Request for Comment Regarding Revised Overhead Transfer Rate Methodology, 29935-29948 [2017-13635]

Download as PDF mstockstill on DSK30JT082PROD with NOTICES Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices without change, in accordance with the Paperwork Reduction Act of 1995 (PRA). Public comments on the ICR are invited. DATES: The OMB will consider all written comments that agency receives on or before July 31, 2017. ADDRESSES: A copy of this ICR with applicable supporting documentation; including a description of the likely respondents, proposed frequency of response, and estimated total burden may be obtained free of charge from the RegInfo.gov Web site at http:// www.reginfo.gov/public/do/ PRAViewICR?ref_nbr=201701-1235-002 (this link will only become active on the day following publication of this notice) or by contacting Michel Smyth by telephone at 202–693–4129, TTY 202– 693–8064, (these are not toll-free numbers) or by email at DOL_PRA_ PUBLIC@dol.gov. Submit comments about this request by mail to the Office of Information and Regulatory Affairs, Attn: OMB Desk Officer for DOL–WHD, Office of Management and Budget, Room 10235, 725 17th Street NW., Washington, DC 20503; by Fax: 202–395–5806 (this is not a toll-free number); or by email: OIRA_submission@omb.eop.gov. Commenters are encouraged, but not required, to send a courtesy copy of any comments by mail or courier to the U.S. Department of Labor-OASAM, Office of the Chief Information Officer, Attn: Departmental Information Compliance Management Program, Room N1301, 200 Constitution Avenue NW., Washington, DC 20210; or by email: DOL_PRA_PUBLIC@dol.gov. FOR FURTHER INFORMATION CONTACT: Michel Smyth by telephone at 202–693– 4129, TTY 202–693–8064, (these are not toll-free numbers) or by email at DOL_ PRA_PUBLIC@dol.gov. SUPPLEMENTARY INFORMATION: This ICR seeks to extend PRA authority for the Disclosures to Workers Under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) information collection. Agricultural employers, associations, and farm labor contractors use this information collection to make MSPA required disclosures of employment terms and conditions, wage statements, and housing terms and conditions to migrant and seasonal agricultural workers. MSPA section 201 authorizes this information collection. See 29 U.S.C. 1821. This information collection is subject to the PRA. A Federal agency generally cannot conduct or sponsor a collection of information, and the public is generally not required to respond to an VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 information collection, unless it is approved by the OMB under the PRA and displays a currently valid OMB Control Number. In addition, notwithstanding any other provisions of law, no person shall generally be subject to penalty for failing to comply with a collection of information that does not display a valid Control Number. See 5 CFR 1320.5(a) and 1320.6. The DOL obtains OMB approval for this information collection under Control Number 1235–0002. OMB authorization for an ICR cannot be for more than three (3) years without renewal, and the current approval for this collection is scheduled to expire on June 30, 2017. The DOL seeks to extend PRA authorization for this information collection for three (3) more years, without any change to existing requirements. The DOL notes that existing information collection requirements submitted to the OMB receive a month-to-month extension while they undergo review. For additional substantive information about this ICR, see the related notice published in the Federal Register on November 23, 2016 (81 FR 84619). Interested parties are encouraged to send comments to the OMB, Office of Information and Regulatory Affairs at the address shown in the ADDRESSES section within thirty (30) days of publication of this notice in the Federal Register. In order to help ensure appropriate consideration, comments should mention OMB Control Number 1235–0002. The OMB is particularly interested in comments that: • Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; • Evaluate the accuracy of the agency’s estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; • Enhance the quality, utility, and clarity of the information to be collected; and • Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses. Agency: DOL–WHD. Title of Collection: Disclosures to Workers Under the Migrant and Seasonal Agricultural Worker Protection Act. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 29935 OMB Control Number: 1235–0002. Affected Public: Private Sector— businesses or other for-profits and farms. Total Estimated Number of Respondents: 105,587. Total Estimated Number of Responses: 82,429,923. Total Estimated Annual Time Burden: 1,387,659 hours. Total Estimated Annual Other Costs Burden: $3,296,743. Authority: 44 U.S.C. 3507(a)(1)(D). Dated: June 27, 2017. Michel Smyth, Departmental Clearance Officer. [FR Doc. 2017–13797 Filed 6–29–17; 8:45 am] BILLING CODE 4510–27–P NATIONAL CREDIT UNION ADMINISTRATION Request for Comment Regarding Revised Overhead Transfer Rate Methodology National Credit Union Administration (NCUA). ACTION: Request for comment. AGENCY: In a voluntary effort to invite input from stakeholders, the NCUA Board (Board) is seeking comments on proposed changes to the Overhead Transfer Rate (OTR) methodology. The primary goal of the proposed changes are to reduce the complexity of the OTR methodology. The proposed changes would also reduce the resources needed to administer the OTR. This document provides a summary of and response to comments received on the current OTR methodology, and explains and solicits comments on the proposed changes to the OTR methodology. DATES: Comments must be received on or before August 29, 2017 to ensure consideration. SUMMARY: You may submit comments by any one of the following methods (Please send comments by one method only): • NCUA Web site: https:// www.ncua.gov/about/pages/boardcomments.aspx. • Email: Address to boardcomments@ ncua.gov. Include ‘‘[Your name]— Comments on OTR Methodology’’ in the email subject line. • Fax: (703) 518–6319. Use the subject line described above for email. • Mail: Address to Gerald Poliquin, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314– 3428. ADDRESSES: E:\FR\FM\30JNN1.SGM 30JNN1 mstockstill on DSK30JT082PROD with NOTICES 29936 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices • Hand Delivery/Courier: Same as mailing address. Public Inspection: You can view all public comments on NCUA’s Web site at https://www.ncua.gov/about/pages/ board-comments.aspx as submitted, except for those we cannot post for technical reasons. NCUA will not edit or remove any identifying or contact information from the public comments submitted. You may inspect paper copies of comments in NCUA’s headquarters at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703) 518–6360 or send an email to EIMail@ncua.gov. FOR FURTHER INFORMATION CONTACT: Russell Moore or Julie Decker, Loss/Risk Analysis Officers, Office of Examination and Insurance, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314 or telephone: (703) 518–6383 or (703) 518– 6384. SUPPLEMENTARY INFORMATION: NCUA requested comments on the current OTR methodologies and processes through a notice in the Federal Register published on January 27, 2016.1 Areas the Board specifically sought comments on included: • Whether the OTR should continue to be determined using a formula-driven approach, or instead be set largely at the discretion of the Board; • the definition NCUA uses for insurance-related activities; • adjustments or changes to the current calculation; and • alternate methodologies to arrive at an accurate and fair allocation of costs. Within the 90-day comment period, NCUA received 40 comment letters on the OTR methodology. The commenters included federally insured statechartered credit unions, national credit union trade organizations, state leagues, and state supervisory authorities. There were no comment letters received from federal credit unions. While there were only 40 comment letters, the comments addressed a broad range of complex issues. In addition to reviewing comments for input on the existing approach, NCUA staff explored options for the Board to consider for improving the OTR methodology. Many of the comment letters discussed the methodologies for both the OTR and the Operating Fee as well as other budgetrelated issues. This request for comments focuses specifically on the OTR methodology. Comments related to the Operating Fee methodology and 1 81 FR 4804 (Jan. 27, 2016). VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 other budget-related issues were referred to the appropriate office. Based on the comments and NCUA’s internal assessment, the Board is considering changes to the OTR methodology. Table of Contents I. Background II. Legal Authority Comments and Responses III. Current OTR Methodology and Process Comments and Responses IV. Details of Proposed OTR Methodology V. Request for Comment I. Background NCUA administers the Federal Credit Union Act (the Act), which is comprised of three Titles: Title I—General Provisions, Title II—Share Insurance, and Title III—Central Liquidity Facility. The agency’s mission is to ‘‘provide, through regulation and supervision, a safe and sound credit union system, which promotes confidence in the national system of cooperative credit.’’ 2 This includes protecting member rights and deposits. Specifically, NCUA charters, regulates, and insures shares in federal credit unions and insures shares and deposits in federally insured statechartered credit unions through the National Credit Union Share Insurance Fund (Share Insurance Fund). NCUA is responsible for ensuring federally insured credit unions operate safely and soundly and comply with all applicable laws and regulations within NCUA’s jurisdiction.3 In so doing, the agency mitigates risk to the Share Insurance Fund and prevents taxpayerfunded bailouts. To achieve its statutory mission, the agency incurs various expenses, including those involved in examining and supervising federally insured credit unions. The Board adopts an Operating Budget each year to fund the vast majority of the costs of operating the agency.4 The Act authorizes two primary sources to fund the Operating Budget: (1) Requisitions from the Share Insurance Fund; and (2) Operating Fees charged to federal credit unions.5 In 1972, the Government Accountability Office recommended 2 https://www.ncua.gov/About/Pages/Missionand-Vision.aspx. 3 In coordination with State Supervisory Authorities with respect to federally insured statechartered credit unions. 4 Some costs are directly charged to the Share Insurance Fund or the Temporary Corporate Credit Union Stabilization Fund when appropriate to do so. For example, costs for training and equipment provided to State Supervisory Authorities are directly charged to the Share Insurance Fund. 5 Other sources of funding for the Operating Budget include interest income, funds from publication sales, parking fee income, and rental income. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 NCUA adopt a method for properly allocating Operating Budget costs—that is the portion to be funded by requisitions from the Share Insurance Fund and the portion to be covered by Operating Fees paid by federal credit unions.6 NCUA has since used an allocation methodology, known as the OTR, to determine how much of the Operating Budget to fund with a requisition from the Share Insurance Fund. NCUA has employed various allocation methods over the years, with the current methodology adopted in 2003. For a chronological summary of the history of the OTR, refer to Overhead Transfer Rate (OTR)— Timeline at https://www.ncua.gov/ About/Documents/Budget/ Misc%20Documents/overhead-transferrate-chronology.pdf. For a detailed explanation of the current methodology, refer to Federal Register—NCUA Request for Comment Regarding Overhead Transfer Rate Methodology at https://www.federalregister.gov/ documents/2016/01/27/2016-01626/ request-for-comment-regardingoverhead-transfer-rate-methodology. II. Legal Authority Comments and Responses The Board detailed the legal parameters within which it must fund the NCUA Operating Budget in the January 2016 notice and request for comment.7 While the Board did not expressly solicit comments on said authorities, a number of comments addressed NCUA’s legal authority. Below the Board restates the legal parameters outlined in the January 2016 notice. Within these parameters, NCUA has developed a new OTR methodology proposed in this publication that continues to ensure application that is fair to both federal credit unions and federally insured state-chartered credit unions, and that is consistent across all of NCUA’s cost centers. a. Legal Authority NCUA charters, regulates and insures shares in federal credit unions and insures shares and deposits in federally insured state-chartered credit unions. To cover expenses related to its statutory mission, the Board adopts an Operating Budget in the fall of each year. The Act authorizes two primary sources to fund the Operating Budget: (1) Requisitions from the Share Insurance Fund ‘‘for such administrative and other expenses incurred in carrying out the purposes of 6 http://www.gao.gov/assets/210/203181.pdf. 7 81 E:\FR\FM\30JNN1.SGM FR 4804 (Jan. 27, 2016). 30JNN1 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices [Title II of the Act] as [the Board] may determine to be proper’’; 8 and (2) ‘‘fees and assessments (including income earned on insurance deposits) levied on insured credit unions under [the Act].’’ 9 Among the fees levied under the Act are annual Operating Fees, which are required for federal credit unions under 12 U.S.C. 1755 ‘‘and may be expended by the Board to defray the expenses incurred in carrying out the provisions of [the Act,] including the examination and supervision of [federal credit unions].’’ Taken together, these dual primary funding authorities effectively require the Board to determine which expenses are appropriately paid from each source while giving the Board broad discretion in allocating these expenses. To allocate agency expenses between these two primary funding sources, NCUA uses the OTR. The OTR represents the formula NCUA uses to allocate insurance-related expenses to the Share Insurance Fund under Title II. Almost all other operating expenses are collected through annual Operating Fees paid by federal credit unions.10 Two statutory provisions directly limit the Board’s discretion with respect to Share Insurance Fund requisitions for NCUA’s Operating Budget and, hence, the OTR. First, expenses funded from the Share Insurance Fund must carry out the purposes of Title II of the Act, which relate to share insurance.11 Second, NCUA may not fund its entire Operating Budget through charges to the Share Insurance Fund.12 NCUA has not imposed additional policy or regulatory limitations on its discretion for determining the OTR. If NCUA’s OTR methodology were challenged, the court would uphold NCUA’s methodology unless it were shown to be arbitrary or capricious, contrary to law, or unsupported by statutory authority under the Administrative Procedure Act 8 12 U.S.C. 1783(a). U.S.C. 1766(j)(3). Other sources of income for the Operating Budget include interest income, funds from publication sales, parking fee income, and rental income. 10 Annual Operating Fees must ‘‘be determined according to a schedule, or schedules, or other method determined by the NCUA Board to be appropriate, which gives due consideration to the expenses of the [NCUA] in carrying out its responsibilities under the [Act] and to the ability of [FCUs] to pay the fee.’’ 1755(b). The NCUA Board’s methodology for determining the aggregate amount of Operating Fees was discussed in a separate Federal Register publication. 11 12 U.S.C. 1783(a). 12 The Act in 12 U.S.C. 1755(a) states, ‘‘[i]n accordance with rules prescribed by the Board, each [federal credit union] shall pay to the [NCUA] an annual operating fee which may be composed of one or more charges identified as to the function or functions for which assessed.’’ See also 12 U.S.C. 1766(j)(3). mstockstill on DSK30JT082PROD with NOTICES 9 12 VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 (APA).13 The Board believes the existing OTR and this proposal are fully consistent with the APA and all other applicable law.14 b. Comments In response to its initial OTR notice, NCUA received a variety of comments related to the legal authority to requisition funds from the Share Insurance Fund to cover a portion of the Operating Budget. Several commenters stated the agency does not have authority or discretion to establish and determine the OTR. Some commenters asserted that NCUA lacks the legal authority to use the Share Insurance Fund to cover costs of operating the agency. Other commenters claimed NCUA has only very narrow authority to allocate costs, has too broadly interpreted its authority, and may assign to the Share Insurance Fund only those costs directly associated with share insurance payments for failed or troubled credit unions. Some commenters insisted NCUA is required to fund the vast majority of the cost of operating the agency through Operating Fees charged to federal credit unions, claiming Congress intended that Operating Fees were to subsidize costs in managing risk to the Share Insurance Fund. Having considered these comments, NCUA maintains that a plain reading of the Act, as described in section II.a. above and in the January 2016 notice, supports the agency’s legal authority and broad discretion in allocating operating costs. Various commenters disagreed with the agency’s legal analysis and argued that some combination of 12 U.S.C. 1781(b)(1), 1782(a)(5), and 1790 also limit NCUA’s requisition of funds from the Share Insurance Fund for the Operating Budget. Several commenters went further and argued that Title II’s legislative history indicates the savings from NCUA’s reliance on Title I and State Supervisory Authority examinations and reports should accrue to the benefit of the Share Insurance Fund. The Act’s plain language does not require an analysis of the legislative history.15 Even if legislative history was applicable in this case, the plain reading of the Act is consistent with the legislative history and does not support commenters’ interpretation that Congress intended costs savings 29937 provisions to only accrue to the Share Insurance Fund as discussed below. Multiple commenters stated that the plain language of the Act requires the Board to structure examinations and Call Reports originally required under Title I so they may be used for Title II share insurance purposes.16 These commenters similarly stated that the Act places requirements on NCUA to use state regulator examinations and reports to the maximum extent feasible.17 In response, the Board notes that Title II, in 12 U.S.C. 1781(b)(2), authorizes examinations as needed for the protection of the Share Insurance Fund and other credit unions in addition to those permitted under Title I, recognizing that the scope and timing of Title I examinations does not necessarily satisfy share insurance needs under Title II. Regardless of the parsing of the various statutory provisions on this point, the Board is careful to build efficiencies wherever reasonable in light of NCUA’s dual roles as (1) charterer and prudential regulator of federal credit unions and (2) insurer of federal credit unions and federally insured state-chartered credit unions. Efficiencies gained from NCUA’s dual role provide cost savings and help avoid subjecting credit unions to the burden of redundant examinations. Further, the Act’s provisions on cost savings do not prohibit NCUA from allocating insurance-related operating expenses to the Share Insurance Fund through the OTR under 12 U.S.C. 1783(a). Specifically, 12 U.S.C. 1781(b)(1) requires NCUA to adjust the way it conducts examinations of federal credit unions so they may be ‘‘utilized for share insurance purposes.’’ This provision does result in cost savings. However, it does not preclude NCUA from allocating the costs of the ‘‘share insurance purposes’’ portion of federal credit union examinations to the Share Insurance Fund.18 The Board thus disagrees with commenters that argued that the Act requires the cost-savings of NCUA’s dual roles to accrue specifically to the Share Insurance Fund. While the Board did not cite 12 U.S.C. 1790 as an additional limitation in its earlier notice, the Board agrees with commenters stating that this provision should inform NCUA’s interpretation of Title II so that it consciously avoids discrimination against federally insured 16 12 U.S.C. 1781(b)(1), 1782(a)(5). 17 Id. 13 5 U.S.C. 706(2). e.g., Motor Vehicle Mfrs. Ass’n of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29 (1983). 15 See, e.g., Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450 ((2002). 14 See, PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 18 With respect to call reports and other ongoing reports submitted by federally insured credit unions, 12 U.S.C. 1782(a)(5) is also a cost savings provision but does not preclude allocating insurance-related costs of the applicable data collections to the Share Insurance Fund. E:\FR\FM\30JNN1.SGM 30JNN1 mstockstill on DSK30JT082PROD with NOTICES 29938 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices state-chartered credit unions to the benefit of federal credit unions.19 However, the Board does not believe that either the current or the proposed OTR process discriminates against federally insured state-chartered credit unions or federal credit unions to the benefit of the other. As background, all federally insured credit unions are subject to the same requirements for funding the Share Insurance Fund. Specifically, § 1782(c)(1)(A)(i) requires that ‘‘[e]ach insured credit union shall pay to and maintain with the [Share Insurance Fund] a deposit in an amount equaling 1 per centum of the credit union’s insured shares.’’ Section 1782(c)(2)(A) requires that ‘‘[e]ach insured credit union shall, at such times as the Board prescribes (but not more than twice in any calendar year), pay to the Fund a premium charge for insurance in an amount stated as a percentage of insured shares (which shall be the same for all insured credit unions).’’ Thus, in funding the Share Insurance Fund, federal credit unions and federally insured state-chartered credit unions are not treated any differently. Similarly, the requisitions from the Share Insurance Fund used to fund the insurance-related expenses of NCUA’s Operating Budget under § 1783(a) do not distinguish between federal credit unions and federally insured statechartered credit unions. As for the OTR methodology and whether it complies with § 1790, the OTR methodology only considers the type of activity (i.e. insurance-related or not) and treats the expenses related to that activity the same regardless of the type of charter to which the activity applies. Specifically, both the existing and proposed OTR methodologies provide that all insurance-related expenses are funded from the Share Insurance Fund, regardless of charter type. The Act clearly permits expenses related to insurance to be funded by the Share Insurance Fund regardless of charter. Specifically, 12 U.S.C. 1783(a) expressly allows expenses ‘‘incurred in carrying out the purposes of [Title II]’’ to be allocated to the Share Insurance Fund. The costs NCUA incurs in safeguarding the Share Insurance Fund relate to the risks in federal credit unions and federally insured statechartered credit unions. The Act 19 12 U.S.C. 1790 (‘‘It is not the purpose of this subchapter to discriminate in any manner against State-chartered credit unions and in favor of Federal credit unions, but it is the purpose of this subchapter to provide all credit unions with the same opportunity to obtain and enjoy the benefits of this subchapter.’’). VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 provides the Board with a number of specific authorities that relate to costs NCUA incurs in carrying out its obligations under Title II. For instance, Title II of the Act authorizes the Board ‘‘to appoint examiners who shall have the power, on its behalf, to examine any insured credit union . . . whenever in the judgment of the Board an examination is necessary to determine the condition of any such credit union for insurance purposes.’’ 20 Further, Title II authorizes the Board to implement regulations applicable to all insured credit unions to address risk to the Share Insurance Fund. Title II states the Board may ‘‘prescribe such rules and regulations as it may deem necessary and appropriate to carry out the provisions of this subchapter.’’ 21 Title II also grants the Board the following additional authorities relevant to agency operating costs: • ‘‘Appoint such officers and employees as are not otherwise provided for in this chapter;’’ 22 • ‘‘employ experts and consultants or organizations thereof;’’ 23 • ‘‘prescribe the manner in which its general business may be conducted and the privileges granted to it by law may be exercised and enjoyed;’’ 24 • ‘‘exercise all powers specifically granted by the provisions of this subchapter and such incidental powers as shall be necessary to carry out the power so granted;’’ 25 and • ‘‘make examinations of and require information and reports from insured credit unions, as provided in this subchapter.’’ 26 The Board concludes that these authorities taken together provide NCUA as insurer with broad discretion to impose regulations on and examine all insured credit unions. In addition, the cost of the agency activities associated with exercising these and other accompanying authorities can properly be considered costs of carrying out Title II of the Act.27 20 12 U.S.C. 1784(a). 21 12 U.S.C. 1789(a)(11). 22 12 U.S.C. 1789(a)(4). 23 12 U.S.C. 1789(a)(5). 24 12 U.S.C. 1789(a)(6). 25 12 U.S.C. 1789(a)(7). 26 12 U.S.C. 1789(a)(8). 27 For example, Title II specifically addresses a broad range of standards for all insured credit unions, including standards for insurance against burglary and defalcation, loss reserve requirements, investment limitations, ongoing reporting requirements (such as the Call Report), independent audits, accounting principles, national flood insurance program requirements, liquidity capacity, unsafe and unsound conditions or practices, security standards, recordkeeping, monetary transaction and recordkeeping and reporting, benefits to institution affiliated parties, capital standards, and approval of officials. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 Finally, a number of commenters argued that the OTR methodology and/ or calculations either should or must go through full APA notice and comment rulemaking. The APA does not require notice and comment for the OTR methodology. The legal analysis of NCUA’s Office of General Counsel on the applicability of the notice and comment provisions of the APA to the OTR methodology is summarized in the January 2016 OTR notice 28 and articulated more fully in a legal opinion posted on NCUA’s Web site.29 In soliciting comment on the OTR through the Federal Register NCUA has gone, and continues to go, beyond its APA obligations. III. Current OTR Methodology and Process Comments and Responses a. Formula Driven or Set at the Discretion of the Board The majority of commenters expressed support for NCUA’s continued use of a formula to determine the OTR. The Board agrees NCUA should continue to use a formula to determine the OTR. Use of a welldesigned and comprehensive formula represents a good faith effort to consider all of the agency’s costs relative to how NCUA is carrying out its various responsibilities. A formula also helps ensure costs assigned to the OTR relate to agency activities to carry out Title II responsibilities. NCUA’s goal in using a formula-driven OTR methodology is to provide a comprehensive, fair, and equitable allocation of costs within a framework that can be administered at a relatively low cost. Though it is formula driven, the Board can adjust the methodology at any time to ensure it continues to reflect the most equitable and suitable approach to allocating costs. However, five commenters favored setting the OTR at a fixed 50 percent of 28 81 FR 4804 (Jan. 27, 2016) (‘‘Since its inception, NCUA has taken the position that the OTR is not a legislative rule under the Administrative Procedure Act (APA) and is, therefore, exempt from notice and comment rulemaking processes. [ ] As such, NCUA has never used notice and comment rulemaking to establish either an individual determination of the OTR or the general methodology used to calculate the OTR. However, the OTR has been explained, discussed, and reviewed in various public records, including in annual Board Action Memorandums related to budget matters, independent evaluations, and other documents available in public records and on NCUA’s Web site.[ ] Beyond its APA obligations, the Board has chosen to solicit public comments on the OTR processes and methodologies through this Federal Register publication.’’). 29 NCUA’s legal analysis with respect to the OTR and APA process is available at the following Web page: https://www.ncua.gov/Legal/Documents/ Opinion/OL2015-0818.pdf. E:\FR\FM\30JNN1.SGM 30JNN1 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES the Operating Budget. Commenters that supported setting the OTR at 50 percent indicated that it is easily understandable, more in line with the dual functions of NCUA as regulator and insurer, and that the OTR was set at 50 percent for many years. The Board does not believe it is transparent or appropriate to set the OTR at any level, such as the 50 percent recommended by commenters, without a reasoned basis to demonstrate that level of agency operating costs are properly allocated to Title II activities.30 However, the Board agrees that the OTR methodology can be simplified and maintain a sufficient degree of comprehensiveness to ensure it is equitable. Such a simplification should improve understanding of the OTR and reduce administrative costs. For a discussion of how the Board proposes to simplify the OTR methodology, see section IV. b. Delegation of the OTR Calculation to NCUA Staff Ten commenters objected to the Board’s delegation of the OTR calculation to NCUA staff. They argued that by doing so the Board abdicated its oversight and discretion over the OTR and that it will result in reduced transparency. During the November 29, 2015, Board meeting, the Board approved the delegation of authority to administer the Board approved OTR methodology to the Director of the Office of Examination and Insurance (E&I).31 Delegating the ministerial application of the Board approved OTR methodology does not mean the Board has abdicated its oversight and discretion for the OTR. With limited exceptions not at play here, the Act permits the Board to ‘‘delegate to any officer or employee of the Administration such of its functions as it deems appropriate.’’ 32 Further, the current delegation to staff to administer the OTR does not provide staff with the power to change the methodology for calculating the OTR. Rather it mirrors the typical organizational separation of duties where the board sets policy and staff implements the policy. The Board retains approval authority over the methodology that is used to calculate the OTR; only the Board can change the OTR methodology or use its discretion to change the OTR from the calculated result if circumstances so warranted. However, having the OTR set by a Board 30 See 12 U.S.C. 1783(a). 