September 14, 2016

The Hon. Mick Mulvaney
U.S. House of Representatives
Washington, DC 20515

The Hon. Denny Heck
U.S. House of Representatives
Washington, DC 20515

Dear Representatives Mulvaney and Heck:

On behalf of the National Association of State Credit Union Supervisors (NASCUS), the professional association of the 45 state credit union regulatory agencies that charter and supervise the nation’s state-chartered credit unions, I am writing you today to express our support for H.R. 5869.   Thank you for your leadership in demanding accountability and transparency from the National Credit Union Administration (NCUA) with regard to the allocation of its expenses. 

As you are aware, this bill would require the NCUA to submit a report, along with its annual budget, that provides a detailed analysis of how the agency’s expenses are assigned; that specifies whether expenses are paid from the National Credit Union Share Insurance Fund (NCUSIF) or from federal credit union operating fees; and that requires the agency to provide a rationale for any expenses paid from the NCUSIF.  In addition, the bill requires the agency make this report available to the public.

This request for transparency as it relates to NCUA’s apportionment of expenses, particularly with regard to the Overhead Transfer Rate (OTR) methodology, is of immense importance to NASCUS and its members.  NASCUS has been a staunch advocate of taking a closer look at the agency’s methodology as demonstrated by our recent comment letter that supports subjecting the agency’s budget process to notice and comment.  I will reiterate, as has consistently been NASCUS’ position, that we take no position on the size of NCUA’s overall budget allocations, only how those costs are allocated.    

NCUA is unique due to the fact that it charters federal credit unions (FCUs) and administers the credit union share insurance fund.  As both a charterer and share insurer, NCUA’s operations are funded by two sources: FCU operating fees and funds transferred from the share insurance fund to the agency through the OTR.  The method by which NCUA allocates its expenses and draws its operating funds has a substantial impact on the dual chartering system. 

The OTR apportioned to federally insured state-chartered credit unions (FISCUs), through the NCUSIF assessment, is a significant percentage ($101.5 million) of NCUA’s total budgeted costs for 2016.  Although federal credit unions (FCUs) also pay a significant portion of NCUA’s costs through the OTR, increases in the OTR over the years have resulted in substantially reduced operating fees for FCUs.  This shift is due to the fact that NCUA’s budget costs have shifted from being funded by FCU operating fees to being increasingly funded by the NCUSIF.  The NCUSIF is funded by all federally insured credit unions (FICUs) and this change in the OTR methodology has resulted in a competitive disadvantage for FISCUs.  These institutions (FISCUs) are being forced to absorb an increased percentage of NCUA’s expenses due to the change in the OTR methodology, while FCUs enjoy a substantial reduction in their “out of pocket” operating fees. 

This year, the OTR accounted for 73.1% of NCUA’s total budget.  In the previous year (2015), the OTR funded 71.8% of the agency’s budget. Based on historical data, the amount of NCUA’s budget that has been funded by the OTR has increased each year since 1986.   Additionally, it should be noted that the OTR is intended to cover only “insurance related” costs.  However, NCUA charges virtually all of its safety and soundness activities to the share insurance fund. As a result, the costs of federal credit union examinations are being subsidized by the share insurance fund, which artificially reduces the cost of a federal charter as compared to a state charter.  The status quo cannot continue without having a devastating effect on the dual chartering system. 

Your legislation encourages accountability by requiring the agency to provide insight into how they are determining which expenses are appropriately drawn from the NCUSIF, which has been a point of contention for many years.  Additionally, it will require the agency to provide details of their methodology and rationale to the stakeholders that are directly impacted.  We are also hopeful, that Congress will determine that it is appropriate to require NCUA to submit its OTR methodology to the notice and comment process.  A legal analysis, completed by Schwartz & Ballen LLP, determined that the OTR and the related methodology used by the NCUA Board to calculate the OTR is a “statement of general applicability” that is subject to the notice and comment process. We believe notice and comment will provide stakeholders with a meaningful opportunity to provide feedback to the agency regarding its process.   

On behalf of the nation’s state credit union supervisors and the state chartered credit unions they regulate, we appreciate all of your hard work on this important legislation.  If NASCUS can be of any assistance, please do not hesitate to reach out to me directly or to our Legislative and Regulatory Counsel, Nichole Seabron, at (703) 528-0669.

Sincerely,

Lucy Ito
President and CEO
National Association of State Credit Union Supervisors (NASCUS)
Arlington, VA