafted and implemented the rule based upon advice from two accounting firms, yet without comment from the credit union community.18 While I have maintained a CPA license since 1979 and hold the accounting profession in the utmost esteem, it is important to note that accounting firms generally do not render legal advice, provide legal services, or otherwise operate as law firms in the United States. The determination of the OTR methodology is essentially a legal construct and requires the sophisticated analysis of statutes, regulations, and case law, which lies beyond the operational mandate of accounting firms, even highly regarded, top-tier firms.
Further, the NCUA is a federal regulator and should develop and implement policies in an impartial manner, yet the inexorable increase in the OTR over the past several years generally favors federally chartered credit unions. This creates the appearance of a conflict of interest between a federal regulator and federally chartered credit unions to the particular detriment of state-chartered credit unions.19
As the number of federally chartered credit unions has decreased it appears that the NCUA has redeployed its examination resources to state examinations thereby increasing the insurance related hours and, as such, the OTR. This result necessarily follows if there is an increasing examination force shift toward more active state charter insurance examinations. Thus, as the operating budget steadily increases (or remains substantially unchanged) year-in and year-out or the number of federal charters diminish relative to state charters, the OTR continues its climb as well.20
While, in my view, credit unions are best served by having a regulator that understands the not-for-profit, cooperative business model, the justification for a separate federal credit union regulator becomes less apparent as the agency shifts to more of an insurer and less of a regulator. This distinction becomes even more pronounced as the regulations promulgated by the NCUA closely parallel those of the FDIC and are less tailored to the specific risks presented by the credit union community to the Share Insurance Fund. If the NCUA simply acts as an insurer with a panoply of FDIC-centric regulations, some may begin to question its reason for being.21
In order to negate the appearance of a conflict of interest, follow the letter and spirit of the APA, respect the dual charter system, and add a strong element of much needed transparency, I encourage the NCUA to submit, without hesitation, the OTR as a proposed rule for public comment under the APA.22
In addition, I am deeply troubled that the NCUA Board will today consider the delegation of the OTR to the NCUA staff instead of leaving that determination to the Board. Such a delegation will make the determination of the OTR less transparent and more steeped in mystery than it is today. The timing of the delegation is particularly awkward given the NCUA’s lack of transparency in redacting certain critical language directed towards the agency in the January 20, 2011, PricewaterhouseCoopers (PwC) report on the OTR methodology commissioned by the agency.23
Further, the delegation compounds the legal problems the NCUA’s treatment of the OTR has created by ignoring its responsibilities under the APA.24 From my expedited analysis, the Federal Credit Union Act does not specifically address the issue of whether the NCUA may delegate the setting of the OTR to the NCUA staff. How the agency calculates the OTR, however, is inseparably linked to what it must decide when setting the OTR. As a result, the most reasonable reading of the Federal Credit Union Act is that the NCUA Board should oversee the methodology and its application to the OTR and not delegate the function of overseeing the selection and use of the methodology for setting the OTR to the NCUA staff. This conclusion is strengthened by consideration of the APA in light of the impact and nature of the OTR.25
The OTR methodology is not a “plug and play” formula but, instead, relies upon judgment and perspective as to the component parts of the methodology that should reside with the Board in a public meeting. I cannot help but conclude that the true reason for the delegation resides in the desire of the existing Board majority to lock-in the OTR today through the transfer of authority to the NCUA staff so as to avoid the “awkwardness” of a 2 to 1 vote on the OTR or the “uncertainty” that may arise in the event a future NCUA board consists of only two members.
In addition, I should note that these same comments apply to the Board majority’s delegation of the “operating fee” to the NCUA staff.
16 The National Association of State Credit Union Supervisors (NASCUS) recently received a legal opinion from a third-partylaw firm concluding that the determination of the OTR is subject to a notice and comment requirement under the APA. See http://www.nascus.org/press_release/2015-pressreleases/06.23.15%20Legal%20analysis%20on%20OTR.php. The NCUA’s Office of General Counsel disagrees and argues that the OTR does not qualify as a “rule” under the APA.
17 I also think additional consideration needs to be given to how funds from mid-year budget reductions are allocated and whether they should be used, at least in part, to address OTR issues directly, rather than routinely applied to reduce operating fees to benefit just one group of credit unions.
18 In effect, the OTR is really nothing more than whatever the NCUA says it is. Such an approach reminds me of Lewis Carroll’s Humpty Dumpty who famously remarked, "When I use a word, it means just what I choose it to mean - nothing more, nothing less."
19 The OTR accounting presents the agency as principally an insurer and less of a regulator or chartering body. This may not bode well for the agency as some may question why we need two federal deposit insurers.
20 To my knowledge, this reallocation of resources has occurred under the radar and the NCUA has yet to articulate its justification for substantially accelerating its participation in state charter insurance examinations. Causality does not necessarily exist between an increasing gross asset size and the complexity of a credit union. As I have previously stated, the adoption of an 18-month examination cycle for low risk credit unions and heightened collaboration between the NCUA and the SSAs would result in a material decrease in the NCUA operating budget and the ill effects of an increasing OTR.
21 It is worth noting that an interesting intersection between the OTR and the NCUA’s lack of transparency arose when the agency attempted to redact certain critical language directed towards the agency in the January 20, 2011, PricewaterhouseCoopers (PwC) report on the OTR methodology commissioned by the agency. Specifically, PwC – the agency’s handpicked expert on the OTR – admonished the agency regarding its lack of transparency by concluding:
“Based on PwC’s review, the OTR Methodology was considered lacking in terms of the extent to which the classification of NCUA’s activities between insurance and regulatory (upon which the methodology is fundamentally dependent) represents a consensual view on such classifications in the industry. Further, there was found to be dissatisfaction within the industry with respect to NCUA’s efforts to communicate and explain the OTR Methodology in adequate detail.
It is recommended that NCUA should consider providing more visibility on how it characterizes its activities to the different industry groups and credit unions and possibly solicit their feedback with regards to the reasonableness and accuracy of the classification. NCUA should also consider steps aimed at making the methodology itself more transparent, along with all of the assumptions and steps that are utilized. Possible ways of achieving this include more frequent interactions with the stakeholders through different channels (e.g. meeting, publications, etc.).”
See, Overhead Transfer Rate Review, http://www.ncua.gov/about/Documents/Budget/Misc%20Documents/2011PwCOTRReview.pdf,
That the NCUA redacted these remarks and did not seek to follow the sensible guidance of PwC does not reflect well for an agency that presents itself as the paragon of transparency.
22 At its current rate of increase it seems possible that the OTR will reach a tipping point where virtually all of the NCUA’s operating budget will originate from the NCUSIF. Some may argue that the agency could then “subcontract” part of its safety and soundness function to the SSAs and remit payment from the NCUSIF (pursuant to section 1781(b)(2) of the FCUA) for services rendered by the SSAs.
23See footnote 21.
24 I am also troubled by the approach the agency is apparently advancing to solicit comments on the OTR. According to the Board Action Memorandum on Delegating Operating Fees, the Board would seek input from the credit union community on the OTR in January, two months after the OTR is set, and then in conjunction with the agency’s strategic plan, which would involve a three-year cycle. Seeking comments is not without cost and it must be undertaken in an effective and meaningful way that serves a useful purpose. This approach for engaging with the credit union community on the OTR is less than transparent and I urge the board to instead develop the OTR under the APA, as it legally should.
25 Summary Analysis
- NCUA relies on 12 USC 1783(a) to take funds from the NCUSIF to pay for its operations that are related to supervision of federally insured credit unions.
- 1783. National Credit Union Share Insurance Fund