31 NCUA Board Action Bulletin found at the following web address: https://www.ncua.gov/ About/Pages/board-actions/bulletins/2015/ november/BAB20151119.aspx. 32 12 U.S.C. 1789(a)(10); see also 1766(d). VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 approved formula, instead of an explicit Board vote each year, helps avoid any perception that the agency would casually override the calculation in setting the OTR. At any time, any Board member may request a Board vote be scheduled to change the OTR methodology, or to change the OTR from the calculated result. The delegation has not resulted in a reduction in transparency. As was done prior to the delegation, each year staff submits a report to the Board on the results of the calculation and conducts a briefing at a public Board meeting. The materials supporting the OTR calculation and the result are provided as part of the public Board briefing and posted on the agency’s Web site. The Board intends for this public reporting to continue. Further, the Board is committed to soliciting public input at least every three years on the OTR methodology, and any time a change to the methodology is considered. c. Transparency Nine commenters stated that the current OTR methodology is not sufficiently transparent. NCUA has made various efforts over the years to be transparent with respect to the OTR, and recently published extensive information about the OTR. The setting of the OTR has been briefed and acted on each year at a public Board meeting. The associated Board Action Memorandums, which are public records, fully detailed the calculation and included supporting materials. The current methodology was extensively reviewed at a public Board meeting when adopted in 2003. All related materials have been made a matter of public record and posted on NCUA’s Web site. Numerous analyses, independent evaluations, and other documents are available in public records and on NCUA’s Web site. To improve transparency further, the agency organized and posted a variety of new and historical materials on its Web site in 2015.33 Additionally, the January 27, 2016, request for comment regarding the OTR methodology provided detailed explanations for the processes and methodology related to calculating the OTR. Although all information related to the OTR calculation is publicly available already, the Board acknowledges that an obstacle to transparency is the complexity of the methodology itself. In an effort to address the transparency concern, the Board is considering simplifying the 33 Materials related to the OTR can be found at www.ncua.gov/About/Pages/budget-strategicplanning/supplementary-materials.aspx. PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 29939 OTR methodology. While still formula driven, the proposed changes to the methodology would provide for a simpler approach that remains comprehensive, fair, and equitable. The proposed changes to the methodology are described in detail in section IV of this document. d. Definition of Insurance-Related Activities NCUA’s definition of insurancerelated activities received the most comments. Of the 36 commenters on this topic, most disagree with the definition NCUA uses for insurancerelated activities. Many commenters objected to equating ‘‘safety and soundness’’ with ‘‘insurance-related,’’ with some arguing that the charterer/ prudential regulator cares about safety and soundness and it is therefore not the sole domain of the insurer. Commenters asserted the definition assumes that NCUA has no safety and soundness oversight in its role as regulator and charterer of federal credit unions. By doing so, commenters claim NCUA is shifting expenses that should fall under the operating fee paid by federal credit unions to the Share Insurance Fund. NCUA recognizes the historical role of a charterer/prudential regulator involves enforcing laws and implementing public policy. Before the advent of federal deposit insurance, federal financial institution regulators were concerned with protecting the stability of the financial system by ‘‘regulating’’ it. Thus, financial institution examinations focused on ensuring (1) statutes and regulations were followed to protect consumers, and (2) institutions were viable to protect consumer deposits, preserve access to financial services, and safeguard the stability of the economy. Though not responsible for the financial liability that comes with the role of insurer, prudential regulators are concerned with potential threats to the viability of their financial institutions to protect consumers and their jurisdiction’s economy. This focus on viability benefits the insurer, whose primary role is to protect depositors and the taxpayer and contribute to the stability of the financial system. NCUA has a unique dual role in that it serves as both the regulator of federal credit unions and the insurer of all federally insured credit unions.34 34 The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. On its Web site, the OCC lists its mission as ensuring that national banks and federal savings E:\FR\FM\30JNN1.SGM Continued 30JNN1 29940 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES Congress established the Share Insurance Fund and assigned its administration to the Board.35 This arrangement has a variety of benefits. A regulator/supervisor with insurance responsibility creates a strong alignment of incentives in preserving safety and soundness, thereby managing risk to the Share Insurance Fund. The appropriate combination of functions reduces the likelihood that a regulator would act without adequate regard for the insurance implications. It also generally avoids additional and duplicative oversight costs, and the corresponding burden on insured institutions of separate requirements and supervision from a different regulator and insurer. Given its multiple roles, NCUA appropriately allocates costs associated with activities connected to each role. Various provisions of the Act, as noted earlier, govern or inform this allocation. Thus, NCUA currently categorizes those activities designed to manage risk to the Share Insurance Fund as ‘‘insurancerelated.’’ This includes activities designed to enforce regulations NCUA adopts to carry out the purpose of Title II (Share Insurance) as well as related examination and supervision activities.36 NCUA’s categorization associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations. Similarly, the Board of Governors of the Federal Reserve System has supervisory and regulatory authority over a wide range of financial institutions, including state-chartered banks that are members of the Federal Reserve System, bank holding companies, thrift holding companies and foreign banking organizations that have a branch, agency, a commercial lending company subsidiary or a bank subsidiary in the United States. On its Web site, the Federal Reserve states its mission is to provide the nation with a safer, more flexible, and more stable monetary and financial system. One of its four stated general duties is supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers. On its Web site, the Federal Deposit Insurance Corporation states its mission is to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, making large and complex financial institutions resolvable, and managing receiverships. 35 12 U.S.C. 1782, 1783. 36 As noted in the Legal Authority section, NCUA has the authority to promulgate rules and regulations to carry out the purpose of Title II— Share Insurance. Accordingly, the NCUA Board has approved rules and regulations that specifically address credit union activities that pose risk to the Share Insurance Fund. NCUA has mapped all examination related rules and regulations to one of two categories: insurance regulatory related, or noninsurance or consumer regulatory related. This regulatory mapping provides the basis for determining how examination time is reported for use in the current OTR methodology. The mapping is discussed in detail in the 2013 independent study by PwC and in NCUA’s January 2016 request for comment. VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 focuses on the primary motivation for the regulation or examination and supervision activity. The motivation for insurance-related regulations and examination activities is based on the nature of the threat to the viability of the institution, and therefore potential losses to the Share Insurance Fund. The insurance-related definition excludes procedures that assess compliance with other regulations. Consumer protection and other laws and regulations (such as field of membership rules) designed to otherwise govern how credit unions operate, and related examination activities, are not primarily intended to reduce the potential for losses to the Share Insurance Fund. Moreover, while systemic and egregious violations of such laws could result in material fines to the institution, such occasions are very infrequent and rarely result in the failure of the institution or losses to the Share Insurance Fund. Thus, NCUA currently allocates costs associated with regulating and examining the safety and soundness of insured institutions as insurancerelated. Worthy of note, Congress uses ‘‘safety and soundness’’ and related terminology in the Act.37 There are two subjects in Title I containing safety and soundness terminology: the interest rate ceiling for federal credit unions (12 U.S.C. 1757(5)(A)(vi)(I)) and provisions regarding multiple common bond groups (12 U.S.C. 1759(d) and 12 U.S.C. 1759(f)). The current safety and soundness language applying to these two subjects in Title I was added after Title II was enacted. There are 19 references to safety and soundness in Title II. These provisions cover a range of subjects.38 In particular, NCUA’s various enforcement authorities for violations of laws or regulations and unsafe or unsound conditions or practices are contained in Title II. Thus, most of Congress’ focus on safety and soundness in the Act is in the context of share insurance. However, NCUA acknowledges that safety and soundness is not the sole domain of the insurer; prudential regulators have various responsibilities with respect to the ‘‘safety and soundness’’ of institutions they oversee. In some respects this is recognized in the current OTR formula through the ‘‘Imputed SSA Value.’’ To better reflect that the prudential regulator and insurer both have responsibilities for safety and 37 ‘‘Safe and sound,’’ ‘‘safety and soundness,’’ and ‘‘unsafe or unsound’’ are the terminology encompassing safety and soundness found in the Act. 38 See 12 U.S.C. 1781(c)(2), 1782(a)(6)(B), 1786(b), 1786(e), 1786(f), 1786(g), 1786(k)(2), 1786(r), 1786(s), and 1790d(h). PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 soundness, the Board is considering adjusting the OTR methodology so safety and soundness is not accounted for as the primary domain of the insurer. For more information on the proposed change to the OTR methodology, see section IV. One commenter stated that routine examinations of all insured credit unions should be paid through Operating Fees. Another commenter asserted that the OTR should only be used for examinations of federally insured state-chartered credit unions and examinations of troubled federal credit unions. These recommendations assume that as insurer, NCUA takes only a reactive approach to managing risk to the Share Insurance Fund. The Board notes that NCUA’s role as insurer is best fulfilled by a proactive approach to preventing losses, not just addressing troubled or failed institutions. Since the implementation of federal share insurance in 1970, the Board has instituted a more proactive examination and supervision program geared toward safety and soundness to better manage risk to the Share Insurance Fund. Additionally, as credit unions have become larger and more complex, the risks to the Share Insurance Fund have changed, with NCUA making corresponding adaptions to its operations. In 2002, the Board strengthened its commitment to fulfilling NCUA’s role as insurer by implementing the Risk-Focused Examination Program. As recently as 2016, the Board made the examination program even more risk-based by adopting an extended examination cycle for healthy, well-run credit unions. These programs base examination scope and timing largely on the risks an institution poses to the Share Insurance Fund. Further, the objective of the riskfocused examination is to enable NCUA to identify and address risks before they become a major problem. All of these changes have resulted in an increase in the agency’s insurance-related activities. The Act and NCUA Regulations have also evolved, resulting in more emphasis on safeguarding the Share Insurance Fund. For example: 1. The Credit Union Membership Access Act was enacted into law in 1998.39 This law resulted in new obligations on credit unions and NCUA, such as prompt corrective action, designed to protect the Share Insurance Fund. 39 Information about the Credit Union Membership Access Act is contained within NCUA Letter to Credit Unions 98–CU–16 located at the following web address: https://www.ncua.gov/ Resources/Documents/LCU1998-16.pdf. E:\FR\FM\30JNN1.SGM 30JNN1 mstockstill on DSK30JT082PROD with NOTICES Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices 2. During the aftermath of the financial crisis, the Board strengthened critical safety and soundness rules, such as interest rate risk and liquidity management standards. 3. NCUA also has been providing regulatory relief. New authorities and less prescriptive, more principles-based rules have helped to reduce compliance burdens and provide credit unions with more authority to serve members and manage risk. They result in examiners devoting more time to ensuring safety and soundness through the examination process rather than relying on regulatory limits. Under this proactive approach, the Board’s primary motivation for many of the agency’s current regulations and the majority of the examination program is to manage risk to the Share Insurance Fund. The Board acknowledges there is not always a clear separation between the role of a prudential regulator concerned with enforcing laws and implementing public policy and that of an insurer. For example, NCUA relies, to the extent feasible, on the examination work performed by state regulators to manage risk to the Share Insurance Fund posed by federally insured state-chartered credit unions. This results in some cost savings in the NCUA Operating Budget. Since 2004, the value of the insurancerelated work conducted by state regulators and relied on by NCUA has been reflected in the OTR methodology as the ‘‘Imputed SSA Value.’’ To ensure equitable treatment, the Imputed SSA Value is calculated on the same cost basis as if NCUA had to conduct the work itself.40 The current methodology applies the same approach and definition of insurance-related examination activities to examinations of federally insured state-chartered credit unions as for federal credit unions. The Imputed SSA Value has the effect of reducing the OTR, thereby taking into account the fact that all insured credit unions benefit from the insurance-related examination costs of state regulators borne by state-chartered credit unions. The Board recognizes that another plausible approach to accounting for the related missions of charterer/prudential regulator and insurer is to employ an alternating or partnership framework within the OTR methodology. This would simplify the OTR methodology and avoid having to delineate safety and soundness as the primary domain of the insurer. The concept of an alternating or partnership framework being applied to 40 The Imputed SSA Value for 2017 is $50.8 million. VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 the OTR methodology is described in detail in section IV of this document. e. State Regulator Costs Some commenters asserted that because NCUA equates safety and soundness with insurance-related activities, the OTR methodology is not fair and equitable as state regulators also examine federally insured statechartered credit unions for safety and soundness. As a result, some commenters contended federally insured state-chartered credit unions are charged twice for safety and soundness examinations; once by their state regulator via an operating fee and then by NCUA via the OTR. Further, some commenters claimed that federally insured state-chartered credit unions are disadvantaged when the OTR rises due to increased NCUA examination time allocated to insurance, because the NCUA operating fee paid by federal credit unions declines. NCUA appreciates the work state regulators do in contributing to the safety and soundness of the credit union system. The agency will continue to partner and coordinate closely with state regulators in this regard. It is important to note that ultimately NCUA is accountable for carrying out the purpose of Title II of the Act and managing risk to the Share Insurance Fund. The extent state regulators examine for safety and soundness is the choice of state governments. This choice, along with the adequacy of the examination, affects the extent to which it is feasible for NCUA to rely on these examination reports to meet its Title II responsibilities. State governments also choose the extent to which they rely on the work of NCUA in its role as insurer to reduce overall state costs and burden. State-chartered credit unions are not charged twice as a result of state regulators also examining for safety and soundness. The extent to which state regulators examine for safety and soundness in a manner that can be relied on by NCUA reduces the overall agency costs to which the OTR is applied, benefiting all insured credit unions. Conversely, NCUA’s involvement in developing reporting and examination systems for all insured credit unions, publishing guidance, training and equipping most state examiners, and participating in the examination of federally insured statechartered credit unions reduces overall state regulator costs.41 As discussed 41 NCUA budgeted to spend over 150,000 hours participating in the examination and supervision of federally insured state-chartered credit unions in 2017. To conduct this additional work would PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 29941 above, the current OTR methodology takes into account via the Imputed SSA Value the insurance-related work conducted by state regulators and relied on by NCUA. In addition, the Imputed SSA Value is calculated using the same examination time allocation for federal credit unions. Thus, when more of the agency’s examination time is dedicated to insurance-related areas, the Imputed SSA Value also increases. The Imputed SSA Value has the effect of reducing the OTR (and conversely increasing the operating fee paid by federal credit unions) to the benefit of state-chartered credit unions. This provision helps ensure the current OTR methodology is fair and equitable.42 Some commenters suggested that if the OTR continued to define all safety and soundness activities as insurancerelated, NCUA should use each state regulator’s actual costs instead of an imputed value. Others argued NCUA should pay the state governments for their actual costs instead of merely reducing the OTR. NCUA notes that it is neither feasible nor appropriate to use the actual state regulator costs in determining the OTR. To ensure the methodology is fair and equitable across all federally insured institutions, the Imputed SSA Value is intentionally designed to reflect the replacement cost to NCUA if the agency had to do the insurance-related work it relies on the state regulators to conduct. The cost structure for state regulators can vary widely and include nongermane and potentially inordinate costs. Also, it is not feasible to obtain reliable and comprehensive information require state regulators to add an estimated 175 staff at a cost of up to $35 million. Most state regulators participate in NCUA’s examiner training programs, use the agency’s examination and Call Report systems, and benefit from the agency’s exam techniques and supervisory guidance. State regulators would have to individually or collectively develop and administer these functions and systems if NCUA did not provide them. For context, NCUA’s 2017 budget included the following for units associated with these functions and systems: $10.5 million for the Division of Training and Development; $16.4 million for the Office of the Chief Information Officer’s information technology operations; and $12.3 million for the Office of Examination and Insurance. Also, NCUA’s 2017 capital budget includes $10.4 million to support the Enterprise System Modernization program; much of this program involves modernization of systems that directly or indirectly support supervising credit unions. Additionally, in 2017 NCUA budgeted $1.4 million for training of state examiners and $162,480 in computer lease expense for equipment provided to state regulators. 42 Overhead Transfer Rate Review, PriceWaterhouseCoopers, Section 1.4.3 (January 20, 2011) (Based on PwC’s review, there was no reasonable basis to conclude that the OTR methodology ex-ante and for reasons beyond the control of credit unions, favours or disadvantages any one type of credit unions (i.e. federal versus state chartered) over another.) E:\FR\FM\30JNN1.SGM 30JNN1 29942 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices comprehensive information upon which to draw any reliable conclusions.44 Based on Call Report data, NCUA did compare the total Operating Fees as a percent of average assets paid by federal credit unions to those reported by federally insured state-chartered credit unions. Though this comparison has some limitations, the trends in Graph 1 below show that Operating Fees recorded by federal credit unions and federally insured state-chartered credit unions are comparable in aggregate. f. Regulation Mapping 45 NCUA has mapped all examinationrelated rules and regulations to one of two categories: Insurance regulatory related, or non-insurance and consumer regulatory related. A third party has reviewed the regulatory mapping.46 NCUA reviews the regulatory mapping prior to the beginning of each examination time survey cycle for any necessary updates.47 A detailed review was completed again for 2017 that resulted in minor adjustments to classifications. For the full regulatory mapping, see the 2017 Mapping of NCUA Rules and Regulations document posted on NCUA’s public Web site at https://www.ncua.gov/About/ Documents/mapping-ncua-regulations2017.pdf. Since NCUA equates safety and soundness with the term insurancerelated in the current OTR methodology, commenters argued that the mapping of NCUA’s rules and regulations is faulty. Some commenters asserted that classifying NCUA rules as insurancerelated is flawed because NCUA as charterer/prudential regulator is charged with ensuring compliance with all the provisions contained within the rules and regulations. As noted in the Legal Analysis section above, the Board has the authority to promulgate rules and regulations to carry out the provisions of Title II (Share Insurance) of the Act, as well as examine credit unions for share insurance purposes.48 Accordingly, the Board has approved rules and regulations that specifically address safety and soundness with the intent to protect the Share Insurance Fund. As such, the current OTR methodology accounts for examination and supervision activities for insurancerelated regulations as an insurance cost. As noted above, the Board recognizes that another plausible approach to accounting for the related missions of charterer/prudential regulator and insurer is to employ an alternating or partnership framework within the OTR methodology. This would simplify the OTR methodology in part by avoiding having to map regulations to a specific role as it relates to federal credit unions. The concept of an alternating or partnership framework being applied to 43 Based on the responses received from the state regulators, many state credit union programs are divisions contained within a larger office with funds co-mingled with other programs. The state regulators that responded and that do not separate funds for credit unions from other financial institutions supervised generally either do not allocate expenses or did not provide their allocation methodology. 44 In total, 27 state regulators responded to varying degrees. These state regulators provided as much of the requested information as they could, given limitations they faced. 45 As part of the current OTR methodology, the agency maps NCUA examination activities related to specific regulations based on the primary purpose of the regulation—whether it is for carrying out the purpose of Title II (insurance-related) or part of NCUA’s responsibility as charterer or prudential regulator. For details regarding the regulation mapping, see Appendix A of the January 27, 2016 request for comment. 46 PwC National Credit Union Administration (NCUA) Analysis of Examination Time Survey (ETS) Modifications—October 2, 2013: https:// www.ncua.gov/About/Documents/Budget/2013/ 2013ETSAnalysis.pdf. 47 The examiner time survey is performed annually and is used to determine the percentage of the workload budget relates to regulatory and insurance-related tasks for federal examinations and supervision contacts. 48 12 U.S.C. 1789(a). VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 E:\FR\FM\30JNN1.SGM 30JNN1 EN30JN17.291</GPH> included determining how costs are allocated to the credit union specific activities for state regulators housed within state offices with broader responsibilities.43 NCUA staff first reviewed publicly available information with limited success. NCUA also sent letters to the state regulators to request details on fee structures, costs, and allocation factors for credit union specific activities. The information request did not result in sufficiently Further, federal credit unions continue to bear the majority of NCUA’s operating costs. For NCUA’s 2017 Operating Budget, federal credit unions cover 67 percent of the total Operating Budget through the operating fee and their proportional share of the OTR. mstockstill on DSK30JT082PROD with NOTICES about the relevant cost of each state regulator. NCUA has no authority to compel states to provide this information, nor to maintain records in such a way as to ensure proper allocation of germane costs. As part of the process of evaluating the suggestion to use actual state regulator costs, NCUA attempted to obtain and review the costs of state regulators and their methodologies for annual and/or examination fees for state-chartered credit unions. This Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices the OTR methodology is described in detail in section IV of this document. mstockstill on DSK30JT082PROD with NOTICES g. Other Methodological Aspects of the OTR NCUA received 23 comments suggesting various other changes to the current OTR process. The areas of the calculation receiving comments were the examiner time survey, the allocation factors for various NCUA central offices, and the use of insured shares in the calculation. • Examiner time survey: 49 Commenters generally agreed with using a time survey in allocating the cost of federal credit union examination and supervision. However, some commenters suggested NCUA conduct a time survey during all examinations and supervision contacts instead of on a statistically valid sample basis. Some commenters suggested having state regulators complete the examiner time survey as well. It is not necessary to have 100 percent coverage of all examination and supervision contacts to form a statistically valid basis for the survey. A complete census of all federal credit union examinations and supervision contacts would result in additional agency costs—all staff would have to be trained annually and all examinations and supervision contact hours would need to be increased for the time necessary to complete the survey.50 Moreover, the survey is not pertinent to NCUA’s work in federally insured statechartered credit unions given NCUA is only functioning in its capacity as insurer.51 The benefits of any small increases in precision would be outweighed by the corresponding costs. With respect to state regulator examinations, the agency has no authority to require state regulators to complete a time survey, and it would be challenging to ensure uniformity in how 49 The current examiner time survey is discussed in detail in the Request for Comment Regarding Overhead Transfer Rate Methodology published in the Federal Register on January 27, 2016. 50 Completing examination time surveys increases the time spent on each examination and supervision contact by an average of one hour. This equates to about 6,000 hours if survey data was collected at every onsite examination and supervision contact. Additionally, annual training would be required for all examiners and supervisory examiners. This would increase training hours for field staff by about 700 hours. The total additional time would be about 6,700 hours, approximately 6 additional employees. 51 As required by law, NCUA does review compliance with the Bank Secrecy Act and the Flood Disaster Protection Act when it conducts an examination of a federally insured state-chartered credit union and the state regulator has chosen not to conduct the review. These situations are limited and the time associated with this activity would have an indiscernible effect on the OTR. VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 29943 their time is reported. The proposed changes to the OTR methodology discussed in section IV would eliminate the need for an examiner time survey, resulting in additional cost savings.52 • Allocation factors for various NCUA central offices: Some commenters stated the allocation of costs for NCUA’s nonfield offices are not based on standard or consistent criteria. Overall, NCUA agrees that improvements can be made in allocation methods involving the non-field cost centers, and is addressing this in the proposed changes to the OTR methodology. Some noted that the Office of National Examinations and Supervision (ONES) costs cannot be 100 percent safety and soundness as it examines natural person credit unions with assets over $10 billion and, therefore, has regulatory responsibility. Other commenters noted ONES is also responsible for reviewing Bank Secrecy Act compliance for the corporate credit unions it supervises, suggesting some non-insurance time is spent supervising them. NCUA agrees that ONES time is not 100 percent insurance related and this issue was addressed in the 2017 OTR calculation. Other commenters questioned why the Office of Small Credit Union Initiatives and the Office of Consumer Financial Protection and Access vary in their methodology for classifying time spent on field of membership expansion. NCUA agrees that there are differences in the time allocations and has developed a consistent standard for use in the proposed changes to the OTR methodology discussed in section IV. • Use of Insured Shares: Two commenters recommended not using insured shares in the calculation of the OTR. The commenters suggested that time and resources spent in each charter type would be more appropriate. In developing the revised OTR methodology in 2003, one of the main goals of NCUA was to allocate costs as precisely as possible. For the current OTR methodology, it is necessary and appropriate to incorporate insured shares to ensure it is precise and equitable. Use of insured shares is consistent with the mutual nature of the Share Insurance Fund and part of the statutory scheme related to Share Insurance Fund deposits, premiums and dividends.53 It also reflects the fundamental economics with respect to how the implicit costs of the OTR are borne by federal and state-chartered credit unions. Nevertheless, there are reasonable alternative approaches to calculating the OTR that do not involve use of insured shares. As discussed in section IV, the proposed changes to the OTR method eliminate the need for use of insured shares in the calculation. 