NASCUS comment letter offers alternatives to ‘improve the process’

ARLINGTON -- The methodology for NCUA’s overhead transfer rate (OTR) is “is severely flawed,” in that it is arbitrary, capricious, and inequitable to federally insured, state chartered credit unions, NASCUS wrote in its comment letter on the methodology to NCUA today.

But several recommendations offered by the association would “improve the process,” NASCUS stated.

In a 20-page comment letter –accompanied by an appendix holding a 2015 legal analysis that found the OTR is subject to “notice and comment” under the Administrative Procedure Act – NASCUS made several key points about the problems associated with the current OTR methodology, including:

  • The current OTR methodology threatens the dual chartering system;
  • NCUA’s unique role as both competing chartering authority and Administrator of the NCUSIF obligates it to treat FISCUs equitably;
  • The agency’s proposition that it has no safety and soundness examination obligations as a chartering authority is without support in statute or practice;
  • The determination of the OTR must not be delegated to staff;
  • There are more equitable ways to allocate NCUA’s operating costs consistent with Congress’ intent.

“This issue is important to NASCUS, to state regulators, and to state credit unions because NCUA expenses improperly allocated to the NCUSIF artificially inflate the cost of credit union share insurance, threaten the dual chartering system by artificially disadvantaging the state system, and inhibit regulatory and supervisory innovation,” NASCUS President and CEO Lucy Ito wrote. “Fundamentally, NCUA’s current methodology that classifies all safety and soundness as solely an insurance fund concern runs contrary to both the plain language of the Federal Credit Union Act and the history of bank and credit union regulation in the United States.”

A key point in the NASCUS letter addresses NCUA’s premise that it has no safety and soundness responsibilities for the credit unions it charters. “According to NCUA’s reasoning, the only reason it examines FCUs for safety and soundness is to protect the NCUSIF,” the letter states. “Put another way, NCUA feels no obligation, as a federal agency empowered to grant credit union charters, to ensure those charters are safe and sound for the members entrusting the FCU with their savings.”

The letter adds that, contrary to the NCUA’s fundamental premise that all safety and soundness is insurance, the FCUA states that ’regulators’ (as in NCUA as chartering authority) are responsible for safety and soundness to protect the public and the economy. “That is why the chartering authority for National Banks, the Office of the Comptroller of the Currency (OCC), examines national banks for safety and soundness. And yet, the OCC has no role as insurer of bank deposits. Neither does the Federal Reserve Board (FRB), yet it examines state chartered member banks for safety and soundness.”

The NASCUS letter notes that NCUA’s Federal Register notice on the comments request for the OTR methodology contains only a brief discussion of the statutory justification for allocating all safety and soundness expenses to the NCUSIF. “That NCUA’s legal justification for its extreme interpretation of the FCUA is afforded less than one page in its 33-page request for comments is disappointing given that NCUA’s entire methodology turns on the legal question of NCUA’s Title I obligations as a chartering authority.”

The letter points out that Congress intended NCUA to balance its roles as chartering supervisor and insurer, by dividing NCUA’s roles between Title I, its chartering supervisory functions, and Title II, its administration of the NCUSIF.

“As a chartering authority, NCUA has the responsibility to examine its charters for safe and sound financial condition just as the OCC, the FRB, and state regulators do. As administrator of the NCUSIF, NCUA has an obligation to review the financial condition of its insured credit unions. In so doing, we agree NCUA, on behalf the NCUSIF, would conduct some examinations of FCUs and FISCUs. However, to the ‘maximum extent feasible’ the NCUSIF should be relying on exams conducted by the chartering authorities. This was a deliberate act by Congress to preserve the resources of the NCUSIF,” the letter states.

The letter offers four alternative approaches to “more equitably recognize the costs of examination:”

  • The NCUSIF should treat federal credit unions, and federal credit union examinations, in the exact same manner as it treats federally insured state chartered credit unions and federally insured state chartered credit union examinations
  • Rather than reduce the overhead transfer by the amount of the imputed value of state examination work, the NCUA should  refund that money to federally insured state chartered credit unions
  • Rather than reduce the overhead transfer by the amount of the imputed value of state examination work, the NCUA should pay out those funds for the benefit of the state agencies.
  • The NCUA should eschew a formal overhead transfer calculation and establish the overhead transfer rate at 50% of its budget

“We sincerely believe our recommendations could improve the process in an equitable, and statutorily sound manner,” NASCUS wrote. “We remain deeply concerned that the current allocation of NCUA’s operating expenses is inequitable to the state credit union system and incompatible with the wording, and spirit, of the FCUA.”


NASCUS comment letter to NCUA on OTR methodology

Information Contact:
Patrick Keefe, Vice President, Communications, or (703) 528-5974

The National Association of State Credit Union Supervisors (NASCUS) is the primary resource and voice of the state governmental agencies that charter, regulate and examine the nation’s state-chartered credit unions. NASCUS membership is made up of state-chartered credit unions, state regulators and other supporters of the state credit union system. NASCUS is the only organization dedicated to the defense and promotion of the state credit union charter and the autonomy of state credit union regulatory agencies.