Op-ed aims to clear confusion over OTR, insurance premium

Dec. 14, 2016 -- A decrease in the overhead transfer rate did not – and could not – force an insurance premium to be assessed, NASCUS President and CEO Lucy Ito writes in an op-ed appearing in Credit Union Times, and she notes that the higher the OTR, the more all credit unions -- state and federal--will be on the hook for future premium assessments to maintain the equity ratio.

However, Ito also notes that the agency’s leadership is working toward a more transparent, understandable and fair OTR – which NASCUS appreciates and supports.

In the piece, the NASCUS leader notes that the recent declarations on the same day by NCUA that it intends to reduce the OTR in 2017 (for the first time since 2013)  – and set a range for an insurance premium in the New Year – has led to confusion within the credit union system. “The juxtaposition of the discussion about these two actions has led to a misconception that one caused the other, or vice versa,” Ito writes. “I can tell you, I have heard exactly that as I have spoken to state credit union executives and regulators in the weeks following the board meeting, as I’ve traveled across the country and in Washington.”

She writes that her goal in the column is to clear up misunderstanding, pointing out that the OTR and the insurance fund’s equity ratio have an inverse relationship. “That is: as the OTR goes down, the equity of the fund potentially increases (with the opposite being true as well),” she writes.

As an example, she points to the decision by NCUA to reduce the OTR in 2017 to 67.7% (from the previous year’s 73.1%). If the change had not been made, she points out, the insurance fund would have been charged just about $218 million in 2017. “Instead, at the reduced rate, the bill to the insurance fund is about $10 million less for 2017 (just a tad under $202 million) than the previous year (and about $15 million less than the charge would have been under the previous rate). In any case: the difference is potentially available to contribute toward the fund’s equity ratio,” she points out.

Further, Ito notes that – if NCUA had held the line over the past four years on the OTR to the 2013 rate of 59.1%, the insurance fund would have saved about $103 million, which would potentially be available to offset higher premiums.

Noting that the entire situation is confusing, Ito points that “the very fact that some folks initially thought the decrease in the OTR is to blame for an insurance premium only underscores the opacity of the OTR and how difficult it is to understand.”

She also points out that, at the November board meeting, NCUA Board Chairman Rick Metsger and Board Member J. Mark McWatters both voiced strong interests in adopting a future OTR methodology for the agency that is rooted in “transparency, understandability, fairness.” “We could even see a proposal by early next year,” Ito writes. “NASCUS is very much supportive of their efforts.”

LINK:

CU Times: The Opacity of the OTR and Confusion Over an Insurance Premium