52 Based on the most recent Examination Time Survey results, field staff time would be reduced by approximately 200 hours annually. Central office and regional office staff time devoted to operating, maintaining, and administering the Examination Time Survey and related processes would be reduced by approximately 150 hours annually. 53 12 U.S.C. 1782(c)(2) and (3). 54 The insurer may evaluate compliance matters as part of a reciprocal arrangement with the prudential regulator in evaluating matters specific to insurance as part of the overall shared supervision of a credit union. A simplified assumption of equal sharing reflects the offsetting benefits for each role under a framework emulating an alternating examination program. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 IV. Details of Proposed OTR Methodology The proposed simplification of the OTR formula is intended to facilitate greater understanding of the methodology, and will decrease the agency resources necessary to administer the OTR. The new approach is within NCUA’s authority and, though simplified, would provide a sufficient level of precision with respect to the allocation of agency costs. The simplified formula applies the following underlying principles to the allocation of agency operating costs: 1. Time spent examining and supervising federal credit unions is allocated as 50 percent insurance related. The 50 percent allocation mathematically emulates an examination and supervision program design where NCUA would alternate examinations, and/or conduct joint examinations, between its insurance function and its prudential regulator function if they were separate units within NCUA. It reflects an equal sharing of supervisory responsibilities between NCUA’s dual roles as charterer/ prudential regulator and insurer given both roles have a vested interest in the safety and soundness of federal credit unions.54 It is consistent with the alternating examinations FDIC and state regulators conduct for insured statechartered banks as mandated by Congress. Further, it reflects that NCUA is responsible for managing risk to the Share Insurance Fund and therefore should not rely solely on examinations and supervision conducted by the prudential regulator. 2. All time and costs NCUA spends supervising or evaluating the risks posed by federally insured statechartered credit unions or other entities NCUA does not charter or regulate (for example, third-party vendors and CUSOs) is allocated as 100 percent insurance related. NCUA does not charter state-chartered credit unions nor E:\FR\FM\30JNN1.SGM 30JNN1 29944 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices serve as their prudential regulator. NCUA’s role with respect to federally insured state-chartered credit unions is as insurer. Therefore, all examination and supervision work and other agency costs attributable to insured statechartered credit unions is allocated as 100 percent insurance related. 3. Time and costs related to NCUA’s role as charterer and enforcer of consumer protection and other noninsurance based laws governing the operation of credit unions (like field of membership requirements) are allocated as 0 percent insurance related.55 As the federal agency with the responsibility to charter federal credit unions and enforce non-insurance related laws governing how credit unions operate in the marketplace, NCUA resources allocated to these functions are properly assigned to its role as charterer/ prudential regulator. 4. Time and costs related to NCUA’s role in administering federal share insurance and the Share Insurance Fund are allocated as 100 percent insurance related. NCUA conducts liquidations of credit unions, insured share payouts, and other resolution activities in its role as insurer. Also, activities related to share insurance, such as answering consumer inquiries about insurance coverage, are a function of NCUA’s role as insurer. These four principles are applied to the activities and costs of the agency to arrive at the portion of the agency’s Operating Budget to be charged to the Share Insurance Fund as discussed in detail below. Step 1—Workload Program Annually, NCUA develops a workload budget based on NCUA’s examination and supervision program to carry out the agency’s core mission. The workload budget reflects the amount of time necessary to examine and supervise federally insured credit unions, along with other related activities, and therefore the level of field staff needed to implement the exam program. Applying principles 1, 2, and 3 (those relevant to the workload budget) to the applicable elements of the workload budget results in a composite rate that reflects the portion of the agency’s overall mission program activities that are insurance related. For illustrative purposes, Table 1 shows the application of the allocation principles to the 2017 workload budget.56 TABLE 1—ALLOCATION OF WORKLOAD HOURS 57 Budgeted workload hours Percent insurance related Insurancerelated workload hours (A) Workload programs 2017 data (B) (A) × (B) Federal Credit Union Examination & Supervision. State Credit Union Examination & Supervision. Consumer Compliance Reviews & Related Training. Field of Membership & Chartering ................. 498,159 50 249,080 167,414 100 167,414 20,000 0 0 500 0 0 CUSO & Third-party Vendor Reviews ........... 5,576 100 5,576 Total ........................................................ 691,649 N/A 422,070 Total Insurance-Related Workload Hours to Total Workload Hours. .................... .................... 61% Step 2—Operating Budget mstockstill on DSK30JT082PROD with NOTICES Allocation basis The Operating Budget represents the costs of the activities associated with achieving the strategic goals and objectives set forth in the NCUA Strategic Plan. The Operating Budget is based on agency priorities and initiatives that drive resulting resource needs and allocations. Information related to NCUA’s budget process, including detailed information on the Board-approved 2017 Operating Budget, is available on the agency’s Web site.58 55 This includes any reviews of credit unions focused solely on compliance, such as a fair lending exam. It does not include the more broadly based examinations and supervision contacts of federal credit unions covered by principle 1. It also does not include enforcing laws, like Prompt Corrective VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 Based on allocation principle 1 reflecting NCUA’s roles as both prudential regulator and insurer. Based on allocation principle 2 reflecting NCUA’s role as insurer. Based on allocation principle 3 reflecting NCUA’s role as prudential regulator. Based on allocation principle 3 reflecting NCUA’s role as prudential regulator. Based on allocation principle 2 reflecting NCUA’s role as insurer. Field staff time conducting reviews of CUSOs and third-party vendors—NCUA does not charter or regulate CUSOs and third-party vendors. Weighted average of field staff program time devoted to NCUA’s role as insurer. The agency achieves its primary mission through the examination and supervision program. For the proposed formula, as applied to the 2017 Operating Budget, the percentage of insurance-related workload hours (61 percent) derived from Step 1 represents the main allocation factor used in Step 2 for the costs of the field offices (the Regions and ONES). A few agency offices have roles that are significantly distinct enough to warrant their own allocation factors, as discussed below. A weighted average allocation factor (60 percent) representing the aggregate budgets for the Regions, Ones, and the specific agency offices listed in Step 2 is applied to the central offices that design or oversee the examination and supervision program, or support the agency’s overall operations. These costs in total make up NCUA’s Operating Budget. Table 2 reflects the application Action, that are part of share insurance under Title II as covered by principle 4. 56 If the proposed change to the methodology is adopted by the Board, the calculation would apply to future workload and operating budgets. Thus, actual results may vary from those presented herein for illustrative purposes. 57 Numbers may not reconcile exactly due to rounding. 58 https://www.ncua.gov/About/Pages/budgetstrategic-planning/supplementary-materials.aspx. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 E:\FR\FM\30JNN1.SGM 30JNN1 29945 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices of the OTR allocation factors to the 2017 Operating Budget as an example. TABLE 2—ALLOCATION OF NCUA OPERATING BUDGET 59 Operating budget $ millions Operating cost to be borne by the share insurance fund $ millions (A) Cost area (2017 data) Percent insurance related (B) (A) × (B) Regions and ONES: The financial budget for the agency’s five regional offices and ONES is allocated based on the weighted average of insurance-related activities calculated from the workload budget in Step 1 (using principles 1, 2, and 3). Resources in the regions and ONES execute NCUA’s examination program. Thus, the budgeted costs related to these programs should receive the same allocation basis as the programs themselves ................ Asset Management Assistance Center: Manages liquidation payouts and assets acquired from liquidations on behalf of the Share Insurance Fund. Thus, the OTR allocation factor is based on principle 4 and allocated at 100 percent insurance related .................................... Office of Consumer Financial Protection and Access Largely in NCUA’s role as charterer and prudential regulator, this office is responsible for chartering and field-of-membership matters, low-income designations, bylaw amendments, consumer financial literacy efforts, consumer inquiries and complaints, consumer protection compliance, fair lending examinations, and related interagency coordination. These activities are allocated based on principle 3 as 0 percent insurance related. The office does some work with respect to federally insured state-chartered credit unions, including share insurance coverage matters, in NCUA’s role as insurer; these activities are allocated based on principle 4 as 100 percent insurance related. The net of this combined activity results in an allocation factor of 13 percent insurance related. See discussion below for more details .............................................. Office of Small Credit Union Initiatives: Provides consulting and training services for small credit unions, both federal credit unions and federally insured state-chartered credit unions. Also processes grants and loans for federally insured credit unions. Principle 1 is applied to the office’s work with federal credit unions and principle 2 is applied to the office’s work with federally insured state-chartered credit unions. The net of this combined activity results in an allocation factor of 60 percent insurance related. See discussion below for more details ....................................................................................................................................... Subtotal: The 60 percent subtotal factor represents the dollar-weighted average of the above four cost centers (Regions and Ones, Asset Management Assistance Center, Office of Consumer Financial Protection and Access, and Office of Small Credit Union Initiatives) representing specific aspects of NCUA’s mission ................................................................... All Other Offices: This category includes the offices that design or oversee the agency’s mission and its related offices, or provide necessary support to mission offices or the entire agency. As such, the proportion of insurance-related activities for these offices correspond to that of the mission offices. Therefore, these office costs are allocated based on the weighted average of insurance-related activities calculated in the subtotal above ................ 170.9 mstockstill on DSK30JT082PROD with NOTICES Regional Offices and ONES Asset Management Assistance Center The financial budget for the agency’s five regional offices and ONES is allocated based on the weighted average of non-insurance and insurance-related activities calculated in Step 1. The Regions and ONES execute NCUA’s examination programs; thus, the budgeted costs related to these offices should receive the same allocation basis as the programs themselves. The allocation factor is based on principles 1, 2, and 3 as documented in Table 1. The budget for the regional offices and ONES is allocated at 61.0 percent for insurance-related activities. NCUA conducts credit union liquidations and performs management and recovery of assets through the Asset Management and Assistance Center. The Asset Management Assistance Center assists NCUA regional offices with the review of large, complex loan portfolios and actual or potential bond claims. It also participates extensively in the operational phases of conservatorships and records reconstruction. The purpose of the Asset Management Assistance Center is to manage and reduce costs to the Share Insurance Fund and credit union members of credit union failures. Thus, OTR allocation is based on 104.3 7.4 100 7.4 9.9 13 1.3 6.5 60 3.9 194.6 60 116.8 103.6 60 62.2 298.2 Total ...................................................................................................................................... 61 ........................ 179.0 principle 4 at 100 percent insurance related. Office of Consumer Financial Protection and Access This division is responsible for NCUA’s consumer financial literacy efforts, consumer inquiries and complaints, consumer protection compliance and rulemaking, fair lending examinations, interagency coordination and outreach, chartering and field-of-membership matters, lowincome designations, charter conversions, and bylaw amendments. The majority of the work performed by the Office of Consumer Financial Protection and Access is related to NCUA’s role as prudential regulator and 59 The totals may not reconcile exactly due to rounding. VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 E:\FR\FM\30JNN1.SGM 30JNN1 29946 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices charterer of federal credit unions. This office is unique and differs from the Regions and ONES in the distribution and nature of work performed related to federal credit unions. Thus, principle 3 is applied to the majority of this office’s work and allocated at 0 percent insurance related. However, some work the office performs involves federally insured state-chartered credit unions, which falls under principle 4. The office also addresses share insurance coverage matters, which also falls under principle 4. The composite rate of this office’s insurance-related activities calculates as 13 percent as reflected in Table 3. Thus, an allocation factor of 13 percent is applied to the office’s financial budget in the OTR calculation. TABLE 3—ALLOCATION OF THE OFFICE OF CONSUMER PROTECTION AND FINANCIAL ACCESS STAFF TIME Division Number of staff (full time equivalent) Staff time spent on activities (full time equivalent) Allocation factor (percent) Proportion of staff insurancerelated work (full time equivalent) Administrative .................................................................................................. —Principle 3 Activities .............................................................................. —Principle 4 Activities .............................................................................. Consumer Access ............................................................................................ –Principle 3 Activities ................................................................................ —Principle 4 Activities .............................................................................. Consumer Affairs ............................................................................................. —Principle 3 Activities .............................................................................. —Principle 4 Activities .............................................................................. Consumer Compliance Policy and Outreach .................................................. —Principle 3 Activities .............................................................................. —Principle 4 Activities .............................................................................. 3 ........................ ........................ 20 ........................ ........................ 12 ........................ ........................ 10 ........................ ........................ ........................ 2.7 0.3 ........................ 15.0 5.0 ........................ 11.4 0.6 ........................ 10.0 0.0 ........................ 0 100 ........................ 0 100 ........................ 0 100 ........................ 0 100 ........................ 0.0 0.3 ........................ 0.0 5.0 ........................ 0.0 0.6 ........................ 0.0 ........................ Totals ................................................................................................. 45 ........................ ........................ 5.9 Insurance-Related Full Time Equivalent Staff to Total Staff ..... 13% ........................ ........................ ........................ mstockstill on DSK30JT082PROD with NOTICES The office’s administrative staff provides support for the whole office. Ten percent of this unit’s work was devoted to supporting insurance-related functions, like responding to consumer inquiries on share insurance coverage. Thus, principle 4 is applied to those activities as 100 percent insurance related while the remaining 90 percent of their time was spent supporting charting, bylaw, field of membership, and related activities, which fall under principle 3 as 0 percent insurance related. The Division of Consumer Access staff spent 25 percent of their time addressing insurance-related functions, like insurability standards for mergers and insurance applicants where principle 4 applies. The remainder of this unit’s time was spent processing various chartering and field of membership expansion applications and bylaw matters where principle 3 applies. The Division of Consumer Affairs staff spent 5 percent of its time addressing share insurance questions received from consumers which falls under principle 4. The division spent the remaining 95 percent of its time on consumer related activities like administering the Financial Literacy Program, which falls under principle 3. The Division of Consumer Compliance Policy and Outreach focuses on issues related to consumer regulations including implementing the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act. All of these activities fall under principle 3; therefore, 100 percent of the division’s staff time is allocated as 0 percent insurance related. Office of Small Credit Union Initiatives The proposed methodology allocates the cost of the Office of Small Credit Union Initiatives based on principles 1 and 2. The office tracks the time the Economic Development Specialists spent consulting and training both federal credit unions and federally insured state-charted credit unions. The proportion of time spent on federal credit unions is allocated based on principle 1 while federally insured state-chartered credit union work is allocated based on principle 2. Other office personnel process grants and loans for both federal credit unions and federally insured state-chartered credit unions. Grant and loan activities are allocated the same way as the consulting and training time using principles 1 and 2. The resulting allocation factor for the Office of Small Credit Union Initiatives is 60 percent as shown in Tables 4 and 5.60 Table 4 illustrates the allocation for the Office of Small Credit Union Initiative’s consulting hours between federal and state-chartered credit unions applied to the budgeted hours for 2017. Principle 1 is applied for federal charters and principle 2 is applied for state charters. The result is a composite rate of 59.3 percent insurance-related hours for the Economic Development Specialists. 60 About 73% of all grants and loans processed by the Office of Small Credit Union Initiatives in 2016 were for federal credit unions. Of the 18,633 hours budgeted for Economic Development Specialist consulting and training, about 81% is for federal credit unions. VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 E:\FR\FM\30JNN1.SGM 30JNN1 29947 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices TABLE 4—2017 ECONOMIC DEVELOPMENT SPECIALIST WORKLOAD ALLOCATION Percent insurance related Budget (hours) Charter type Hours insurance related Percent of budget insurance related Federal Charter ................................................................................................ State Charter ................................................................................................... 15,185 3,448 50 100 7,592 3,448 40.7 18.5 Total .......................................................................................................... 18,633 N/A 11,040 59.3 Table 5 illustrates the allocation of the grant and loan activities performed by the Office of Small Credit Union Initiatives by charter type. Principle 1 is applied for federal charters and principle 2 is applied for state charters. This results in a composite rate of 63.7 percent insurance-related activities for grants and loans. TABLE 5—GRANT APPROVAL AND LOAN DISBURSEMENT 2016 BY CHARTER TYPE 61 Total grants and loans Charter type Percent insurancerelated Total insurancerelated Percent of total Federal Charter ................................................................................................ State Charter ................................................................................................... 235 89 50 100 118 89 36.3 27.5 Total .......................................................................................................... 324 N/A 207 63.7 Table 6 shows the resulting overall composite rate of 59.8 percent insurance-related activities for the Office of Small Credit Union Initiatives. This factor is applied to the financial budget for this office in the OTR calculation. TABLE 6—ALLOCATION OF THE FINANCIAL BUDGET Staff Insurancerelated (percent) Budget Budget allocation Economic Development Specialists ............................................ Grants and Loans ........................................................................ 3,733,000 527,000 59.3 63.7 2,211,982 335,881 Total ...................................................................................... 4,260,000 59.8 2,547,773 mstockstill on DSK30JT082PROD with NOTICES All Other Offices NCUA’s remaining offices design or oversee the agency’s mission and its related offices, or provide necessary support to mission offices or the entire agency. As such, the proportion of insurance-related activities for these offices corresponds to that of the mission offices. It would be administratively burdensome to attempt to account for any variation in activity levels from the mission functions, and would not result in a material difference in outcomes. Therefore, these office costs are allocated based on the weighted average of insurance-related activities calculated in the subtotal of agency costs for the offices above that have a distinct allocation factor. The budgeted costs for the following offices 61 Numbers may not reconcile exactly due to rounding. VerDate Sep<11>2014 17:32 Jun 29, 2017 Jkt 241001 are allocated at 60.0 percent insurancerelated activities for purposes of calculating the OTR: • NCUA Board, • Executive Director, • General Counsel, • Chief Financial Officer, • Chief Information Officer, • Chief Economist, • Human Resources, • Examination and Insurance, • Inspector General, • Minority and Women Inclusion, • Public and Congressional Affairs, and • Continuity and Security Management. c. Step 3—Calculate the OTR The OTR represents the percentage of the NCUA Operating Budget that is funded by a transfer from the Share Insurance Fund.62 Using the result from Step 2, the OTR calculation is shown in Table 7. TABLE 7—OTR CALCULATION Operating Costs to be Borne by the Share Insurance Fund ........ ÷ Total Operating Budget ............. $179.0 $298.2 = OTR ........................................... 60.0% Based on data used to determine the OTR for 2017, the proposed changes to the OTR methodology would result in an OTR of 60.0 percent. The current methodology resulted in an OTR of 67.7 percent for 2017. Table 8 summarizes the results for the 2017 OTR calculation using the current and proposed methodologies. 62 The percentage of actual expenses funded by the Share Insurance Fund as they are incurred each month. PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 E:\FR\FM\30JNN1.SGM 30JNN1 29948 Federal Register / Vol. 82, No. 125 / Friday, June 30, 2017 / Notices TABLE 8—2017 OTR RESULTS COMPARISON Current methodology OTR Percent ................................................................................ OTR $ Millions ............................................................................. For informational purposes only, Table 9 illustrates the portion of NCUA’s total Operating Budget costs Change 63 Proposed methodology 67.7% $201.8 ¥7.70% ¥$22.8 60.0% $179.0 funded explicitly and implicitly by federal credit unions and federally insured state-chartered credit unions respectively. TABLE 9—OPERATING BUDGET COST DISTRIBUTION Portion of 2017 operating budget covered by: Federal Credit Union Operating Fee .................................................................................. OTR (proportional based on insured shares) .................................................................... 40.0% ............................... 30.8% ............................... (60.0% × 51.3%). ............. 70.8% 64 ........................... Total ............................................................................................................................ 0.0%. 29.2%. (60.0% × 48.7%). 29.2%. Commenters are also encouraged to discuss any other relevant issues they believe NCUA should consider with respect to the OTR methodology and, to the extent feasible, provide documentation to support any recommendations. V. Request for Comment In addition to the proposed changes to the OTR methodology, the Board proposes to formally adopt the following OTR related processes: • To solicit through the Federal Register public comment on the OTR methodology at least every 3 years, and whenever NCUA seeks to change the OTR methodology. • Maintain the staff delegation to administer the OTR methodology but require public board briefings every year, no later than each December, on the results of the calculation and to post all related materials to NCUA’s Web site. • As part of future rulemaking, indicate for any proposed regulation involving the activities and authorities of credit unions whether the regulation is based on Title I, Title II, and/or Title III of the Act and seek comment on this determination. While the proposed new OTR methodology would no longer rely on mapping of regulations, this will increase clarity regarding the purpose of and authority for any new or updated regulations and preserve future flexibility with respect to any desired changes to the OTR methodology. The Board seeks comments on all the proposed revisions to the OTR methodology and formal adoption of the procedures discussed above. In particular, the Board is interested in comments on alternative approaches to arriving at an allocation factor for the cost of examining and supervising federal credit unions (principle 1). For example, within the context of the overall simplification of the OTR methodology, should federal credit union examination and supervision activity be allocated primarily to the operating fee, or should it continue to reflect that much of NCUA’s examination and supervision focus is on managing risk to the Share Insurance Fund.65 63 For 2017, the proposed OTR methodology calculation would result in a decline of 11.4% from the current methodology. 64 Based on the current OTR methodology, 67 percent of the total 2017 Operating Budget is covered by federal credit unions through Operating Fees and the OTR: https://www.ncua.gov/About/ Documents/Agenda%20Items/ AG204161117Item4a.pdf. 65 To provide context for commenters, an assumption under principle 1 in the proposed OTR methodology that only the examination and supervision of troubled federal credit unions was insurance-related would result in an OTR of about 31 percent. Conversely, if the results of the Examiner Time Survey (about 88 percent insurancerelated) were used for the allocation factor for principle 1 in the proposed OTR methodology, it would result in an OTR of about 85 percent. The proposed change to the OTR methodology would result in the annual Operating Fee paid by federal credit unions increasing by about 24%—an increase of $22.8 million from $96.4 million to $119.2 million. Based on the 2017 Operating Fee scale, Table 10 provides several examples of how a federal credit union’s operating fee would increase. TABLE 10—EXAMPLES OF OPERATING FEE INCREASE FOR FEDERAL CREDIT UNIONS Asset size of federal credit union $9.46 billion .......................... $1.01 billion .......................... $503 million .......................... $100 million .......................... $50 million ............................ $10 million ............................ $1 million .............................. mstockstill on DSK30JT082PROD with NOTICES Federally insured statechartered credit unions Federal credit unions VerDate Sep<11>2014 17:32 Jun 29, 2017 Increase to annual operating fee $133,234 51,143 25,445 5,060 2,526 505 0 Jkt 241001 PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 By the National Credit Union Administration Board on June 23, 2017. Gerard Poliquin, Secretary of the Board. [FR Doc. 2017–13635 Filed 6–29–17; 8:45 am] BILLING CODE 7535–01–P OFFICE OF PERSONNEL MANAGEMENT Notice of Submission for Approval: Questionnaire for Non-Sensitive Positions (SF 85) U.S. Office of Personnel Management. ACTION: 60-Day notice and request for comments. AGENCY: The National Background Investigation Bureau (NBIB), U.S. Office of Personnel Management (OPM) is notifying the general public and other Federal agencies that OPM is seeking Office of Management and Budget (OMB) approval of a revised information collection, Questionnaire for NonSensitive Positions, (SF 85). DATES: Comments are encouraged and will be accepted until August 29, 2017. SUMMARY: E:\FR\FM\30JNN1.SGM 30JNN1

