Overhead Transfer Rate Methodology, 55644-55652 [2017-25222]
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Federal Register / Vol. 82, No. 224 / Wednesday, November 22, 2017 / Notices
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[FR Doc. 2017–25201 Filed 11–21–17; 8:45 am]
BILLING CODE 7510–13–P
NATIONAL CREDIT UNION
ADMINISTRATION
Overhead Transfer Rate Methodology
National Credit Union
Administration (NCUA).
ACTION: Final notice.
AGENCY:
In June 2017, the NCUA
Board (Board) published a notice and
request for comment on proposed
changes to its Overhead Transfer Rate
(OTR) methodology and sought industry
comments on the proposed changes.1
This Final Notice discusses the
comments received and provides the
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SUMMARY:
1 Request for Comment Regarding Revised
Overhead Transfer Rate Methodology, 82 FR 29935
(June 30, 2017).
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Board’s response to the comments. This
Final Notice also sets forth the new OTR
methodology the Board has chosen to
adopt after consideration of the public
comments received.
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:
Table of Contents
I. Background and Legal Authority
II. Legal Authority Comments and Responses
III. Proposed OTR Methodology Comments
and Responses
IV. Final Action
V. Details of the OTR Methodology
I. Background and Legal Authority
The 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. Pursuant to the Act,
the 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). The NCUA is
responsible for ensuring federally
insured credit unions operate safely and
soundly and comply with all applicable
laws and regulations within the NCUA’s
jurisdiction.2 In so doing, the agency
mitigates risk to the Share Insurance
Fund and prevents taxpayer-funded
bailouts. 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.’’ 3 This includes
protecting member rights and deposits.
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 in the fall of each year to fund
the vast majority of the costs of
operating the agency.4 The Act
authorizes two primary sources to fund
2 In coordination with State Supervisory
Authorities with respect to federally insured statechartered credit unions.
3 https://www.ncua.gov/About/Pages/Missionand-Vision.aspx.
4 Some costs are directly charged to the Share
Insurance 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.
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the Operating Budget: (1) Requisitions
from the Share Insurance Fund ‘‘for
such administrative and other expenses
incurred in carrying out the purposes of
[Title II of the Act] as [the Board] may
determine to be proper’’; 5 and (2) ‘‘fees
and assessments (including income
earned on insurance deposits) levied on
insured credit unions under [the Act].’’ 6
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, the
NCUA uses the OTR. The OTR
represents the formula the 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.7 Two
statutory provisions directly limit the
Board’s discretion with respect to Share
Insurance Fund requisitions for the
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.8
Second, the NCUA may not fund its
entire Operating Budget through charges
to the Share Insurance Fund.9 The
NCUA has not imposed additional
policy or regulatory limitations on its
discretion for determining the OTR.
5 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.
7 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 Board’s
methodology for determining the aggregate amount
of Operating Fees was discussed in a separate
Federal Register publication. 81 FR 4674 (Jan. 27,
2016).
8 12 U.S.C. 1783(a).
9 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).
6 12
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In 1972, the Government
Accountability Office recommended the
NCUA adopt a method for properly
allocating Operating Budget costs—that
is, the portion of the NCUA’s budget
funded by requisitions from the Share
Insurance Fund and the portion covered
by Operating Fees paid by federal credit
unions.10 The 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.
The NCUA has employed various
allocation methods over the years, with
the methodology adopted in 2003. For a
chronological 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 prior 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.
In January of 2016, the Board
voluntarily published its OTR
methodology in the Federal Register
and invited industry comment.11 In June
2017, the Board proposed changes to the
OTR methodology in the Federal
Register and requested comments on the
proposed changes.12
Within the 60-day comment period,
the NCUA received 26 comment letters
on the OTR methodology. The
commenters included federal credit
unions, federally insured state-chartered
credit unions, national credit union
trade organizations, state leagues, state
supervisory authorities, and a credit
union service organization (CUSO).
II. Legal Authority Comments and
Responses
In response to its initial OTR notice
in January 2016, the 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 of the
2016 commenters stated the agency does
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10 http://www.gao.gov/assets/210/203181.pdf.
11 Request for Comment Regarding Overhead
Transfer Rate Methodology, 81 FR 4804 (Jan. 27,
2016).
