The National Credit Union Administration Friday issued a significantly simplified calculation for deriving the annual overhead transfer rate that helps fund the agency’s budget.
The plan, which shrinks the process to three steps from the current eight, was unveiled as part of a Request for Comment. Interested parties will have 60 days to submit responses. Speaking at the NCUA board’s monthly meeting, Larry Fazio, director of the regulator’s Office of Examination and Insurance, said he expects to present a formal proposal in November.
At the center of Friday’s proposal is a move to reallocate resources the regulator spends on credit union examinations. Currently, questions of safety and soundness are paid for solely by federally chartered credit unions, while both federal- and state-chartered CUs bear the cost of insurance-related work. Under the new proposal, those would be split evenly.
As things stand now, NCUA examiners painstakingly estimate the hourly breakdown on an institution-by-institution basis. Results are aggregated and the end figure serves as perhaps the key component in calculating the overhead transfer rate. Of the approximately 692,000 work hours NCUA budgeted for 2017, nearly 500,000 are assigned to examination chores.
“Our goal was to reduce complexity while still ensuring fairness,” Fazio said.
Acting chairman J. Mark McWatters called the proposed fifty-fifty division of hours a “rough justice” number, but said it would make the calculation much easier.
In addition to cutting the number of steps involved in calculating the overhead transfer rate, Friday’s proposal also reduced the number of required data points more than 80 percent.
The board set the overhead transfer rate for fiscal year 2017 at 67.7 percent, down from 73.1 percent the prior year. But if the 2017 rate had been calculated using the methodology proposed Friday it would have fallen to 60%, meaning the amount subtracted from the National Credit Union Share Insurance Fund – to which state- and federally chartered credit unions contribute – would have been significantly smaller.
A sensitive issue
The issue is an extremely sensitive one for NCUA’s board. Federally insured state-chartered institutions have complained increasingly that they are funding an out-sized proportion of the agency’s budget through the annual transfer from the share insurance fund. At the same time, federally chartered credit unions prefer a high transfer rate since it means the supplementary federal operating fee that only they pay will be correspondingly lower.
“It’s probably the most misunderstood rule we have,” board member Rick Metsger said Friday.
The board embarked on the process of revising its overhead transfer methodology in January 2016, when it published a request for comments. It received just 40, and will begin crafting a final rule after digesting the additional comments it receives over the next two months.
Since the draft unveiled Friday falls short of a proposed regulation and will likely undergo a significant editing job, responses were relatively muted. The National Association of State Credit Union Supervisors called it a “significant step in the right direction” in a brief statement Friday, while the National Association of Federally-Insured Credit Unions encouraged the board “to avoid tipping the scale in favor of state regulators.”
“At the end of the day, we continue to urge the agency to materially reduce its overall operating expenses, which would in turn reduce the OTR's impact on the share insurance fund and the industry as a whole," Alexander Monterrubio, NAFCU’s director of regulatory affairs said in a press release.
Both McWatters and Metsger, along with the Credit Union National Association, urged credit unions to offer their comments on the issue.
“Our ultimate goal is to see a process that ensures fairness to state and federal credit unions for the allocation of legitimate insurance-related costs, and we plan to submit a detailed comment letter outlining ways that can be achieved,” CUNA deputy chief advocacy officer Elizabeth Eurgubian said Friday in a press release.
Board OKs securitization
In other actions, Lara Rodriguez, NCUA’s deputy general counsel, said agency officials had concluded that NCUA possesses broad authority to allow the securitization and sale of loans by federal credit unions. NCUA issued a legal opinion to that effect and posted it online Thursday evening, Rodriquez added.
Dated June 21 and signed by General Counsel Michael J. McKenna, the opinion concluded securitizing and selling assets falls well within the scope of the incidental powers granted to credit unions under the Federal Credit Union Act.
“Congress's record of steadily expanding the range of expressly granted powers, combined with the legislative history encouraging NCUA to meet the needs of FCUs and their members, justify, if not require, a broad and ambulatory view of the business for which FCUs are incorporated,” McKenna wrote.
NCUA officials plan to follow up the safe-harbor opinion before the end of 2017 with a set of guidelines advising on how securitization should be handled, according to Rodriguez.