Agencies

[Federal Register Volume 82, Number 125 (Friday, June 30, 2017)]
[Notices]
[Pages 29935-29948]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13635]


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NATIONAL CREDIT UNION ADMINISTRATION


Request for Comment Regarding Revised Overhead Transfer Rate 
Methodology

AGENCY: National Credit Union Administration (NCUA).

ACTION: Request for comment.

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SUMMARY: In a voluntary effort to invite input from stakeholders, the 
NCUA Board (Board) is seeking comments on proposed changes to the 
Overhead Transfer Rate (OTR) methodology. The primary goal of the 
proposed changes are to reduce the complexity of the OTR methodology. 
The proposed changes would also reduce the resources needed to 
administer the OTR. This document provides a summary of and response to 
comments received on the current OTR methodology, and explains and 
solicits comments on the proposed changes to the OTR methodology.

DATES: Comments must be received on or before August 29, 2017 to ensure 
consideration.

ADDRESSES: You may submit comments by any one of the following methods 
(Please send comments by one method only):
     NCUA Web site: https://www.ncua.gov/about/pages/board-comments.aspx.
     Email: Address to boardcomments@ncua.gov. Include ``[Your 
name]--Comments on OTR Methodology'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerald Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.

[[Page 29936]]

     Hand Delivery/Courier: Same as mailing address.
    Public Inspection: You can view all public comments on NCUA's Web 
site at https://www.ncua.gov/about/pages/board-comments.aspx as 
submitted, except for those we cannot post for technical reasons. NCUA 
will not edit or remove any identifying or contact information from the 
public comments submitted. You may inspect paper copies of comments in 
NCUA's headquarters at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6360 or send an email to EIMail@ncua.gov.

FOR FURTHER INFORMATION CONTACT: Russell Moore or Julie Decker, Loss/
Risk Analysis Officers, Office of Examination and Insurance, National 
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 
22314 or telephone: (703) 518-6383 or (703) 518-6384.