12 Request for Comment Regarding Revised
Overhead Transfer Rate Methodology, 82 FR 29935
(June 30, 2017). The OTR does not require noticeand-comment procedures. The NCUA’s legal
analysis with respect to the OTR and
Administrative Procedure Act processes is available
at the following Web page: https://www.ncua.gov/
Legal/Documents/Opinion/OL2015-0818.pdf.
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not have authority or discretion to
establish and determine the OTR. Some
commenters asserted that the NCUA
lacks the legal authority to use the Share
Insurance Fund to cover costs of
operating the agency. Other commenters
claimed the 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 the 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. Finally, some commenters
insisted that the Board must use APA
notice-and-comment processes to
establish the OTR. To the extent
commenters explained their positions,
they read various limitations into the
provisions the NCUA cites in Section I
above and the response below and
pointed to the Act’s legislative history.
In response to the June 2017 Request
for Comment the NCUA received a
number of comments that reiterated the
substance of or referenced points made
in the comments received in response to
the January 2016 Request for Comment.
While helpful, the comments did not
advocate materially new legal
arguments or substantively expand on
ones made in response to the January
2016 Request for Comment.
Accordingly, the substance of the
Board’s responses to comments largely
tracks those published in the June 2017
notice, with minor alterations. The
Board believes this will be helpful to
stakeholders in addressing questions
they may have by once again fully
explaining the NCUA’s legal analysis set
forth above.
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 the 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 the NCUA’s reliance on Title I and
State Supervisory Authority
examinations and reports should accrue
to the benefit of the Share Insurance
Fund. Having considered these
comments, the NCUA maintains that a
plain reading of the Act, as described in
section I above and in both the January
2016 and June 2017 notices, supports
the agency’s legal authority and broad
discretion in allocating operating costs.
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As the Board previously stated, the
Act’s plain language does not require an
analysis of the legislative history.13
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.
a. Allocation of the Cost Savings From
the NCUA’s Dual Roles
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. These
commenters similarly stated that the Act
places requirements on the NCUA to use
state regulator examinations and reports
to the maximum extent feasible.
As the Board has previously
explained, Title II of the Act, 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. With respect to use
of state regulator exams and reports, the
Board is careful to build efficiencies
wherever reasonable in light of the
NCUA’s dual roles as (1) charterer and
prudential regulator of federal credit
unions and (2) insurer of federal credit
unions and federally insured statechartered credit unions. This ensures
the NCUA uses state regulator
examinations and reports to the
maximum extent feasible for purposes
of insurance. Efficiencies gained from
the 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 the 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 the 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
the NCUA from allocating the costs of
the ‘‘share insurance purposes’’ portion
of federal credit union examinations to
13 See, e.g., Barnhart v. Sigmon Coal Co., 534 U.S.
438, 450 (2002).
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the Share Insurance Fund.14 The Board
thus disagrees with commenters that
argued the Act requires the cost-savings
of the NCUA’s dual roles to accrue
specifically to the Share Insurance
Fund.
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b. 12 U.S.C. 1790—Prohibition of
Discrimination Based on Charter Type
With respect to 12 U.S.C. 1790, the
Board agrees with commenters stating
that this provision should inform the
NCUA’s interpretation of Title II so that
it consciously avoids discrimination
against federally insured state-chartered
credit unions to the benefit of federal
credit unions.15 However, the Board
does not believe that either the prior
OTR process or the one adopted in this
Final Notice 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,
requisitions from the Share Insurance
Fund used to fund the insurance-related
expenses of the NCUA’s Operating
Budget under § 1783(a) do not
distinguish between federal credit
unions and federally insured statechartered credit unions.
In response to the June 2017 Request
for Comment one commenter stated that
the primary goal of the proposed
changes was to reduce the complexity of
the OTR methodology. The commenter
14 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.
15 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.’’).
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stated that the NCUA’s primary goal
should be to ensure fair and equitable
treatment of federal credit unions and
federally insured state-chartered credit
unions in the allocation of insurancerelated activities. However, the Board
has always approached the OTR with
the goal that it be fair and equitable to
both charter types. The Board believes
the new method continues to provide a
fair and equitable distribution of Title I
and Title II costs while recognizing that
somewhat less precision can make the
process more cost effective and
understandable. In other words, fairness
and equity among charter types is more
than a goal, they have been and
continue to be fundamental to the OTR
methodology.
c. Title II Operating Costs
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)
allows expenses ‘‘incurred in carrying
out the purposes of [Title II]’’ to be
allocated to the Share Insurance Fund.
