Higher OTR limits insurance fund, NASCUS writes in comment letter

(Nov. 6, 2020) Increases in the overhead transfer rate (OTR – the rate at which dollars transferred from the National Credit Union Share Insurance Fund (NCUSIF) to fund insurance-related costs of NCUA) lead to the “incontrovertible truth” that doing so means the insurance fund has less resources to face financial troubles for credit unions, NASCUS wrote in a comment letter late last week.

That is, unless the agency decides to charge an insurance fund premium, NASCUS indicated.

In its comment letter to the agency on its request for information about the methodologies used to determine the OTR (and the federal credit union (FCU) operating fee), NASCUS noted that the current proposal for next year’s OTR reflects an increase. The association asserted that the allocation of agency expenses to the insurance fund take on a “particular importance against the backdrop of the ongoing pandemic in the United States and resulting economic dislocation.”

NASCUS pointed out that every dollar the agency pulls from the insurance fund to cover the expenses of the agency is a dollar not available to cover credit union losses, such as those resulting from the financial impact of the coronavirus pandemic. It also means that’s a dollar that may need to be replaced in the insurance fund through an insurance premium being charged.

And there are more issues to be considered, the state system declared through NASCUS.

Furthermore, the allocation of NCUA’s operating expenses and the corresponding effect on FCU chartering fees has the potential to imbalance the dual chartering system by disadvantaging the state system in an inequitable and inorganic manner,” NASCUS wrote.

The state system also noted that for more than 20 years there has been an imbalance in how the agency covers its expenses from the insurance fund through the OTR, forcing federally insured, state credit unions (FISCUs) to “shoulder an inordinate cost of supervising the safety and soundness of the credit union system.” NASCUS pointed to mid-year statistics from federally insured credit unions showing FISCUS holding nearly 50% of all insured shares, but number only 37% of the federally insured credit unions. Put another way, NASCUS wrote, FISCUs pay half the NCUSIF’s costs but are only 37% of the work.

Some stakeholders are apt to assert that FCUs pay an aggregate greater amount of NCUA’s overall budget when the total expense to FCUs of the operating fee and OTR are aggregated,” NASCUS wrote. “But this assertion ignores the fact that the NCUSIF is NOT expending resources to conduct examinations on a majority of FISCUs because it relies on the exam work conducted by the states — exam work which is paid for entirely by FISCUs.”

Illustrating its point, NASCUS noted that in 2019 nine states sent their examiners to more 6,793 hours of non-NCUSIF funded training, paid for by state credit union fees of more than $25.2 million for examination and supervision in those nine states alone. “A similar story can be told in the remaining 36 state regulatory agencies,” NASCUS wrote.

Two other imbalances lie within the current system, NASCUS pointed out: the OTR is borne by state-chartered CUs in lost NCUSIF dividend opportunity or as additional insurance premium costs (as may be the case in 2021), and an “inverse benefit” for FCUs through application of the OTR.

The larger the OTR, the more modest the FCU operating fee,” NASCUS wrote. “That inequitable result is one reason why the OTR methodology is so important to the state system.”

In other comments, NASCUS:

  • Supported including the agency’s budget for capital projects within the annual budget subject to the OTR (although it noted doing so “may not be equitable” in some cases under how it is defined in the methodology).
  • Disagreed that allocating NCUA work related to CUSOs and other third-party vendors as solely related to the insurance fund is consistent with the principles of the methodology or with the practical reality of a chartering authority. “The allocation of third-party regulatory and supervisory work takes on an enhanced importance given NCUA’s interest in obtaining direct supervisory authority over such entities,” NASCUS wrote. “Should NCUA obtain that regulatory and supervisory authority (which NASCUS supports), ensuring equitable allocation of associated expenses will be essential.”
  • Deferred comment on providing an incentive (through a discount in operating fees) for FCUs to complete the voluntary diversity self-assessment “So long as there was no corresponding effect on the OTR from any shortfalls in operating fee funding resulting from the proposed discounts.”

NASCUS Comment: Request for Comment, OTR and Operating Fee Schedule Methodologies