SUPPLEMENTARY INFORMATION: NCUA requested comments on the current OTR 
methodologies and processes through a notice in the Federal Register 
published on January 27, 2016.\1\ Areas the Board specifically sought 
comments on included:
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    \1\ 81 FR 4804 (Jan. 27, 2016).
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     Whether the OTR should continue to be determined using a 
formula-driven approach, or instead be set largely at the discretion of 
the Board;
     the definition NCUA uses for insurance-related activities;
     adjustments or changes to the current calculation; and
     alternate methodologies to arrive at an accurate and fair 
allocation of costs.
    Within the 90-day comment period, NCUA received 40 comment letters 
on the OTR methodology. The commenters included federally insured 
state-chartered credit unions, national credit union trade 
organizations, state leagues, and state supervisory authorities. There 
were no comment letters received from federal credit unions. While 
there were only 40 comment letters, the comments addressed a broad 
range of complex issues. In addition to reviewing comments for input on 
the existing approach, NCUA staff explored options for the Board to 
consider for improving the OTR methodology. Many of the comment letters 
discussed the methodologies for both the OTR and the Operating Fee as 
well as other budget-related issues. This request for comments focuses 
specifically on the OTR methodology. Comments related to the Operating 
Fee methodology and other budget-related issues were referred to the 
appropriate office.
    Based on the comments and NCUA's internal assessment, the Board is 
considering changes to the OTR methodology.

Table of Contents

I. Background
II. Legal Authority Comments and Responses
III. Current OTR Methodology and Process Comments and Responses
IV. Details of Proposed OTR Methodology
V. Request for Comment

I. Background

    NCUA administers the Federal Credit Union Act (the Act), which is 
comprised of three Titles: Title I--General Provisions, Title II--Share 
Insurance, and Title III--Central Liquidity Facility. The agency's 
mission is to ``provide, through regulation and supervision, a safe and 
sound credit union system, which promotes confidence in the national 
system of cooperative credit.'' \2\ This includes protecting member 
rights and deposits. Specifically, NCUA charters, regulates, and 
insures shares in federal credit unions and insures shares and deposits 
in federally insured state-chartered credit unions through the National 
Credit Union Share Insurance Fund (Share Insurance Fund).
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    \2\ https://www.ncua.gov/About/Pages/Mission-and-Vision.aspx.
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    NCUA is responsible for ensuring federally insured credit unions 
operate safely and soundly and comply with all applicable laws and 
regulations within NCUA's jurisdiction.\3\ In so doing, the agency 
mitigates risk to the Share Insurance Fund and prevents taxpayer-funded 
bailouts.
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    \3\ In coordination with State Supervisory Authorities with 
respect to federally insured state-chartered credit unions.
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    To achieve its statutory mission, the agency incurs various 
expenses, including those involved in examining and supervising 
federally insured credit unions. The Board adopts an Operating Budget 
each year to fund the vast majority of the costs of operating the 
agency.\4\ The Act authorizes two primary sources to fund the Operating 
Budget: (1) Requisitions from the Share Insurance Fund; and (2) 
Operating Fees charged to federal credit unions.\5\
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    \4\ Some costs are directly charged to the Share Insurance Fund 
or the Temporary Corporate Credit Union Stabilization Fund when 
appropriate to do so. For example, costs for training and equipment 
provided to State Supervisory Authorities are directly charged to 
the Share Insurance Fund.
    \5\ Other sources of funding for the Operating Budget include 
interest income, funds from publication sales, parking fee income, 
and rental income.
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    In 1972, the Government Accountability Office recommended NCUA 
adopt a method for properly allocating Operating Budget costs--that is 
the portion to be funded by requisitions from the Share Insurance Fund 
and the portion to be covered by Operating Fees paid by federal credit 
unions.\6\ NCUA has since used an allocation methodology, known as the 
OTR, to determine how much of the Operating Budget to fund with a 
requisition from the Share Insurance Fund.
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    \6\ http://www.gao.gov/assets/210/203181.pdf.
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    NCUA has employed various allocation methods over the years, with 
the current methodology adopted in 2003. For a chronological summary of 
the history of the OTR, refer to Overhead Transfer Rate (OTR)--Timeline 
at https://www.ncua.gov/About/Documents/Budget/Misc%20Documents/overhead-transfer-rate-chronology.pdf. For a detailed explanation of 
the current methodology, refer to Federal Register--NCUA Request for 
Comment Regarding Overhead Transfer Rate Methodology at https://www.federalregister.gov/documents/2016/01/27/2016-01626/request-for-comment-regarding-overhead-transfer-rate-methodology.

II. Legal Authority Comments and Responses

    The Board detailed the legal parameters within which it must fund 
the NCUA Operating Budget in the January 2016 notice and request for 
comment.\7\ While the Board did not expressly solicit comments on said 
authorities, a number of comments addressed NCUA's legal authority. 
Below the Board restates the legal parameters outlined in the January 
2016 notice. Within these parameters, NCUA has developed a new OTR 
methodology proposed in this publication that continues to ensure 
application that is fair to both federal credit unions and federally 
insured state-chartered credit unions, and that is consistent across 
all of NCUA's cost centers.
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    \7\ 81 FR 4804 (Jan. 27, 2016).
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a. Legal Authority

    NCUA charters, regulates and insures shares in federal credit 
unions and insures shares and deposits in federally insured state-
chartered credit unions. To cover expenses related to its statutory 
mission, the Board adopts an Operating Budget in the fall of each year. 
The Act authorizes two primary sources to fund the Operating Budget: 
(1) Requisitions from the Share Insurance Fund ``for such 
administrative and other expenses incurred in carrying out the purposes 
of

[[Page 29937]]

[Title II of the Act] as [the Board] may determine to be proper''; \8\ 
and (2) ``fees and assessments (including income earned on insurance 
deposits) levied on insured credit unions under [the Act].'' \9\ Among 
the fees levied under the Act are annual Operating Fees, which are 
required for federal credit unions under 12 U.S.C. 1755 ``and may be 
expended by the Board to defray the expenses incurred in carrying out 
the provisions of [the Act,] including the examination and supervision 
of [federal credit unions].'' Taken together, these dual primary 
funding authorities effectively require the Board to determine which 
expenses are appropriately paid from each source while giving the Board 
broad discretion in allocating these expenses.
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    \8\ 12 U.S.C. 1783(a).
    \9\ 12 U.S.C. 1766(j)(3). Other sources of income for the 
Operating Budget include interest income, funds from publication 
sales, parking fee income, and rental income.
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    To allocate agency expenses between these two primary funding 
sources, NCUA uses the OTR. The OTR represents the formula NCUA uses to 
allocate insurance-related expenses to the Share Insurance Fund under 
Title II. Almost all other operating expenses are collected through 
annual Operating Fees paid by federal credit unions.\10\ Two statutory 
provisions directly limit the Board's discretion with respect to Share 
Insurance Fund requisitions for NCUA's Operating Budget and, hence, the 
OTR. First, expenses funded from the Share Insurance Fund must carry 
out the purposes of Title II of the Act, which relate to share 
insurance.\11\ Second, NCUA may not fund its entire Operating Budget 
through charges to the Share Insurance Fund.\12\ NCUA has not imposed 
additional policy or regulatory limitations on its discretion for 
determining the OTR. If NCUA's OTR methodology were challenged, the 
court would uphold NCUA's methodology unless it were shown to be 
arbitrary or capricious, contrary to law, or unsupported by statutory 
authority under the Administrative Procedure Act (APA).\13\ The Board 
believes the existing OTR and this proposal are fully consistent with 
the APA and all other applicable law.\14\
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    \10\ Annual Operating Fees must ``be determined according to a 
schedule, or schedules, or other method determined by the NCUA Board 
to be appropriate, which gives due consideration to the expenses of 
the [NCUA] in carrying out its responsibilities under the [Act] and 
to the ability of [FCUs] to pay the fee.'' 1755(b). The NCUA Board's 
methodology for determining the aggregate amount of Operating Fees 
was discussed in a separate Federal Register publication.
    \11\ 12 U.S.C. 1783(a).
    \12\ The Act in 12 U.S.C. 1755(a) states, ``[i]n accordance with 
rules prescribed by the Board, each [federal credit union] shall pay 
to the [NCUA] an annual operating fee which may be composed of one 
or more charges identified as to the function or functions for which 
assessed.'' See also 12 U.S.C. 1766(j)(3).
    \13\ 5 U.S.C. 706(2).
    \14\ See, e.g., Motor Vehicle Mfrs. Ass'n of United States, Inc. 
v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29 (1983).
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b. Comments

    In response to its initial OTR notice, NCUA received a variety of 
comments related to the legal authority to requisition funds from the 
Share Insurance Fund to cover a portion of the Operating Budget. 
Several commenters stated the agency does not have authority or 
discretion to establish and determine the OTR. Some commenters asserted 
that NCUA lacks the legal authority to use the Share Insurance Fund to 
cover costs of operating the agency. Other commenters claimed NCUA has 
only very narrow authority to allocate costs, has too broadly 
interpreted its authority, and may assign to the Share Insurance Fund 
only those costs directly associated with share insurance payments for 
failed or troubled credit unions. Some commenters insisted NCUA is 
required to fund the vast majority of the cost of operating the agency 
through Operating Fees charged to federal credit unions, claiming 
Congress intended that Operating Fees were to subsidize costs in 
managing risk to the Share Insurance Fund. Having considered these 
comments, NCUA maintains that a plain reading of the Act, as described 
in section II.a. above and in the January 2016 notice, supports the 
agency's legal authority and broad discretion in allocating operating 
costs.
    Various commenters disagreed with the agency's legal analysis and 
argued that some combination of 12 U.S.C. 1781(b)(1), 1782(a)(5), and 
1790 also limit NCUA's requisition of funds from the Share Insurance 
Fund for the Operating Budget. Several commenters went further and 
argued that Title II's legislative history indicates the savings from 
NCUA's reliance on Title I and State Supervisory Authority examinations 
and reports should accrue to the benefit of the Share Insurance Fund. 
The Act's plain language does not require an analysis of the 
legislative history.\15\ Even if legislative history was applicable in 
this case, the plain reading of the Act is consistent with the 
legislative history and does not support commenters' interpretation 
that Congress intended costs savings provisions to only accrue to the 
Share Insurance Fund as discussed below.
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    \15\ See, e.g., Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450 
((2002).
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    Multiple commenters stated that the plain language of the Act 
requires the Board to structure examinations and Call Reports 
originally required under Title I so they may be used for Title II 
share insurance purposes.\16\ These commenters similarly stated that 
the Act places requirements on NCUA to use state regulator examinations 
and reports to the maximum extent feasible.\17\ In response, the Board 
notes that Title II, in 12 U.S.C. 1781(b)(2), authorizes examinations 
as needed for the protection of the Share Insurance Fund and other 
credit unions in addition to those permitted under Title I, recognizing 
that the scope and timing of Title I examinations does not necessarily 
satisfy share insurance needs under Title II. Regardless of the parsing 
of the various statutory provisions on this point, the Board is careful 
to build efficiencies wherever reasonable in light of NCUA's dual roles 
as (1) charterer and prudential regulator of federal credit unions and 
(2) insurer of federal credit unions and federally insured state-
chartered credit unions. Efficiencies gained from NCUA's dual role 
provide cost savings and help avoid subjecting credit unions to the 
burden of redundant examinations. Further, the Act's provisions on cost 
savings do not prohibit NCUA from allocating insurance-related 
operating expenses to the Share Insurance Fund through the OTR under 12 
U.S.C. 1783(a). Specifically, 12 U.S.C. 1781(b)(1) requires NCUA to 
adjust the way it conducts examinations of federal credit unions so 
they may be ``utilized for share insurance purposes.'' This provision 
does result in cost savings. However, it does not preclude NCUA from 
allocating the costs of the ``share insurance purposes'' portion of 
federal credit union examinations to the Share Insurance Fund.\18\ The 
Board thus disagrees with commenters that argued that the Act requires 
the cost-savings of NCUA's dual roles to accrue specifically to the 
Share Insurance Fund.
---------------------------------------------------------------------------

    \16\ 12 U.S.C. 1781(b)(1), 1782(a)(5).
    \17\ Id.
    \18\ With respect to call reports and other ongoing reports 
submitted by federally insured credit unions, 12 U.S.C. 1782(a)(5) 
is also a cost savings provision but does not preclude allocating 
insurance-related costs of the applicable data collections to the 
Share Insurance Fund.
---------------------------------------------------------------------------

    While the Board did not cite 12 U.S.C. 1790 as an additional 
limitation in its earlier notice, the Board agrees with commenters 
stating that this provision should inform NCUA's interpretation of 
Title II so that it consciously avoids discrimination against federally 
insured

[[Page 29938]]

state-chartered credit unions to the benefit of federal credit 
unions.\19\ However, the Board does not believe that either the current 
or the proposed OTR process discriminates against federally insured 
state-chartered credit unions or federal credit unions to the benefit 
of the other.
---------------------------------------------------------------------------

    \19\ 12 U.S.C. 1790 (``It is not the purpose of this subchapter 
to discriminate in any manner against State-chartered credit unions 
and in favor of Federal credit unions, but it is the purpose of this 
subchapter to provide all credit unions with the same opportunity to 
obtain and enjoy the benefits of this subchapter.'').
---------------------------------------------------------------------------

    As background, all federally insured credit unions are subject to 
the same requirements for funding the Share Insurance Fund. 
Specifically, Sec.  1782(c)(1)(A)(i) requires that ``[e]ach insured 
credit union shall pay to and maintain with the [Share Insurance Fund] 
a deposit in an amount equaling 1 per centum of the credit union's 
insured shares.'' Section 1782(c)(2)(A) requires that ``[e]ach insured 
credit union shall, at such times as the Board prescribes (but not more 
than twice in any calendar year), pay to the Fund a premium charge for 
insurance in an amount stated as a percentage of insured shares (which 
shall be the same for all insured credit unions).'' Thus, in funding 
the Share Insurance Fund, federal credit unions and federally insured 
state-chartered credit unions are not treated any differently. 
Similarly, the requisitions from the Share Insurance Fund used to fund 
the insurance-related expenses of NCUA's Operating Budget under Sec.  
1783(a) do not distinguish between federal credit unions and federally 
insured state-chartered credit unions.
    As for the OTR methodology and whether it complies with Sec.  1790, 
the OTR methodology only considers the type of activity (i.e. 
insurance-related or not) and treats the expenses related to that 
activity the same regardless of the type of charter to which the 
activity applies. Specifically, both the existing and proposed OTR 
methodologies provide that all insurance-related expenses are funded 
from the Share Insurance Fund, regardless of charter type.
    The Act clearly permits expenses related to insurance to be funded 
by the Share Insurance Fund regardless of charter. Specifically, 12 
U.S.C. 1783(a) expressly allows expenses ``incurred in carrying out the 
purposes of [Title II]'' to be allocated to the Share Insurance Fund. 
The costs NCUA incurs in safeguarding the Share Insurance Fund relate 
to the risks in federal credit unions and federally insured state-
chartered credit unions. The Act provides the Board with a number of 
specific authorities that relate to costs NCUA incurs in carrying out 
its obligations under Title II. For instance, Title II of the Act 
authorizes the Board ``to appoint examiners who shall have the power, 
on its behalf, to examine any insured credit union . . . whenever in 
the judgment of the Board an examination is necessary to determine the 
condition of any such credit union for insurance purposes.'' \20\ 
Further, Title II authorizes the Board to implement regulations 
applicable to all insured credit unions to address risk to the Share 
Insurance Fund. Title II states the Board may ``prescribe such rules 
and regulations as it may deem necessary and appropriate to carry out 
the provisions of this subchapter.'' \21\ Title II also grants the 
Board the following additional authorities relevant to agency operating 
costs:
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 1784(a).
    \21\ 12 U.S.C. 1789(a)(11).
---------------------------------------------------------------------------

     ``Appoint such officers and employees as are not otherwise 
provided for in this chapter;'' \22\
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 1789(a)(4).
---------------------------------------------------------------------------

     ``employ experts and consultants or organizations 
thereof;'' \23\
---------------------------------------------------------------------------

    \23\ 12 U.S.C. 1789(a)(5).
---------------------------------------------------------------------------

     ``prescribe the manner in which its general business may 
be conducted and the privileges granted to it by law may be exercised 
and enjoyed;'' \24\
---------------------------------------------------------------------------

    \24\ 12 U.S.C. 1789(a)(6).
---------------------------------------------------------------------------

     ``exercise all powers specifically granted by the 
provisions of this subchapter and such incidental powers as shall be 
necessary to carry out the power so granted;'' \25\ and
---------------------------------------------------------------------------

    \25\ 12 U.S.C. 1789(a)(7).
---------------------------------------------------------------------------

     ``make examinations of and require information and reports 
from insured credit unions, as provided in this subchapter.'' \26\
---------------------------------------------------------------------------

    \26\ 12 U.S.C. 1789(a)(8).
---------------------------------------------------------------------------

    The Board concludes that these authorities taken together provide 
NCUA as insurer with broad discretion to impose regulations on and 
examine all insured credit unions. In addition, the cost of the agency 
activities associated with exercising these and other accompanying 
authorities can properly be considered costs of carrying out Title II 
of the Act.\27\
---------------------------------------------------------------------------

    \27\ For example, Title II specifically addresses a broad range 
of standards for all insured credit unions, including standards for 
insurance against burglary and defalcation, loss reserve 
requirements, investment limitations, ongoing reporting requirements 
(such as the Call Report), independent audits, accounting 
principles, national flood insurance program requirements, liquidity 
capacity, unsafe and unsound conditions or practices, security 
standards, recordkeeping, monetary transaction and recordkeeping and 
reporting, benefits to institution affiliated parties, capital 
standards, and approval of officials.
---------------------------------------------------------------------------

    Finally, a number of commenters argued that the OTR methodology 
and/or calculations either should or must go through full APA notice 
and comment rulemaking. The APA does not require notice and comment for 
the OTR methodology. The legal analysis of NCUA's Office of General 
Counsel on the applicability of the notice and comment provisions of 
the APA to the OTR methodology is summarized in the January 2016 OTR 
notice \28\ and articulated more fully in a legal opinion posted on 
NCUA's Web site.\29\ In soliciting comment on the OTR through the 
Federal Register NCUA has gone, and continues to go, beyond its APA 
obligations.
---------------------------------------------------------------------------