The costs the NCUA incurs in
safeguarding the Share Insurance Fund
relate to the risks in federal credit
unions and federally insured statechartered credit unions. The Act
provides the Board with specific
authorities that relate to costs the 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.’’ 16
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.’’ 17
Title II also grants the Board the
following authorities relevant to agency
operating costs:
• ‘‘appoint such officers and
employees as are not otherwise
provided for in this chapter;’’ 18
• ‘‘employ experts and consultants or
organizations thereof;’’ 19
• ‘‘prescribe the manner in which its
general business may be conducted and
16 12
U.S.C. 1784(a).
U.S.C. 1789(a)(11).
18 12 U.S.C. 1789(a)(4).
19 12 U.S.C. 1789(a)(5).
17 12
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the privileges granted to it by law may
be exercised and enjoyed;’’ 20
• ‘‘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;’’ 21 and
• ‘‘make examinations of and require
information and reports from insured
credit unions, as provided in this
subchapter.’’ 22
The Board concludes that these
authorities, taken together, provide the
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.23
d. APA Requirements
The legal analysis of the NCUA’s
Office of General Counsel on the
applicability of the notice and comment
provisions of the Administrative
Procedure Act (APA) to the OTR
methodology is summarized in the
January 2016 OTR notice 24 and
articulated more fully in a legal opinion
posted on the NCUA’s Web site.25 In
soliciting comment on the OTR through
the Federal Register, the NCUA has
gone, and continues to go, beyond its
APA obligations.
In response to the June 2017 notice,
one commenter specifically cited the
Board’s characterization of the OTR
20 12
U.S.C. 1789(a)(6).
U.S.C. 1789(a)(7).
22 12 U.S.C. 1789(a)(8).
23 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.
24 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.’’ (footnotes omitted).
25 The 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.
21 12
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methodology as a rule at the June 2017
Board meeting as support for notice and
comment procedures being required.
However, as articulated in the Office of
General Counsel’s analysis 26 cited
above, the APA does not require noticeand-comment procedures for all rules.
Instead, a broad variety of agency
actions fall under the APA’s definition
of ‘‘rule,’’ only some of which require
notice and comment. As the Office of
General Counsel’s analysis states ‘‘The
APA’s definition of a rule is very broad
and applies to ‘nearly every statement
an agency’ may make. However,
determining whether the APA notice
and comment requirements apply to a
particular agency action or rule is a
separate inquiry.’’ By referring to the
OTR as a rule, the Board was not
suggesting notice-and-comment
procedures are required but was instead
calling the OTR what it is under the
APA: A rule that does not require
notice-and-comment procedures.
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III. Proposed OTR Methodology
Comments and Responses
a. Allocate Examination and
Supervision of Federal Credit Unions as
50 Percent Insurance Related
Approximately half of the comments
received addressed the first principle
that examination and supervision of
federal credit unions should be treated
as 50 percent insurance-related. Those
that did address it were split.
Commenters supporting the proposed
principle argued that it appeared to be
a rough approximation of the time the
NCUA should spend between its
prudential and insurance-related
responsibilities with respect to federal
credit unions. One commenter
specifically opined that the NCUA’s
analysis appeared reasonable and that
the principle would be simple to apply.
Another commenter supported the
proposed principle, but suggested that it
may be ‘‘too modest’’ of an assessment
of the time the NCUA devotes to
prudential supervision of federal credit
unions.
Commenters that opposed the
proposed principle argued that the
Board’s policy rationale is not clearly
set out in the notice and, therefore, the
change in policy appears to be without
‘‘a reasoned basis.’’ Some of these
commenters also argued that the
proposed principle is arbitrary,
capricious, and not supported by
substantial evidence. One commenter
stated that it was not based on
observable and measurable data inputs.
