(Jan. 15, 2021) NASCUS President and CEO Lucy Ito urged careful review of the proposal by the entire credit union system – and noted that federal law requires the agency to consult with the state system. “The FCU Act requires NCUA to consult and cooperate with state supervisors on prompt corrective action and capital adequacy issues, and we expect the agency to meet its lawful obligation,” she said. “Both approaches outlined by NCUA represent significant changes to how federally insured credit unions will meet capitalization requirements. The approaches include trade-offs that credit unions must weigh thoroughly, but also offer the potential for significant flexibility. NASCUS urges all of its members, both regulators and credit unions, to study this proposal carefully and offer input to us as we prepare our own feedback to the agency on the proposal.”

(Dec. 23, 2020) A 2021 budget of $341.4 million – with an overhead transfer rate (OTR) of 62.3% — was approved by the NCUA Board on a split vote of 2-1 at its meeting late last week, with barely two weeks to go until that budget takes effect for the new year.

The agency’s budget for next year is down about 1.7% from the 2020 budget, but the OTR went up by 100 basis points. Board Chairman Rodney Hood and (now) Vice Chairman Kyle Hauptman voted for the 2021 budget; Member Todd Harper against it.

The OTR represents money that is transferred from the National Credit Union Share Insurance Fund (NCUSIF) to the operating budget of the agency to cover “insurance-related” expenses of the agency. The remainder of the operating budget is covered by the operating fee paid by federal credit unions, resulting in a split of 62.3% (from the OTR) and 37.7%, respectively.

NASCUS President and CEO Lucy Ito said the OTR increase for next year is a sign of the need for NCUA to reconsider how it allocates expenses.

In a press statement following last Friday’s board meeting, Ito said what appears counterintuitive to the state system in the 2021 NCUA budget is that the projected increase in workload for state exams is not matched with an at least equal if not greater increase in workload for federal credit union exams. She noted that assets between state and federal CUs are approximately equal, yet FCUs outnumber FISCUs by more than 1,000 (3,213 FCUs versus 1,920 FISCUs as of the end of the 2020 third quarter).

Further, she said, the 1-point OTR increase will essentially mean there will be $3.3 million less to cover losses by the National Credit Union Share Insurance Fund should those materialize as the result of an economic downturn due to the financial impact of the coronavirus pandemic

“NASCUS will continue to work with NCUA to allocate expenses to the OTR in a way that safeguards balance and equity, and that ensures that the insurance fund has the resources necessary to protect the savings of credit union members,” she said.

Along those lines, she added, NASCUS welcomes the formation of an OTR working group comprised of NCUA, state regulators, and NASCUS to assure transparency in and reasonableness of cost allocation assumptions to foster equity between federal and state credit unions.

LINKS:
Notice: Overhead transfer rate

Board action memorandum — 2020-2021 budget

NCUA 2021-2022 budget justification (Dec. 18, 2020)

(Dec. 18, 2020) NASCUS President and CEO Lucy Ito, in a press statement, praised the NCUA Board for finalizing the subordinated debt rule, noting the state system’s long support for such action.

“The state system has long said that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego,” said NASCUS President and CEO Lucy Ito. “The risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before any effect on the share insurance fund, and subordinated debt is consistent with that goal.”

Ito also thanked the board for moving forward on the final rule, which has been in the works for at least four years. She said NASCUS and state regulators look forward to working closely with NCUA in preparing for the implementation of the subordinated debt rule, and related capital rules, given the state system’s familiarity and experience with this form of capital

LINK:
Press statement by Lucy Ito on subordinated debt adoption

(Nov. 20, 2020) NASCUS President and CEO Lucy Ito shared the board members’ call for vigilance, but also urged the agency to husband its resources, as NASCUS did in a comment letter last month. Writing to the agency on its proposed methodology to calculate the overhead transfer rate (OTR) – the rate at which the agency transfers dollars from the insurance fund to the agency’s operating budget to cover “insurance-related costs” – NASCUS wrote that a higher rate means the insurance fund has less resources to face financial troubles for credit unions.

“As we wrote earlier this month, 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,” Ito said. “It also means that’s a dollar that may need to be replaced in the insurance fund through an insurance premium being charged.”

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

(Nov. 20, 2020) NASCUS’ Lucy Ito expects to present the state credit union system view on the next NCUA budget – particularly its impact for the overhead transfer rate (OTR) – when the agency holds its annual budget briefing Dec. 2.

Late last week, the agency published its 2021-22 draft budget – totaling $342.5 million in 2021 and $364.2 million in 2022 – which will be the subject of the Dec. 2 briefing. The agency’s final budget is slated for approval during the NCUA Board’s Dec. 17 open meeting.

The agency primarily funds its operations through two sources: fees charged to federal credit unions (the FCU “operating fee”), and through funds transferred from the National Credit Union Share Insurance Fund (NCUSIF) to pay for “insurance-related costs” of the agency.

Budget documents posted on the agency’s website late last week show a total proposed 2021 budget of $342.5 million –down about $4.9 million, or 1.4%, from the approved budget of $347.4 million for 2020.

But that reduction would be more than made up in 2022, when the agency projects a 6.3% increase in its total budget, for a total of $364.2 million. That figure includes a $341.8 million operating budget (up $26.2 million); a $14.6 million capital budget (up $4.3 million); and $7.9 million NCUSIF administrative budget (down $218,000).

To fund its 2021 budget, the agency is estimating an OTR of 62.3% — one percentage point higher than in 2020 – with the remaining 37.7% of the budget to be paid largely by FCU operating fees. In its published budget, NCUA states that the primary driver of the increase in the estimated 2021 OTR is the rise in examination and supervision time for federally insured state-chartered credit unions.

“Calendar year 2021 marks the end of the first, five-year cycle associated with the Exam Flexibility Initiative that extended the NCUA exam time for eligible institutions,” the budget states. “The increase in budgeted time for FISCU examination and supervision for 2021 is due to program obligations associated with examination scheduling and scope requirements.”

NASCUS has voiced its concern over the years that the operations of the agency not be funded primarily by the insurance fund. In fact, in a comment letter to the agency earlier this month, NASCUS pointed out the “incontrovertible truth” that doing so means the insurance fund has less resources to face financial troubles for credit unions, unless an insurance fund premium is assessed, which is not outlined in the 2021 budget.

In fact, the 2021 budget proposal is already facing some headwinds: At the NCUA Board meeting Thursday, Board Member Mark McWatters said he does not support the proposal put forth by the staff. He said the budget proposal inappropriately omits some items, and funds other items that are not necessary for ensuring the safety and soundness of credit unions.

He did not outline the specific items in either case. However, last year, McWatters said he intended to pursue a “collegial, collaborative” path for adding consumer protection resources at the agency for the 2021 budget (such as additional staff). That, apparently, did not happen and is at least partly responsible for McWatters’ stated opposition.

The Dec. 2 budget briefing is scheduled to last one hour; it gets underway at 10 a.m. and will be live-streamed via the Internet.

LINK:
NCUA 2021/2022 Budget Justification

Credit unions, their relationships with regulators, leadership during a national pandemic, and teambuilding are all discussed during a podcast NASCUS President and CEO Lucy Ito recorded with news aggregator CUInsight, and which debuted this week. During the 36-minute audio report, Ito also discusses strategies for credit unions to consider to remain competitive and the changing regulatory environment. To hear the podcast, see the link below.

LINK:
CUInsight.com podcast: Lucy Ito – Organizational interest (Oct. 26)