    \28\ 81 FR 4804 (Jan. 27, 2016) (``Since its inception, NCUA has 
taken the position that the OTR is not a legislative rule under the 
Administrative Procedure Act (APA) and is, therefore, exempt from 
notice and comment rulemaking processes. [ ] As such, NCUA has never 
used notice and comment rulemaking to establish either an individual 
determination of the OTR or the general methodology used to 
calculate the OTR. However, the OTR has been explained, discussed, 
and reviewed in various public records, including in annual Board 
Action Memorandums related to budget matters, independent 
evaluations, and other documents available in public records and on 
NCUA's Web site.[ ] Beyond its APA obligations, the Board has chosen 
to solicit public comments on the OTR processes and methodologies 
through this Federal Register publication.'').
    \29\ NCUA's legal analysis with respect to the OTR and APA 
process is available at the following Web page: https://www.ncua.gov/Legal/Documents/Opinion/OL2015-0818.pdf.
---------------------------------------------------------------------------

III. Current OTR Methodology and Process Comments and Responses

a. Formula Driven or Set at the Discretion of the Board

    The majority of commenters expressed support for NCUA's continued 
use of a formula to determine the OTR. The Board agrees NCUA should 
continue to use a formula to determine the OTR. Use of a well-designed 
and comprehensive formula represents a good faith effort to consider 
all of the agency's costs relative to how NCUA is carrying out its 
various responsibilities. A formula also helps ensure costs assigned to 
the OTR relate to agency activities to carry out Title II 
responsibilities. NCUA's goal in using a formula-driven OTR methodology 
is to provide a comprehensive, fair, and equitable allocation of costs 
within a framework that can be administered at a relatively low cost. 
Though it is formula driven, the Board can adjust the methodology at 
any time to ensure it continues to reflect the most equitable and 
suitable approach to allocating costs.
    However, five commenters favored setting the OTR at a fixed 50 
percent of

[[Page 29939]]

the Operating Budget. Commenters that supported setting the OTR at 50 
percent indicated that it is easily understandable, more in line with 
the dual functions of NCUA as regulator and insurer, and that the OTR 
was set at 50 percent for many years. The Board does not believe it is 
transparent or appropriate to set the OTR at any level, such as the 50 
percent recommended by commenters, without a reasoned basis to 
demonstrate that level of agency operating costs are properly allocated 
to Title II activities.\30\ However, the Board agrees that the OTR 
methodology can be simplified and maintain a sufficient degree of 
comprehensiveness to ensure it is equitable. Such a simplification 
should improve understanding of the OTR and reduce administrative 
costs. For a discussion of how the Board proposes to simplify the OTR 
methodology, see section IV.
---------------------------------------------------------------------------

    \30\ See 12 U.S.C. 1783(a).
---------------------------------------------------------------------------

b. Delegation of the OTR Calculation to NCUA Staff

    Ten commenters objected to the Board's delegation of the OTR 
calculation to NCUA staff. They argued that by doing so the Board 
abdicated its oversight and discretion over the OTR and that it will 
result in reduced transparency. During the November 29, 2015, Board 
meeting, the Board approved the delegation of authority to administer 
the Board approved OTR methodology to the Director of the Office of 
Examination and Insurance (E&I).\31\
---------------------------------------------------------------------------

    \31\ NCUA Board Action Bulletin found at the following web 
address: https://www.ncua.gov/About/Pages/board-actions/bulletins/2015/november/BAB20151119.aspx.
---------------------------------------------------------------------------

    Delegating the ministerial application of the Board approved OTR 
methodology does not mean the Board has abdicated its oversight and 
discretion for the OTR. With limited exceptions not at play here, the 
Act permits the Board to ``delegate to any officer or employee of the 
Administration such of its functions as it deems appropriate.'' \32\ 
Further, the current delegation to staff to administer the OTR does not 
provide staff with the power to change the methodology for calculating 
the OTR. Rather it mirrors the typical organizational separation of 
duties where the board sets policy and staff implements the policy. The 
Board retains approval authority over the methodology that is used to 
calculate the OTR; only the Board can change the OTR methodology or use 
its discretion to change the OTR from the calculated result if 
circumstances so warranted. However, having the OTR set by a Board 
approved formula, instead of an explicit Board vote each year, helps 
avoid any perception that the agency would casually override the 
calculation in setting the OTR. At any time, any Board member may 
request a Board vote be scheduled to change the OTR methodology, or to 
change the OTR from the calculated result.
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 1789(a)(10); see also 1766(d).
---------------------------------------------------------------------------

    The delegation has not resulted in a reduction in transparency. As 
was done prior to the delegation, each year staff submits a report to 
the Board on the results of the calculation and conducts a briefing at 
a public Board meeting. The materials supporting the OTR calculation 
and the result are provided as part of the public Board briefing and 
posted on the agency's Web site. The Board intends for this public 
reporting to continue. Further, the Board is committed to soliciting 
public input at least every three years on the OTR methodology, and any 
time a change to the methodology is considered.

c. Transparency

    Nine commenters stated that the current OTR methodology is not 
sufficiently transparent. NCUA has made various efforts over the years 
to be transparent with respect to the OTR, and recently published 
extensive information about the OTR. The setting of the OTR has been 
briefed and acted on each year at a public Board meeting. The 
associated Board Action Memorandums, which are public records, fully 
detailed the calculation and included supporting materials. The current 
methodology was extensively reviewed at a public Board meeting when 
adopted in 2003. All related materials have been made a matter of 
public record and posted on NCUA's Web site. Numerous analyses, 
independent evaluations, and other documents are available in public 
records and on NCUA's Web site. To improve transparency further, the 
agency organized and posted a variety of new and historical materials 
on its Web site in 2015.\33\ Additionally, the January 27, 2016, 
request for comment regarding the OTR methodology provided detailed 
explanations for the processes and methodology related to calculating 
the OTR. Although all information related to the OTR calculation is 
publicly available already, the Board acknowledges that an obstacle to 
transparency is the complexity of the methodology itself. In an effort 
to address the transparency concern, the Board is considering 
simplifying the OTR methodology. While still formula driven, the 
proposed changes to the methodology would provide for a simpler 
approach that remains comprehensive, fair, and equitable. The proposed 
changes to the methodology are described in detail in section IV of 
this document.
---------------------------------------------------------------------------

    \33\ Materials related to the OTR can be found at www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx.
---------------------------------------------------------------------------

d. Definition of Insurance-Related Activities

    NCUA's definition of insurance-related activities received the most 
comments. Of the 36 commenters on this topic, most disagree with the 
definition NCUA uses for insurance-related activities. Many commenters 
objected to equating ``safety and soundness'' with ``insurance-
related,'' with some arguing that the charterer/prudential regulator 
cares about safety and soundness and it is therefore not the sole 
domain of the insurer. Commenters asserted the definition assumes that 
NCUA has no safety and soundness oversight in its role as regulator and 
charterer of federal credit unions. By doing so, commenters claim NCUA 
is shifting expenses that should fall under the operating fee paid by 
federal credit unions to the Share Insurance Fund.
    NCUA recognizes the historical role of a charterer/prudential 
regulator involves enforcing laws and implementing public policy. 
Before the advent of federal deposit insurance, federal financial 
institution regulators were concerned with protecting the stability of 
the financial system by ``regulating'' it. Thus, financial institution 
examinations focused on ensuring (1) statutes and regulations were 
followed to protect consumers, and (2) institutions were viable to 
protect consumer deposits, preserve access to financial services, and 
safeguard the stability of the economy. Though not responsible for the 
financial liability that comes with the role of insurer, prudential 
regulators are concerned with potential threats to the viability of 
their financial institutions to protect consumers and their 
jurisdiction's economy. This focus on viability benefits the insurer, 
whose primary role is to protect depositors and the taxpayer and 
contribute to the stability of the financial system.
    NCUA has a unique dual role in that it serves as both the regulator 
of federal credit unions and the insurer of all federally insured 
credit unions.\34\

[[Page 29940]]

Congress established the Share Insurance Fund and assigned its 
administration to the Board.\35\ This arrangement has a variety of 
benefits. A regulator/supervisor with insurance responsibility creates 
a strong alignment of incentives in preserving safety and soundness, 
thereby managing risk to the Share Insurance Fund. The appropriate 
combination of functions reduces the likelihood that a regulator would 
act without adequate regard for the insurance implications. It also 
generally avoids additional and duplicative oversight costs, and the 
corresponding burden on insured institutions of separate requirements 
and supervision from a different regulator and insurer.
---------------------------------------------------------------------------

    \34\ The Office of the Comptroller of the Currency (OCC) 
charters, regulates, and supervises all national banks and federal 
savings associations as well as federal branches and agencies of 
foreign banks. On its Web site, the OCC lists its mission as 
ensuring that national banks and federal savings associations 
operate in a safe and sound manner, provide fair access to financial 
services, treat customers fairly, and comply with applicable laws 
and regulations. Similarly, the Board of Governors of the Federal 
Reserve System has supervisory and regulatory authority over a wide 
range of financial institutions, including state-chartered banks 
that are members of the Federal Reserve System, bank holding 
companies, thrift holding companies and foreign banking 
organizations that have a branch, agency, a commercial lending 
company subsidiary or a bank subsidiary in the United States. On its 
Web site, the Federal Reserve states its mission is to provide the 
nation with a safer, more flexible, and more stable monetary and 
financial system. One of its four stated general duties is 
supervising and regulating banking institutions to ensure the safety 
and soundness of the nation's banking and financial system and to 
protect the credit rights of consumers. On its Web site, the Federal 
Deposit Insurance Corporation states its mission is to maintain 
stability and public confidence in the nation's financial system by 
insuring deposits, examining and supervising financial institutions 
for safety and soundness and consumer protection, making large and 
complex financial institutions resolvable, and managing 
receiverships.
    \35\ 12 U.S.C. 1782, 1783.
---------------------------------------------------------------------------

    Given its multiple roles, NCUA appropriately allocates costs 
associated with activities connected to each role. Various provisions 
of the Act, as noted earlier, govern or inform this allocation. Thus, 
NCUA currently categorizes those activities designed to manage risk to 
the Share Insurance Fund as ``insurance-related.'' This includes 
activities designed to enforce regulations NCUA adopts to carry out the 
purpose of Title II (Share Insurance) as well as related examination 
and supervision activities.\36\ NCUA's categorization focuses on the 
primary motivation for the regulation or examination and supervision 
activity. The motivation for insurance-related regulations and 
examination activities is based on the nature of the threat to the 
viability of the institution, and therefore potential losses to the 
Share Insurance Fund. The insurance-related definition excludes 
procedures that assess compliance with other regulations. Consumer 
protection and other laws and regulations (such as field of membership 
rules) designed to otherwise govern how credit unions operate, and 
related examination activities, are not primarily intended to reduce 
the potential for losses to the Share Insurance Fund. Moreover, while 
systemic and egregious violations of such laws could result in material 
fines to the institution, such occasions are very infrequent and rarely 
result in the failure of the institution or losses to the Share 
Insurance Fund.
---------------------------------------------------------------------------

    \36\ As noted in the Legal Authority section, NCUA has the 
authority to promulgate rules and regulations to carry out the 
purpose of Title II--Share Insurance. Accordingly, the NCUA Board 
has approved rules and regulations that specifically address credit 
union activities that pose risk to the Share Insurance Fund. NCUA 
has mapped all examination related rules and regulations to one of 
two categories: insurance regulatory related, or non-insurance or 
consumer regulatory related. This regulatory mapping provides the 
basis for determining how examination time is reported for use in 
the current OTR methodology. The mapping is discussed in detail in 
the 2013 independent study by PwC and in NCUA's January 2016 request 
for comment.
---------------------------------------------------------------------------

    Thus, NCUA currently allocates costs associated with regulating and 
examining the safety and soundness of insured institutions as 
insurance-related. Worthy of note, Congress uses ``safety and 
soundness'' and related terminology in the Act.\37\ There are two 
subjects in Title I containing safety and soundness terminology: the 
interest rate ceiling for federal credit unions (12 U.S.C. 
1757(5)(A)(vi)(I)) and provisions regarding multiple common bond groups 
(12 U.S.C. 1759(d) and 12 U.S.C. 1759(f)). The current safety and 
soundness language applying to these two subjects in Title I was added 
after Title II was enacted. There are 19 references to safety and 
soundness in Title II. These provisions cover a range of subjects.\38\ 
In particular, NCUA's various enforcement authorities for violations of 
laws or regulations and unsafe or unsound conditions or practices are 
contained in Title II. Thus, most of Congress' focus on safety and 
soundness in the Act is in the context of share insurance.
---------------------------------------------------------------------------

    \37\ ``Safe and sound,'' ``safety and soundness,'' and ``unsafe 
or unsound'' are the terminology encompassing safety and soundness 
found in the Act.
    \38\ See 12 U.S.C. 1781(c)(2), 1782(a)(6)(B), 1786(b), 1786(e), 
1786(f), 1786(g), 1786(k)(2), 1786(r), 1786(s), and 1790d(h).
---------------------------------------------------------------------------

    However, NCUA acknowledges that safety and soundness is not the 
sole domain of the insurer; prudential regulators have various 
responsibilities with respect to the ``safety and soundness'' of 
institutions they oversee. In some respects this is recognized in the 
current OTR formula through the ``Imputed SSA Value.'' To better 
reflect that the prudential regulator and insurer both have 
responsibilities for safety and soundness, the Board is considering 
adjusting the OTR methodology so safety and soundness is not accounted 
for as the primary domain of the insurer. For more information on the 
proposed change to the OTR methodology, see section IV.
    One commenter stated that routine examinations of all insured 
credit unions should be paid through Operating Fees. Another commenter 
asserted that the OTR should only be used for examinations of federally 
insured state-chartered credit unions and examinations of troubled 
federal credit unions. These recommendations assume that as insurer, 
NCUA takes only a reactive approach to managing risk to the Share 
Insurance Fund.
    The Board notes that NCUA's role as insurer is best fulfilled by a 
proactive approach to preventing losses, not just addressing troubled 
or failed institutions. Since the implementation of federal share 
insurance in 1970, the Board has instituted a more proactive 
examination and supervision program geared toward safety and soundness 
to better manage risk to the Share Insurance Fund. Additionally, as 
credit unions have become larger and more complex, the risks to the 
Share Insurance Fund have changed, with NCUA making corresponding 
adaptions to its operations. In 2002, the Board strengthened its 
commitment to fulfilling NCUA's role as insurer by implementing the 
Risk-Focused Examination Program. As recently as 2016, the Board made 
the examination program even more risk-based by adopting an extended 
examination cycle for healthy, well-run credit unions. These programs 
base examination scope and timing largely on the risks an institution 
poses to the Share Insurance Fund. Further, the objective of the risk-
focused examination is to enable NCUA to identify and address risks 
before they become a major problem. All of these changes have resulted 
in an increase in the agency's insurance-related activities.
    The Act and NCUA Regulations have also evolved, resulting in more 
emphasis on safeguarding the Share Insurance Fund. For example:
    1. The Credit Union Membership Access Act was enacted into law in 
1998.\39\ This law resulted in new obligations on credit unions and 
NCUA, such as prompt corrective action, designed to protect the Share 
Insurance Fund.
---------------------------------------------------------------------------

    \39\ Information about the Credit Union Membership Access Act is 
contained within NCUA Letter to Credit Unions 98-CU-16 located at 
the following web address: https://www.ncua.gov/Resources/Documents/LCU1998-16.pdf.

---------------------------------------------------------------------------

[[Page 29941]]

    2. During the aftermath of the financial crisis, the Board 
strengthened critical safety and soundness rules, such as interest rate 
risk and liquidity management standards.
    3. NCUA also has been providing regulatory relief. New authorities 
and less prescriptive, more principles-based rules have helped to 
reduce compliance burdens and provide credit unions with more authority 
to serve members and manage risk. They result in examiners devoting 
more time to ensuring safety and soundness through the examination 
process rather than relying on regulatory limits.
    Under this proactive approach, the Board's primary motivation for 
many of the agency's current regulations and the majority of the 
examination program is to manage risk to the Share Insurance Fund.
    The Board acknowledges there is not always a clear separation 
between the role of a prudential regulator concerned with enforcing 
laws and implementing public policy and that of an insurer. For 
example, NCUA relies, to the extent feasible, on the examination work 
performed by state regulators to manage risk to the Share Insurance 
Fund posed by federally insured state-chartered credit unions. This 
results in some cost savings in the NCUA Operating Budget. Since 2004, 
the value of the insurance-related work conducted by state regulators 
and relied on by NCUA has been reflected in the OTR methodology as the 
``Imputed SSA Value.'' To ensure equitable treatment, the Imputed SSA 
Value is calculated on the same cost basis as if NCUA had to conduct 
the work itself.\40\ The current methodology applies the same approach 
and definition of insurance-related examination activities to 
examinations of federally insured state-chartered credit unions as for 
federal credit unions. The Imputed SSA Value has the effect of reducing 
the OTR, thereby taking into account the fact that all insured credit 
unions benefit from the insurance-related examination costs of state 
regulators borne by state-chartered credit unions.
---------------------------------------------------------------------------

    \40\ The Imputed SSA Value for 2017 is $50.8 million.
---------------------------------------------------------------------------

    The Board recognizes that another plausible approach to accounting 
for the related missions of charterer/prudential regulator and insurer 
is to employ an alternating or partnership framework within the OTR 
methodology. This would simplify the OTR methodology and avoid having 
to delineate safety and soundness as the primary domain of the insurer. 
The concept of an alternating or partnership framework being applied to 
the OTR methodology is described in detail in section IV of this 
document.

e. State Regulator Costs

    Some commenters asserted that because NCUA equates safety and 
soundness with insurance-related activities, the OTR methodology is not 
fair and equitable as state regulators also examine federally insured 
state-chartered credit unions for safety and soundness. As a result, 
some commenters contended federally insured state-chartered credit 
unions are charged twice for safety and soundness examinations; once by 
their state regulator via an operating fee and then by NCUA via the 
OTR. Further, some commenters claimed that federally insured state-
chartered credit unions are disadvantaged when the OTR rises due to 
increased NCUA examination time allocated to insurance, because the 
NCUA operating fee paid by federal credit unions declines.
    NCUA appreciates the work state regulators do in contributing to 
the safety and soundness of the credit union system. The agency will 
continue to partner and coordinate closely with state regulators in 
this regard. It is important to note that ultimately NCUA is 
accountable for carrying out the purpose of Title II of the Act and 
managing risk to the Share Insurance Fund. The extent state regulators 
examine for safety and soundness is the choice of state governments. 
This choice, along with the adequacy of the examination, affects the 
extent to which it is feasible for NCUA to rely on these examination 
reports to meet its Title II responsibilities. State governments also 
choose the extent to which they rely on the work of NCUA in its role as 
insurer to reduce overall state costs and burden.
    State-chartered credit unions are not charged twice as a result of 
state regulators also examining for safety and soundness. The extent to 
which state regulators examine for safety and soundness in a manner 
that can be relied on by NCUA reduces the overall agency costs to which 
the OTR is applied, benefiting all insured credit unions. Conversely, 
NCUA's involvement in developing reporting and examination systems for 
all insured credit unions, publishing guidance, training and equipping 
most state examiners, and participating in the examination of federally 
insured state-chartered credit unions reduces overall state regulator 
costs.\41\ As discussed above, the current OTR methodology takes into 
account via the Imputed SSA Value the insurance-related work conducted 
by state regulators and relied on by NCUA. In addition, the Imputed SSA 
Value is calculated using the same examination time allocation for 
federal credit unions. Thus, when more of the agency's examination time 
is dedicated to insurance-related areas, the Imputed SSA Value also 
increases. The Imputed SSA Value has the effect of reducing the OTR 
(and conversely increasing the operating fee paid by federal credit 
unions) to the benefit of state-chartered credit unions. This provision 
helps ensure the current OTR methodology is fair and equitable.\42\
---------------------------------------------------------------------------

