Urging respect for states, ND offers corrections to OTR

April 4, 2016 -- Pointing out the weaknesses of the current overhead transfer rate (OTR) methodology, and suggesting methods for correcting those weaknesses, North Dakota’s top credit union regulator has posted a comment letter to NCUA – and urged the federal agency to respect the role of states.

“The Department is concerned with what appears to be a systematic effort to consolidate authority over the safety and soundness of financial institutions,” North Dakota Department of Financial Institutions Commissioner Robert Entringer wrote. “We recognize and respect your role as insurer of deposits and ask that you afford us that same level of respect as the chartering agency for North Dakota credit unions as well as our legally mandated role to regulate and ensure the safety and soundness of the institutions we charter.”

The state regulator also encouraged the NCUA Board to “respect a credit union's choice to be state or federally chartered, and not indirectly subsidize the federal charter through the OTR at the expense of all credit unions, including state chartered credit unions.”

Specifically, the North Dakota regulator cited as a weakness that, through the mapping of procedures and regulations, virtually all safety and soundness related examination costs are assumed to be an insurance related cost.  “No consideration is afforded to these costs as also a chartering related expense, and no attempt is made to allocate these costs between both the insurance and chartering function,” Entringer wrote. “This is a critical flaw within the assumption of the methodology.”

But the North Dakota regulator asserted that the framework for the OTR “can be salvaged.”

“Correcting the public policy-related assumptions, effectively adjusting cost accounting allocations of overlapping safety and soundness expenses -- to be consistent with congressional intent and the application by other state and federal regulatory agencies -- could make the methodology functional,” he wrote. “Additionally, better adherence to the stated principles of relying upon SSA work product would also help strengthen the process.”

He suggested a two-step process:

  • Clearly separate the NCUA regulations between insurance and chartering function. “Until it is clear to all parties (credit union officials, consumers, state and federal examiners) which rules are insurance related and which are only related to federal charters, it is not practical to expect accuracy in Examiner Time Surveys,” he wrote.
  • Recognize that congressional intent was for safety and soundness responsibility to be shared equally between the chartering and insuring function. “This is consistent with the framework employed by other federal banking regulators,” Entringer wrote. “Insurance regulatory related expenses (safety and soundness related expenses) need to be allocated on a 50/50 basis between the chartering and insurance related examination costs during FCU examinations. This cost accounting allocation essentially assigns the safety and soundness costs to both the insurance and chartering roles consistent with congressional intent and consistent with the functional application by other financial institution regulators and insurers.”

North Dakota DFI OTR comment letter to NCUA