The same commenter argued that the
26 Id.
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principle reflects the NCUA’s position
of ‘‘how things should be’’ but not how
things are in reality. Another
commenter argued that the principle
ignores the Federal Deposit Insurance
Corporation’s (FDIC) actual practices,
citing the following: (1)
Pronouncements from the FDIC
asserting its primary focus and intention
is to protect the insurance fund by
ensuring the safety and soundness of its
member institutions; (2) conducting
annual joint examinations with state
regulators in many cases rather than
alternating examinations, suggesting the
FDIC considers protection of the
insurance fund through its own
examinations as a critical responsibility;
and (3) the FDIC conducts a substantial
and increasing amount of offsite
monitoring, examination and
supervision on all its institutions for
safety and soundness purposes on an
ongoing basis. Several other
commenters recommended that the
Board take additional time to study this
assumption to develop a more
empirically supportable principle and
that the Board continue to refine this
principle in the future to be more
accurate.
The Board believes the rationale for
the first principle is supportable and
easy to understand. It attributes equal
weight to each of NCUA’s dual roles as
regulator and insurer of federal credit
unions. It creates a cost sharing similar
to what would result if NCUA
conducted alternating examinations of
federal credit unions, acting as the
regulator during one exam cycle and the
insurer the next. Additionally, joint
examinations between the regulator and
insurer are generally staffed equally,
resulting in a 50–50 time split. Whether
alternating examinations or
participating in joint examinations, the
examination and supervision time of the
insurer still ends up approximately 50
percent. As noted in the request for
comment, it is consistent with the
alternating examinations the FDIC and
state regulators conduct for insured
state-chartered banks, as mandated by
Congress.
As one commenter noted, the FDIC
prominently asserts its primary focus is
to protect its insurance fund by ensuring
the safety and soundness of its member
institutions, in many cases through
annual joint examinations. Like the
FDIC, the NCUA’s primary focus in its
role as insurer is to protect the Share
Insurance Fund. However, unlike the
FDIC, the NCUA also has chartering
authority. Since the NCUA examination
staff perform all examinations of federal
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55647
credit unions,27 the NCUA as insurer
can fully rely on all federal credit union
examination reports for insurance
purposes where the FDIC deals with
many different state regulators. The
FDIC conducts annual/joint
examinations where it perceives
elevated risks. The NCUA also increases
examination activity where it perceives
elevated risk and may choose to
increase supervision for federal credit
unions or conduct joint examinations
for federally insured state-chartered
credit unions. Further, the NCUA
conducts a substantial amount of offsite
monitoring and supervision of both
federal credit unions and federally
insured state-chartered credit unions,
increasing this oversight when risk
warrants. All examination and
supervision time, both onsite and
offsite, for all credit unions, whether
they are healthy or troubled, is covered
by the methodology in the workload
hours portion of the calculation. This is
consistent with Principle 1 and the
FDIC model.
Using a principle-based approach
simplifies the OTR calculation and
reduces the resources needed to
administer it. Further, it reflects that the
NCUA as insurer 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.
Importantly, the simplified
assumption of equal sharing reflects the
offsetting benefits for each role under a
framework emulating an alternating
examination program like the one used
by FDIC. In other words, 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. It reflects an equal sharing
of supervisory responsibilities between
the 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.
b. Allocate Examination and
Supervision of All Others as 100 Percent
Insurance Related
Few commenters addressed the
second principle that all time and costs
the NCUA spends supervising or
evaluating the risks posed by federally
insured state-chartered credit unions or
other entities the NCUA does not
charter or regulate (for example, third27 The Consumer Financial Protection Bureau
also performs compliance examinations on credit
unions with assets greater the $10 billion.
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party vendors and CUSOs) should be
treated as 100 percent insurance related.
The majority of responsive comments
supported the proposed principle. One
commenter recommended that the
Board allocate the supervision of CUSOs
as 50 percent prudential regulatory and
50 percent insurance related. Another
commenter recommended that the
Board allocate CUSOs and third-party
supervision as 25 percent prudential
regulatory and 75 percent as insuredrelated. The commenter reasoned that,
since the safety and soundness of
federal credit unions is partially
allocated to Title I, it would follow that
some hours for CUSOs and third-party
reviews should reflect the NCUA’s
safety and soundness responsibility as
charterer and prudential regulator.