    \41\ NCUA budgeted to spend over 150,000 hours participating in 
the examination and supervision of federally insured state-chartered 
credit unions in 2017. To conduct this additional work would require 
state regulators to add an estimated 175 staff at a cost of up to 
$35 million. Most state regulators participate in NCUA's examiner 
training programs, use the agency's examination and Call Report 
systems, and benefit from the agency's exam techniques and 
supervisory guidance. State regulators would have to individually or 
collectively develop and administer these functions and systems if 
NCUA did not provide them. For context, NCUA's 2017 budget included 
the following for units associated with these functions and systems: 
$10.5 million for the Division of Training and Development; $16.4 
million for the Office of the Chief Information Officer's 
information technology operations; and $12.3 million for the Office 
of Examination and Insurance. Also, NCUA's 2017 capital budget 
includes $10.4 million to support the Enterprise System 
Modernization program; much of this program involves modernization 
of systems that directly or indirectly support supervising credit 
unions. Additionally, in 2017 NCUA budgeted $1.4 million for 
training of state examiners and $162,480 in computer lease expense 
for equipment provided to state regulators.
    \42\ Overhead Transfer Rate Review, PriceWaterhouseCoopers, 
Section 1.4.3 (January 20, 2011) (Based on PwC's review, there was 
no reasonable basis to conclude that the OTR methodology ex-ante and 
for reasons beyond the control of credit unions, favours or 
disadvantages any one type of credit unions (i.e. federal versus 
state chartered) over another.)
---------------------------------------------------------------------------

    Some commenters suggested that if the OTR continued to define all 
safety and soundness activities as insurance-related, NCUA should use 
each state regulator's actual costs instead of an imputed value. Others 
argued NCUA should pay the state governments for their actual costs 
instead of merely reducing the OTR.
    NCUA notes that it is neither feasible nor appropriate to use the 
actual state regulator costs in determining the OTR. To ensure the 
methodology is fair and equitable across all federally insured 
institutions, the Imputed SSA Value is intentionally designed to 
reflect the replacement cost to NCUA if the agency had to do the 
insurance-related work it relies on the state regulators to conduct. 
The cost structure for state regulators can vary widely and include 
non-germane and potentially inordinate costs. Also, it is not feasible 
to obtain reliable and comprehensive information

[[Page 29942]]

about the relevant cost of each state regulator. NCUA has no authority 
to compel states to provide this information, nor to maintain records 
in such a way as to ensure proper allocation of germane costs.
    As part of the process of evaluating the suggestion to use actual 
state regulator costs, NCUA attempted to obtain and review the costs of 
state regulators and their methodologies for annual and/or examination 
fees for state-chartered credit unions. This included determining how 
costs are allocated to the credit union specific activities for state 
regulators housed within state offices with broader 
responsibilities.\43\ NCUA staff first reviewed publicly available 
information with limited success. NCUA also sent letters to the state 
regulators to request details on fee structures, costs, and allocation 
factors for credit union specific activities. The information request 
did not result in sufficiently comprehensive information upon which to 
draw any reliable conclusions.\44\
---------------------------------------------------------------------------

    \43\ Based on the responses received from the state regulators, 
many state credit union programs are divisions contained within a 
larger office with funds co-mingled with other programs. The state 
regulators that responded and that do not separate funds for credit 
unions from other financial institutions supervised generally either 
do not allocate expenses or did not provide their allocation 
methodology.
    \44\ In total, 27 state regulators responded to varying degrees. 
These state regulators provided as much of the requested information 
as they could, given limitations they faced.
---------------------------------------------------------------------------

    Based on Call Report data, NCUA did compare the total Operating 
Fees as a percent of average assets paid by federal credit unions to 
those reported by federally insured state-chartered credit unions. 
Though this comparison has some limitations, the trends in Graph 1 
below show that Operating Fees recorded by federal credit unions and 
federally insured state-chartered credit unions are comparable in 
aggregate.
[GRAPHIC] [TIFF OMITTED] TN30JN17.291

    Further, federal credit unions continue to bear the majority of 
NCUA's operating costs. For NCUA's 2017 Operating Budget, federal 
credit unions cover 67 percent of the total Operating Budget through 
the operating fee and their proportional share of the OTR.

f. Regulation Mapping \45\
---------------------------------------------------------------------------

    \45\ As part of the current OTR methodology, the agency maps 
NCUA examination activities related to specific regulations based on 
the primary purpose of the regulation--whether it is for carrying 
out the purpose of Title II (insurance-related) or part of NCUA's 
responsibility as charterer or prudential regulator. For details 
regarding the regulation mapping, see Appendix A of the January 27, 
2016 request for comment.
---------------------------------------------------------------------------

    NCUA has mapped all examination-related rules and regulations to 
one of two categories: Insurance regulatory related, or non-insurance 
and consumer regulatory related. A third party has reviewed the 
regulatory mapping.\46\ NCUA reviews the regulatory mapping prior to 
the beginning of each examination time survey cycle for any necessary 
updates.\47\ A detailed review was completed again for 2017 that 
resulted in minor adjustments to classifications. For the full 
regulatory mapping, see the 2017 Mapping of NCUA Rules and Regulations 
document posted on NCUA's public Web site at https://www.ncua.gov/About/Documents/mapping-ncua-regulations-2017.pdf.
---------------------------------------------------------------------------

    \46\ PwC National Credit Union Administration (NCUA) Analysis of 
Examination Time Survey (ETS) Modifications--October 2, 2013: 
https://www.ncua.gov/About/Documents/Budget/2013/2013ETSAnalysis.pdf.
    \47\ The examiner time survey is performed annually and is used 
to determine the percentage of the workload budget relates to 
regulatory and insurance-related tasks for federal examinations and 
supervision contacts.
---------------------------------------------------------------------------

    Since NCUA equates safety and soundness with the term insurance-
related in the current OTR methodology, commenters argued that the 
mapping of NCUA's rules and regulations is faulty. Some commenters 
asserted that classifying NCUA rules as insurance-related is flawed 
because NCUA as charterer/prudential regulator is charged with ensuring 
compliance with all the provisions contained within the rules and 
regulations.
    As noted in the Legal Analysis section above, the Board has the 
authority to promulgate rules and regulations to carry out the 
provisions of Title II (Share Insurance) of the Act, as well as examine 
credit unions for share insurance purposes.\48\ Accordingly, the Board 
has approved rules and regulations that specifically address safety and 
soundness with the intent to protect the Share Insurance Fund. As such, 
the current OTR methodology accounts for examination and supervision 
activities for insurance-related regulations as an insurance cost.
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 1789(a).
---------------------------------------------------------------------------

    As noted above, the Board recognizes that another plausible 
approach to accounting for the related missions of charterer/prudential 
regulator and insurer is to employ an alternating or partnership 
framework within the OTR methodology. This would simplify the OTR 
methodology in part by avoiding having to map regulations to a specific 
role as it relates to federal credit unions. The concept of an 
alternating or partnership framework being applied to

[[Page 29943]]

the OTR methodology is described in detail in section IV of this 
document.

g. Other Methodological Aspects of the OTR

    NCUA received 23 comments suggesting various other changes to the 
current OTR process. The areas of the calculation receiving comments 
were the examiner time survey, the allocation factors for various NCUA 
central offices, and the use of insured shares in the calculation.
     Examiner time survey: \49\ Commenters generally agreed 
with using a time survey in allocating the cost of federal credit union 
examination and supervision. However, some commenters suggested NCUA 
conduct a time survey during all examinations and supervision contacts 
instead of on a statistically valid sample basis. Some commenters 
suggested having state regulators complete the examiner time survey as 
well.
---------------------------------------------------------------------------

    \49\ The current examiner time survey is discussed in detail in 
the Request for Comment Regarding Overhead Transfer Rate Methodology 
published in the Federal Register on January 27, 2016.
---------------------------------------------------------------------------

    It is not necessary to have 100 percent coverage of all examination 
and supervision contacts to form a statistically valid basis for the 
survey. A complete census of all federal credit union examinations and 
supervision contacts would result in additional agency costs--all staff 
would have to be trained annually and all examinations and supervision 
contact hours would need to be increased for the time necessary to 
complete the survey.\50\ Moreover, the survey is not pertinent to 
NCUA's work in federally insured state-chartered credit unions given 
NCUA is only functioning in its capacity as insurer.\51\ The benefits 
of any small increases in precision would be outweighed by the 
corresponding costs. With respect to state regulator examinations, the 
agency has no authority to require state regulators to complete a time 
survey, and it would be challenging to ensure uniformity in how their 
time is reported. The proposed changes to the OTR methodology discussed 
in section IV would eliminate the need for an examiner time survey, 
resulting in additional cost savings.\52\
---------------------------------------------------------------------------

    \50\ Completing examination time surveys increases the time 
spent on each examination and supervision contact by an average of 
one hour. This equates to about 6,000 hours if survey data was 
collected at every onsite examination and supervision contact. 
Additionally, annual training would be required for all examiners 
and supervisory examiners. This would increase training hours for 
field staff by about 700 hours. The total additional time would be 
about 6,700 hours, approximately 6 additional employees.
    \51\ As required by law, NCUA does review compliance with the 
Bank Secrecy Act and the Flood Disaster Protection Act when it 
conducts an examination of a federally insured state-chartered 
credit union and the state regulator has chosen not to conduct the 
review. These situations are limited and the time associated with 
this activity would have an indiscernible effect on the OTR.
    \52\ Based on the most recent Examination Time Survey results, 
field staff time would be reduced by approximately 200 hours 
annually. Central office and regional office staff time devoted to 
operating, maintaining, and administering the Examination Time 
Survey and related processes would be reduced by approximately 150 
hours annually.
---------------------------------------------------------------------------

     Allocation factors for various NCUA central offices: Some 
commenters stated the allocation of costs for NCUA's non-field offices 
are not based on standard or consistent criteria. Overall, NCUA agrees 
that improvements can be made in allocation methods involving the non-
field cost centers, and is addressing this in the proposed changes to 
the OTR methodology. Some noted that the Office of National 
Examinations and Supervision (ONES) costs cannot be 100 percent safety 
and soundness as it examines natural person credit unions with assets 
over $10 billion and, therefore, has regulatory responsibility. Other 
commenters noted ONES is also responsible for reviewing Bank Secrecy 
Act compliance for the corporate credit unions it supervises, 
suggesting some non-insurance time is spent supervising them. NCUA 
agrees that ONES time is not 100 percent insurance related and this 
issue was addressed in the 2017 OTR calculation. Other commenters 
questioned why the Office of Small Credit Union Initiatives and the 
Office of Consumer Financial Protection and Access vary in their 
methodology for classifying time spent on field of membership 
expansion. NCUA agrees that there are differences in the time 
allocations and has developed a consistent standard for use in the 
proposed changes to the OTR methodology discussed in section IV.
     Use of Insured Shares: Two commenters recommended not 
using insured shares in the calculation of the OTR. The commenters 
suggested that time and resources spent in each charter type would be 
more appropriate. In developing the revised OTR methodology in 2003, 
one of the main goals of NCUA was to allocate costs as precisely as 
possible. For the current OTR methodology, it is necessary and 
appropriate to incorporate insured shares to ensure it is precise and 
equitable. Use of insured shares is consistent with the mutual nature 
of the Share Insurance Fund and part of the statutory scheme related to 
Share Insurance Fund deposits, premiums and dividends.\53\ It also 
reflects the fundamental economics with respect to how the implicit 
costs of the OTR are borne by federal and state-chartered credit 
unions. Nevertheless, there are reasonable alternative approaches to 
calculating the OTR that do not involve use of insured shares. As 
discussed in section IV, the proposed changes to the OTR method 
eliminate the need for use of insured shares in the calculation.
---------------------------------------------------------------------------

    \53\ 12 U.S.C. 1782(c)(2) and (3).
---------------------------------------------------------------------------

IV. Details of Proposed OTR Methodology

    The proposed simplification of the OTR formula is intended to 
facilitate greater understanding of the methodology, and will decrease 
the agency resources necessary to administer the OTR. The new approach 
is within NCUA's authority and, though simplified, would provide a 
sufficient level of precision with respect to the allocation of agency 
costs. The simplified formula applies the following underlying 
principles to the allocation of agency operating costs:
    1. Time spent examining and supervising federal credit unions is 
allocated as 50 percent insurance related. The 50 percent allocation 
mathematically emulates an examination and supervision program design 
where NCUA would alternate examinations, and/or conduct joint 
examinations, between its insurance function and its prudential 
regulator function if they were separate units within NCUA. It reflects 
an equal sharing of supervisory responsibilities between NCUA's dual 
roles as charterer/prudential regulator and insurer given both roles 
have a vested interest in the safety and soundness of federal credit 
unions.\54\ It is consistent with the alternating examinations FDIC and 
state regulators conduct for insured state-chartered banks as mandated 
by Congress. Further, it reflects that NCUA is responsible for managing 
risk to the Share Insurance Fund and therefore should not rely solely 
on examinations and supervision conducted by the prudential regulator.
---------------------------------------------------------------------------

    \54\ The insurer may evaluate compliance matters as part of a 
reciprocal arrangement with the prudential regulator in evaluating 
matters specific to insurance as part of the overall shared 
supervision of a credit union. A simplified assumption of equal 
sharing reflects the offsetting benefits for each role under a 
framework emulating an alternating examination program.
---------------------------------------------------------------------------

    2. All time and costs NCUA spends supervising or evaluating the 
risks posed by federally insured state-chartered credit unions or other 
entities NCUA does not charter or regulate (for example, third-party 
vendors and CUSOs) is allocated as 100 percent insurance related. NCUA 
does not charter state-chartered credit unions nor

[[Page 29944]]

serve as their prudential regulator. NCUA's role with respect to 
federally insured state-chartered credit unions is as insurer. 
Therefore, all examination and supervision work and other agency costs 
attributable to insured state-chartered credit unions is allocated as 
100 percent insurance related.
    3. Time and costs related to NCUA's role as charterer and enforcer 
of consumer protection and other non-insurance based laws governing the 
operation of credit unions (like field of membership requirements) are 
allocated as 0 percent insurance related.\55\ As the federal agency 
with the responsibility to charter federal credit unions and enforce 
non-insurance related laws governing how credit unions operate in the 
marketplace, NCUA resources allocated to these functions are properly 
assigned to its role as charterer/prudential regulator.
---------------------------------------------------------------------------

    \55\ This includes any reviews of credit unions focused solely 
on compliance, such as a fair lending exam. It does not include the 
more broadly based examinations and supervision contacts of federal 
credit unions covered by principle 1. It also does not include 
enforcing laws, like Prompt Corrective Action, that are part of 
share insurance under Title II as covered by principle 4.
---------------------------------------------------------------------------

    4. Time and costs related to NCUA's role in administering federal 
share insurance and the Share Insurance Fund are allocated as 100 
percent insurance related. NCUA conducts liquidations of credit unions, 
insured share payouts, and other resolution activities in its role as 
insurer. Also, activities related to share insurance, such as answering 
consumer inquiries about insurance coverage, are a function of NCUA's 
role as insurer.
    These four principles are applied to the activities and costs of 
the agency to arrive at the portion of the agency's Operating Budget to 
be charged to the Share Insurance Fund as discussed in detail below.
Step 1--Workload Program
    Annually, NCUA develops a workload budget based on NCUA's 
examination and supervision program to carry out the agency's core 
mission. The workload budget reflects the amount of time necessary to 
examine and supervise federally insured credit unions, along with other 
related activities, and therefore the level of field staff needed to 
implement the exam program. Applying principles 1, 2, and 3 (those 
relevant to the workload budget) to the applicable elements of the 
workload budget results in a composite rate that reflects the portion 
of the agency's overall mission program activities that are insurance 
related. For illustrative purposes, Table 1 shows the application of 
the allocation principles to the 2017 workload budget.\56\
---------------------------------------------------------------------------

    \56\ If the proposed change to the methodology is adopted by the 
Board, the calculation would apply to future workload and operating 
budgets. Thus, actual results may vary from those presented herein 
for illustrative purposes.
    \57\ Numbers may not reconcile exactly due to rounding.

                                   Table 1--Allocation of Workload Hours \57\
----------------------------------------------------------------------------------------------------------------
                                                                     Insurance-
                                            Budgeted     Percent      related
       Workload programs 2017 data          workload    insurance     workload           Allocation basis
                                             hours       related       hours
                                                  (A)          (B)    (A) x (B)
----------------------------------------------------------------------------------------------------------------
Federal Credit Union Examination &            498,159           50      249,080  Based on allocation principle 1
 Supervision.                                                                     reflecting NCUA's roles as
                                                                                  both prudential regulator and
                                                                                  insurer.
State Credit Union Examination &              167,414          100      167,414  Based on allocation principle 2
 Supervision.                                                                     reflecting NCUA's role as
                                                                                  insurer.
Consumer Compliance Reviews & Related          20,000            0            0  Based on allocation principle 3
 Training.                                                                        reflecting NCUA's role as
                                                                                  prudential regulator.
Field of Membership & Chartering........          500            0            0  Based on allocation principle 3
                                                                                  reflecting NCUA's role as
                                                                                  prudential regulator.
CUSO & Third-party Vendor Reviews.......        5,576          100        5,576  Based on allocation principle 2
                                                                                  reflecting NCUA's role as
                                                                                  insurer. Field staff time
                                                                                  conducting reviews of CUSOs
                                                                                  and third-party vendors--NCUA
                                                                                  does not charter or regulate
                                                                                  CUSOs and third-party vendors.
                                         -----------------------------------------------------------------------
    Total...............................      691,649          N/A      422,070  ...............................
                                         -----------------------------------------------------------------------
        Total Insurance-Related Workload  ...........  ...........          61%  Weighted average of field staff
         Hours to Total Workload Hours.                                           program time devoted to NCUA's
                                                                                  role as insurer.
----------------------------------------------------------------------------------------------------------------

Step 2--Operating Budget
    The Operating Budget represents the costs of the activities 
associated with achieving the strategic goals and objectives set forth 
in the NCUA Strategic Plan. The Operating Budget is based on agency 
priorities and initiatives that drive resulting resource needs and 
allocations. Information related to NCUA's budget process, including 
detailed information on the Board-approved 2017 Operating Budget, is 
available on the agency's Web site.\58\
---------------------------------------------------------------------------

    \58\ https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx.
---------------------------------------------------------------------------

    The agency achieves its primary mission through the examination and 
supervision program. For the proposed formula, as applied to the 2017 
Operating Budget, the percentage of insurance-related workload hours 
(61 percent) derived from Step 1 represents the main allocation factor 
used in Step 2 for the costs of the field offices (the Regions and 
ONES). A few agency offices have roles that are significantly distinct 
enough to warrant their own allocation factors, as discussed below. A 
weighted average allocation factor (60 percent) representing the 
aggregate budgets for the Regions, Ones, and the specific agency 
offices listed in Step 2 is applied to the central offices that design 
or oversee the examination and supervision program, or support the 
agency's overall operations. These costs in total make up NCUA's 
Operating Budget. Table 2 reflects the application

[[Page 29945]]

of the OTR allocation factors to the 2017 Operating Budget as an 
example.
---------------------------------------------------------------------------

    \59\ The totals may not reconcile exactly due to rounding.

