LEGAL ANALYSIS: OVERHEAD TRANSFER RATE SUBJECT TO NOTICE, COMMENT
Annual assignment of funds is a ‘major rule,’ according to study commissioned by NASCUS
ARLINGTON, VA — The “overhead transfer rate” – the percentage of funds that the National Credit Union Administration (NCUA) annually transfers to its operating budget from the National Credit Union Share Insurance Fund (NCUSIF) to cover expenses of the agency – is subject to notice and comment requirements under federal law, according to a legal analysis prepared by a Washington, D.C. law firm for the National Association of State Credit Union Supervisors (NASCUS).
Lucy Ito, president and CEO of NASCUS, said the analysis confirms that the overhead transfer rate (OTR) substantially affects the dual chartering system of state and federal credit unions.
“As the analysis points out, by shifting a portion of federal credit unions’ share of NCUA expenses to the NCUSIF, the OTR reduces out-of-pocket expenses incurred by federal credit unions,” Ito said. “Our fundamental point is that the resulting reduction in federal credit union operating fees provides a singular advantage to those credit unions, and adversely affects the competitive position of state charters relative to federal charters.”
The OTR is a process in which the NCUA uses the resources of the insurance fund to cover the agency’s annual “insurance-related” expenses. The percentage of annual expenses the agency uses to determine the amount it will take from the insurance fund to cover the agency’s annual expenses is referred to as the OTR.
NASCUS has consistently questioned NCUA’s calculation of the OTR. Since 1986, the OTR has mostly fluctuated around 50% to 60% of NCUA’s annual budget. But, in recent years, it has grown dramatically, accounting now for 71.8% of the agency’s total budget.
The analysis, prepared by the law firm of Schwartz & Ballen, LLP, found that NCUA’s adoption of the OTR constitutes a “major rule” subject to the Administrative Procedure Act (“APA”) notice and comment requirements. A “major rule” indicates the agency action will have a substantial impact on costs, prices, or competition in the industry, and specifically requires the agency to consider the costs and benefits of the rule, and any possible alternatives.
“The NCUA Board has never published a proposed OTR in the Federal Register for public comment, nor has it requested in the Federal Register public comment on its methodology for calculating the OTR or any change to its methodology,” the analysis states. “Accordingly, we believe the process the NCUA Board uses to implement the OTR violates the APA.”
Earlier this month, NASCUS wrote of its support for legislation (H.R. 2287, introduced by Rep. Mick Mulvaney, R-S.C.) which would require NCUA to open its entire budget process to notice and comment from stakeholders and the public. The association expressed that support in a letter to leaders of the House financial institutions subcommittee.
The 29-page analysis – the first to link OTR to the APA requirements of public notice and comment related — notes that an APA-compliant notice and comment process would require the NCUA Board to explain and demonstrate the reasonableness of the OTR and the methodology it uses to calculate the OTR.
NASCUS’ Ito explained that the publication of the analysis is a watershed event in the long history of state regulators’ desire to provide more input into the development of the annual OTR from the insurance fund to the NCUA’s annual budget.
“Opening the OTR to public notice and comment will give all stakeholders – whether state or federally chartered – the opportunity to evaluate and respond to NCUA’s allocation of expenses across the industry,” she said.