Additionally, at least one commenter
opposed the proposed second principle,
arguing the Board has not explained its
policy rationale clearly in the notice
and, therefore, the change in policy is
without a ‘‘reasoned basis.’’
The Board disagrees that it has not
explained its policy rationale. The
NCUA has specifically defined its role
with federally insured state-chartered
credit unions and other entities the
NCUA does not charter or regulate,
including CUSOs. The NCUA does not
charter, nor is it the prudential regulator
of, federally insured state-chartered
credit unions; therefore, the NCUA’s
role is solely as the insurer. Further, the
Board does not believe singling out
CUSO activities is necessary or
appropriate under the first or second
proposed principle. Doing so would
revert back to the prior approach of
more particular designation of
examination activities as insurance or
regulatory based, which the proposed
principles are designed to lessen for the
reasons discussed above.
A CUSO itself is at times subject to a
limited review during the examination
of a federally insured credit union. This
review generally covers the
documentation required by NCUA or
state regulation that credit unions must
execute prior to investing in or lending
to a CUSO. Examiners may also assess
the risk a CUSO’s activities pose to the
credit union as part of the credit union
examination. The CUSO related time
within the scope of the examination and
supervision of federally insured credit
unions is captured under Principle 1 for
federal credit unions and Principle 2 for
federally insured state-chartered credit
unions. The time designated for
separate, stand-alone reviews of CUSOs
and third-party vendors is accounted for
separately in the NCUA’s workload
budget and is covered by Principle 2
only. The Board has no direct regulatory
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authority with respect to CUSOs and
there is no support to allocate time
specifically designated for CUSO and
third-party vender reviews as anything
other than the NCUA’s role as insurer.
c. Allocate Time and Costs Related to
the NCUA’s Role as Charterer and
Enforcer of Consumer Protection and
Other Non-Insurance Based Laws
Governing the Operations of Credit
Unions as Zero Percent Insurance
Related
Only a few commenters addressed the
third proposed principle that all time
and costs related to the NCUA’s role as
charterer and enforcer of consumer
protection and other non-insurance
based laws governing the operations of
credit unions should be treated as not
insurance related. Each commenter to
address the proposed principle favored
the Board’s approach but did not offer
substantive commentary.
d. Allocate Administration of the Share
Insurance Fund as 100 Percent
Insurance Related
Only a few commenters addressed the
fourth principle that time and costs
related to the NCUA’s role in
administering federal share insurance
and the Share Insurance Fund should be
treated as 100 percent insurance related.
Each commenter to address the
proposed principle favored the Board’s
approach but did not offer substantive
commentary.
e. Soliciting Public Comment on the
OTR Methodology
Less than half of the commenters
addressed whether the Board should
solicit public comment on the OTR
methodology every three years and
whenever the Board seeks to change the
OTR methodology. All of those
commenting favored soliciting public
comment. One commenter
recommended that the Board adopt a
standardized five-year review period for
the calculation. Another commenter
recommended that the Board also solicit
public comment on the OTR
methodology for any year the OTR
changes more than two percent. A third
commenter recommended that the
Board codify the OTR methodology as
part of the NCUA’s regulations,
believing this would subject the OTR
methodology to the notice-and-comment
requirements of the APA. A fourth
commenter recommended that the
Board include the OTR methodology in
the NCUA’s rolling regulatory review
under the Economic Growth and
Regulatory Paperwork Reduction Act of
1996. Finally, another commenter
argued that the Board should subject the
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OTR methodology to periodic
verification from an independent third
party.
The Board is committed to seeking
public comment on the OTR
methodology every three years or when
there are changes to the methodology.
The Board reiterates that changes to the
methodology means changes to the four
principles or abandonment of the
principles in favor of another
methodology, not changes to the
NCUA’s organizational structure. The
results of the calculation are not static
and will change from year to year based
on the contemporaneous information
from the workload and financial
budgets. The results are updated and
reviewed annually and are applied to
actual expenses. The Board does not
agree that the OTR application should
be submitted for public comment,
regardless of whether it results in a
material year-over-year change to the
rate. Changes to the OTR output would
be a result of the methodology’s
application to organizational changes or
internal resource allocations, not a
result of changes to the methodology.