                                Table 2--Allocation of NCUA Operating Budget \59\
----------------------------------------------------------------------------------------------------------------
                                                                                                  Operating cost
                                                                     Operating        Percent     to be borne by
                      Cost area (2017 data)                          budget $        insurance       the share
                                                                     millions         related     insurance fund
                                                                                                    $ millions
                                                                             (A)             (B)       (A) x (B)
----------------------------------------------------------------------------------------------------------------
Regions and ONES: The financial budget for the agency's five               170.9              61           104.3
 regional offices and ONES is allocated based on the weighted
 average of insurance-related activities calculated from the
 workload budget in Step 1 (using principles 1, 2, and 3).
 Resources in the regions and ONES execute NCUA's examination
 program. Thus, the budgeted costs related to these programs
 should receive the same allocation basis as the programs
 themselves.....................................................
Asset Management Assistance Center: Manages liquidation payouts              7.4             100             7.4
 and assets acquired from liquidations on behalf of the Share
 Insurance Fund. Thus, the OTR allocation factor is based on
 principle 4 and allocated at 100 percent insurance related.....
Office of Consumer Financial Protection and Access Largely in                9.9              13             1.3
 NCUA's role as charterer and prudential regulator, this office
 is responsible for chartering and field-of-membership matters,
 low-income designations, bylaw amendments, consumer financial
 literacy efforts, consumer inquiries and complaints, consumer
 protection compliance, fair lending examinations, and related
 interagency coordination. These activities are allocated based
 on principle 3 as 0 percent insurance related. The office does
 some work with respect to federally insured state-chartered
 credit unions, including share insurance coverage matters, in
 NCUA's role as insurer; these activities are allocated based on
 principle 4 as 100 percent insurance related. The net of this
 combined activity results in an allocation factor of 13 percent
 insurance related. See discussion below for more details.......
Office of Small Credit Union Initiatives: Provides consulting                6.5              60             3.9
 and training services for small credit unions, both federal
 credit unions and federally insured state-chartered credit
 unions. Also processes grants and loans for federally insured
 credit unions. Principle 1 is applied to the office's work with
 federal credit unions and principle 2 is applied to the
 office's work with federally insured state-chartered credit
 unions. The net of this combined activity results in an
 allocation factor of 60 percent insurance related. See
 discussion below for more details..............................
Subtotal: The 60 percent subtotal factor represents the dollar-            194.6              60           116.8
 weighted average of the above four cost centers (Regions and
 Ones, Asset Management Assistance Center, Office of Consumer
 Financial Protection and Access, and Office of Small Credit
 Union Initiatives) representing specific aspects of NCUA's
 mission........................................................
All Other Offices: This category includes the offices that                 103.6              60            62.2
 design or oversee the agency's mission and its related offices,
 or provide necessary support to mission offices or the entire
 agency. As such, the proportion of insurance-related activities
 for these offices correspond to that of the mission offices.
 Therefore, these office costs are allocated based on the
 weighted average of insurance-related activities calculated in
 the subtotal above.............................................
                                                                 -----------------------------------------------
    Total.......................................................           298.2  ..............           179.0
----------------------------------------------------------------------------------------------------------------

Regional Offices and ONES
    The financial budget for the agency's five regional offices and 
ONES is allocated based on the weighted average of non-insurance and 
insurance-related activities calculated in Step 1. The Regions and ONES 
execute NCUA's examination programs; thus, the budgeted costs related 
to these offices should receive the same allocation basis as the 
programs themselves. The allocation factor is based on principles 1, 2, 
and 3 as documented in Table 1. The budget for the regional offices and 
ONES is allocated at 61.0 percent for insurance-related activities.
Asset Management Assistance Center
    NCUA conducts credit union liquidations and performs management and 
recovery of assets through the Asset Management and Assistance Center. 
The Asset Management Assistance Center assists NCUA regional offices 
with the review of large, complex loan portfolios and actual or 
potential bond claims. It also participates extensively in the 
operational phases of conservatorships and records reconstruction. The 
purpose of the Asset Management Assistance Center is to manage and 
reduce costs to the Share Insurance Fund and credit union members of 
credit union failures. Thus, OTR allocation is based on principle 4 at 
100 percent insurance related.
Office of Consumer Financial Protection and Access
    This division is responsible for NCUA's consumer financial literacy 
efforts, consumer inquiries and complaints, consumer protection 
compliance and rulemaking, fair lending examinations, interagency 
coordination and outreach, chartering and field-of-membership matters, 
low-income designations, charter conversions, and bylaw amendments. The 
majority of the work performed by the Office of Consumer Financial 
Protection and Access is related to NCUA's role as prudential regulator 
and

[[Page 29946]]

charterer of federal credit unions. This office is unique and differs 
from the Regions and ONES in the distribution and nature of work 
performed related to federal credit unions. Thus, principle 3 is 
applied to the majority of this office's work and allocated at 0 
percent insurance related. However, some work the office performs 
involves federally insured state-chartered credit unions, which falls 
under principle 4. The office also addresses share insurance coverage 
matters, which also falls under principle 4.
    The composite rate of this office's insurance-related activities 
calculates as 13 percent as reflected in Table 3. Thus, an allocation 
factor of 13 percent is applied to the office's financial budget in the 
OTR calculation.

            Table 3--Allocation of the Office of Consumer Protection and Financial Access Staff Time
----------------------------------------------------------------------------------------------------------------
                                                                                                   Proportion of
                                                     Number of      Staff time                         staff
                                                    staff (full      spent on       Allocation      insurance-
                    Division                           time         activities        factor       related work
                                                    equivalent)     (full time       (percent)      (full time
                                                                    equivalent)                     equivalent)
----------------------------------------------------------------------------------------------------------------
Administrative..................................               3  ..............  ..............  ..............
    --Principle 3 Activities....................  ..............             2.7               0             0.0
    --Principle 4 Activities....................  ..............             0.3             100             0.3
Consumer Access.................................              20  ..............  ..............  ..............
    -Principle 3 Activities.....................  ..............            15.0               0             0.0
    --Principle 4 Activities....................  ..............             5.0             100             5.0
Consumer Affairs................................              12  ..............  ..............  ..............
    --Principle 3 Activities....................  ..............            11.4               0             0.0
    --Principle 4 Activities....................  ..............             0.6             100             0.6
Consumer Compliance Policy and Outreach.........              10  ..............  ..............  ..............
    --Principle 3 Activities....................  ..............            10.0               0             0.0
    --Principle 4 Activities....................  ..............             0.0             100  ..............
                                                 ---------------------------------------------------------------
        Totals..................................              45  ..............  ..............             5.9
                                                 ---------------------------------------------------------------
            Insurance-Related Full Time                      13%  ..............  ..............  ..............
             Equivalent Staff to Total Staff....
----------------------------------------------------------------------------------------------------------------

    The office's administrative staff provides support for the whole 
office. Ten percent of this unit's work was devoted to supporting 
insurance-related functions, like responding to consumer inquiries on 
share insurance coverage. Thus, principle 4 is applied to those 
activities as 100 percent insurance related while the remaining 90 
percent of their time was spent supporting charting, bylaw, field of 
membership, and related activities, which fall under principle 3 as 0 
percent insurance related.
    The Division of Consumer Access staff spent 25 percent of their 
time addressing insurance-related functions, like insurability 
standards for mergers and insurance applicants where principle 4 
applies. The remainder of this unit's time was spent processing various 
chartering and field of membership expansion applications and bylaw 
matters where principle 3 applies.
    The Division of Consumer Affairs staff spent 5 percent of its time 
addressing share insurance questions received from consumers which 
falls under principle 4. The division spent the remaining 95 percent of 
its time on consumer related activities like administering the 
Financial Literacy Program, which falls under principle 3.
    The Division of Consumer Compliance Policy and Outreach focuses on 
issues related to consumer regulations including implementing the Equal 
Credit Opportunity Act, the Home Mortgage Disclosure Act, the Truth in 
Lending Act, and the Real Estate Settlement Procedures Act. All of 
these activities fall under principle 3; therefore, 100 percent of the 
division's staff time is allocated as 0 percent insurance related.
Office of Small Credit Union Initiatives
    The proposed methodology allocates the cost of the Office of Small 
Credit Union Initiatives based on principles 1 and 2. The office tracks 
the time the Economic Development Specialists spent consulting and 
training both federal credit unions and federally insured state-charted 
credit unions. The proportion of time spent on federal credit unions is 
allocated based on principle 1 while federally insured state-chartered 
credit union work is allocated based on principle 2. Other office 
personnel process grants and loans for both federal credit unions and 
federally insured state-chartered credit unions. Grant and loan 
activities are allocated the same way as the consulting and training 
time using principles 1 and 2. The resulting allocation factor for the 
Office of Small Credit Union Initiatives is 60 percent as shown in 
Tables 4 and 5.\60\
---------------------------------------------------------------------------

    \60\ About 73% of all grants and loans processed by the Office 
of Small Credit Union Initiatives in 2016 were for federal credit 
unions. Of the 18,633 hours budgeted for Economic Development 
Specialist consulting and training, about 81% is for federal credit 
unions.
---------------------------------------------------------------------------

    Table 4 illustrates the allocation for the Office of Small Credit 
Union Initiative's consulting hours between federal and state-chartered 
credit unions applied to the budgeted hours for 2017. Principle 1 is 
applied for federal charters and principle 2 is applied for state 
charters. The result is a composite rate of 59.3 percent insurance-
related hours for the Economic Development Specialists.

[[Page 29947]]



                        Table 4--2017 Economic Development Specialist Workload Allocation
----------------------------------------------------------------------------------------------------------------
                                                                                                    Percent of
                                                                      Percent          Hours          budget
                  Charter type                    Budget (hours)     insurance       insurance       insurance
                                                                      related         related         related
----------------------------------------------------------------------------------------------------------------
Federal Charter.................................          15,185              50           7,592            40.7
State Charter...................................           3,448             100           3,448            18.5
                                                 ---------------------------------------------------------------
    Total.......................................          18,633             N/A          11,040            59.3
----------------------------------------------------------------------------------------------------------------

    Table 5 illustrates the allocation of the grant and loan activities 
performed by the Office of Small Credit Union Initiatives by charter 
type. Principle 1 is applied for federal charters and principle 2 is 
applied for state charters. This results in a composite rate of 63.7 
percent insurance-related activities for grants and loans.
---------------------------------------------------------------------------

    \61\ Numbers may not reconcile exactly due to rounding.

                      Table 5--Grant Approval and Loan Disbursement 2016 by Charter Type 61
----------------------------------------------------------------------------------------------------------------
                                                                      Percent          Total
                  Charter type                     Total grants     insurance-      insurance-      Percent of
                                                     and loans        related         related          total
----------------------------------------------------------------------------------------------------------------
Federal Charter.................................             235              50             118            36.3
State Charter...................................              89             100              89            27.5
                                                 ---------------------------------------------------------------
    Total.......................................             324             N/A             207            63.7
----------------------------------------------------------------------------------------------------------------

    Table 6 shows the resulting overall composite rate of 59.8 percent 
insurance-related activities for the Office of Small Credit Union 
Initiatives. This factor is applied to the financial budget for this 
office in the OTR calculation.

                                   Table 6--Allocation of the Financial Budget
----------------------------------------------------------------------------------------------------------------
                                                                   Insurance- related
                Staff                           Budget                 (percent)            Budget allocation
----------------------------------------------------------------------------------------------------------------
Economic Development Specialists.....                3,733,000                     59.3                2,211,982
Grants and Loans.....................                  527,000                     63.7                  335,881
                                      --------------------------------------------------------------------------
    Total............................                4,260,000                     59.8                2,547,773
----------------------------------------------------------------------------------------------------------------

All Other Offices
    NCUA's remaining offices design or oversee the agency's mission and 
its related offices, or provide necessary support to mission offices or 
the entire agency. As such, the proportion of insurance-related 
activities for these offices corresponds to that of the mission 
offices. It would be administratively burdensome to attempt to account 
for any variation in activity levels from the mission functions, and 
would not result in a material difference in outcomes. Therefore, these 
office costs are allocated based on the weighted average of insurance-
related activities calculated in the subtotal of agency costs for the 
offices above that have a distinct allocation factor. The budgeted 
costs for the following offices are allocated at 60.0 percent 
insurance-related activities for purposes of calculating the OTR:
     NCUA Board,
     Executive Director,
     General Counsel,
     Chief Financial Officer,
     Chief Information Officer,
     Chief Economist,
     Human Resources,
     Examination and Insurance,
     Inspector General,
     Minority and Women Inclusion,
     Public and Congressional Affairs, and
     Continuity and Security Management.

c. Step 3--Calculate the OTR

    The OTR represents the percentage of the NCUA Operating Budget that 
is funded by a transfer from the Share Insurance Fund.\62\ Using the 
result from Step 2, the OTR calculation is shown in Table 7.
---------------------------------------------------------------------------

    \62\ The percentage of actual expenses funded by the Share 
Insurance Fund as they are incurred each month.

                        Table 7--OTR Calculation
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Operating Costs to be Borne by the Share Insurance Fund......     $179.0
/ Total Operating Budget.....................................     $298.2
                                                              ----------
= OTR........................................................      60.0%
------------------------------------------------------------------------

    Based on data used to determine the OTR for 2017, the proposed 
changes to the OTR methodology would result in an OTR of 60.0 percent. 
The current methodology resulted in an OTR of 67.7 percent for 2017. 
Table 8 summarizes the results for the 2017 OTR calculation using the 
current and proposed methodologies.

[[Page 29948]]



                                      Table 8--2017 OTR Results Comparison
----------------------------------------------------------------------------------------------------------------
                                         Current methodology      Proposed methodology         Change \63\
----------------------------------------------------------------------------------------------------------------
OTR Percent..........................                    67.7%                    60.0%                   -7.70%
OTR $ Millions.......................                   $201.8                   $179.0                   -$22.8
----------------------------------------------------------------------------------------------------------------

    For informational purposes only, Table 9 illustrates the portion of 
NCUA's total Operating Budget costs funded explicitly and implicitly by 
federal credit unions and federally insured state-chartered credit 
unions respectively.
---------------------------------------------------------------------------

    \63\ For 2017, the proposed OTR methodology calculation would 
result in a decline of 11.4% from the current methodology.

                                   Table 9--Operating Budget Cost Distribution
----------------------------------------------------------------------------------------------------------------
 Portion of 2017 operating budget                                            Federally insured state-chartered
            covered by:                     Federal credit unions                      credit unions
----------------------------------------------------------------------------------------------------------------
Federal Credit Union Operating Fee  40.0%................................  0.0%.
OTR (proportional based on insured  30.8%................................  29.2%.
 shares).                           (60.0% x 51.3%)......................  (60.0% x 48.7%).
    Total.........................  70.8% \64\...........................  29.2%.
----------------------------------------------------------------------------------------------------------------

    The proposed change to the OTR methodology would result in the 
annual Operating Fee paid by federal credit unions increasing by about 
24%--an increase of $22.8 million from $96.4 million to $119.2 million. 
Based on the 2017 Operating Fee scale, Table 10 provides several 
examples of how a federal credit union's operating fee would increase.
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    \64\ Based on the current OTR methodology, 67 percent of the 
total 2017 Operating Budget is covered by federal credit unions 
through Operating Fees and the OTR: https://www.ncua.gov/About/Documents/Agenda%20Items/AG204161117Item4a.pdf.

 Table 10--Examples of Operating Fee Increase for Federal Credit Unions
------------------------------------------------------------------------
                                                            Increase to
           Asset size of federal credit union                 annual
                                                           operating fee
------------------------------------------------------------------------
$9.46 billion...........................................        $133,234
$1.01 billion...........................................          51,143
$503 million............................................          25,445
$100 million............................................           5,060
$50 million.............................................           2,526
$10 million.............................................             505
$1 million..............................................               0
------------------------------------------------------------------------

V. Request for Comment

    In addition to the proposed changes to the OTR methodology, the 
Board proposes to formally adopt the following OTR related processes:
     To solicit through the Federal Register public comment on 
the OTR methodology at least every 3 years, and whenever NCUA seeks to 
change the OTR methodology.
     Maintain the staff delegation to administer the OTR 
methodology but require public board briefings every year, no later 
than each December, on the results of the calculation and to post all 
related materials to NCUA's Web site.
     As part of future rulemaking, indicate for any proposed 
regulation involving the activities and authorities of credit unions 
whether the regulation is based on Title I, Title II, and/or Title III 
of the Act and seek comment on this determination. While the proposed 
new OTR methodology would no longer rely on mapping of regulations, 
this will increase clarity regarding the purpose of and authority for 
any new or updated regulations and preserve future flexibility with 
respect to any desired changes to the OTR methodology.
    The Board seeks comments on all the proposed revisions to the OTR 
methodology and formal adoption of the procedures discussed above. In 
particular, the Board is interested in comments on alternative 
approaches to arriving at an allocation factor for the cost of 
examining and supervising federal credit unions (principle 1). For 
example, within the context of the overall simplification of the OTR 
methodology, should federal credit union examination and supervision 
activity be allocated primarily to the operating fee, or should it 
continue to reflect that much of NCUA's examination and supervision 
focus is on managing risk to the Share Insurance Fund.\65\
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    \65\ To provide context for commenters, an assumption under 
principle 1 in the proposed OTR methodology that only the 
examination and supervision of troubled federal credit unions was 
insurance-related would result in an OTR of about 31 percent. 
Conversely, if the results of the Examiner Time Survey (about 88 
percent insurance-related) were used for the allocation factor for 
principle 1 in the proposed OTR methodology, it would result in an 
OTR of about 85 percent.
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    Commenters are also encouraged to discuss any other relevant issues 
they believe NCUA should consider with respect to the OTR methodology 
and, to the extent feasible, provide documentation to support any 
recommendations.

    By the National Credit Union Administration Board on June 23, 
2017.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2017-13635 Filed 6-29-17; 8:45 am]
 BILLING CODE 7535-01-P