ARLINGTON –The methodology for NCUA’s overhead transfer rate (OTR) is “severely flawed,” not to mention “arbitrary, capricious, and inequitable to federally insured, state chartered credit unions,” according to a comment letter sent to the agency by the National Association of State Credit Union Supervisors.
In the comment letter, NASCUS also offers recommendations it said would “improve the process” of setting the overhead transfer rate, which represents the funds transferred from the NCUSIF to cover what NCUA said is its costs related to examining state chartered CUs that are federally insured.
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 said:
- 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 in the comment letter. “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.”
In the letter NASCUS takes issue with 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.”
NASCUS wrote that contrary to the NCUA’s fundamental premise that all safety and soundness is insurance, the Federal Credit Union Act 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,” NASCUS said. “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,” NASCUS said.
NASCUS further argued 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,” NASCUS said. “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.
NASCUS outlined four alternative approaches it said would “more equitably recognize the costs of examination,” including:
- 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.”