Even if the Board wanted to subject
output changes to notice-and-comment,
the time required for such processes
would almost certainly impede the
Board’s budget processes.
The Board acknowledges that
application of the current methodology
has resulted in material changes in the
OTR from year to year. This was a factor
the Board considered in simplifying the
calculations and the Board expects that
the proposed methodology should result
in less volatility in OTR outputs going
forward. As noted in the legal analysis
contained in the Request for Comment,
the NCUA’s position remains that the
OTR methodology is not subject to the
APA’s notice-and-comment
requirements. The Board maintains that
the same is true with respect to its
application. Further, this conclusion
does not depend on whether the OTR
methodology is included in the NCUA
regulations. Whether a Board action is
codified does not determine whether it
is subject to notice-and-comment
processes.28
Regarding subjecting the proposed
methodology to periodic verification
from an independent third-party, the
Board will consider the cost versus the
benefits of such a review. Given the
greatly simplified methodology, such
reviews may provide limited benefits.
28 Interested parties can review the NCUA’s
position on this in the opinion found on the
NCUA’s Web site at the following address: https://
www.ncua.gov/Legal/Documents/Opinion/OL20150818.pdf.
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f. Maintaining Current Staff Delegations
Only a few commenters addressed
whether the Board should maintain the
current staff delegation to administer
the OTR methodology but require public
board briefings every year. Each
commenter to address the proposal to
maintain current staff delegations
favored the Board’s approach but did
not offer substantive commentary.
g. Additional Comments
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50/50 Split Between OTR and Operating
Fees
One commenter opposed the OTR
methodology and recommended the
NCUA’s operating budget be funded 50
percent by requisition from the Share
Insurance Fund via the OTR and 50
percent from federal credit union
operating fees. This commenter
suggested that this was the Board’s longstanding approach to funding the
NCUA’s operating budget prior to the
current OTR methodology. Another
commenter, however, indicated that a
majority of its member credit unions
would not favor such an approach.
As stated in the Request for Comment,
the Board does not believe it is
transparent or appropriate to set the
OTR at any level, such as 50 percent,
without a reasoned basis to demonstrate
that level of agency operating costs are
properly allocated to Title II activities.
Even if it was, the Board thinks such a
rough justice approach is unnecessarily
simple while providing negligible, if
any, additional administrative ease. The
Board believes the principles-based
methodology adopted in this Final
Notice provides a reasoned basis for the
OTR and is fair and equitable. The
proposed new OTR methodology also
provides a good balance between
understandability, ease of
administration, and precision.
Revise or Replace
At least one commenter strongly
opposed the proposed OTR
methodology in its entirety, arguing that
the Board should revise and refine, not
replace, the current methodology. Some
refinements this commenter suggested
included a clearer distinction between
insurance and safety and soundness
activities.
The Board does not agree that further
distinction between insurance and
safety and soundness is warranted. The
proposed new OTR methodology revises
the former OTR methodology and
addresses concerns raised in the first
request for comment as well as this one
related to the distinction between
insurance related and safety and
soundness. The NCUA recognizes that
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safety and soundness is not the sole
domain of the insurer. Rather, both the
prudential regulator and insurer have
responsibilities for safety and
soundness. In the June 2017 Request for
Comment, the NCUA acknowledged 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. To better
reflect that the prudential regulator and
insurer both have responsibilities for
safety and soundness, the Board is
adjusting the OTR methodology
accordingly. This is reflected in the first
principle of the proposed new
methodology. Further, the old
methodology also recognized this to
some extent through the Imputed SSA
Value component.
Another commenter also
recommended retaining the old
methodology, stating it is an objective,
formula-based model that uses
measurable data inputs, which
prioritizes fairness, accuracy, and
equity. Instead of replacing the old
methodology, the commenter suggested
the Board refine the examiner time
survey and reevaluate the Imputed SSA
Value. The Board disagrees with this
recommendation and favors the
proposed new methodology.
The proposed new methodology,
though simpler, is still objective and
formula driven. The examiner time
study and the assignment of time as
insurance, insurance regulatory, and
consumer regulatory has been an area of
great debate and the Board does not
believe any amount of refining of these
categories will alleviate the criticism
and confusion around the process. The
same criticism and confusion pertains to
the ‘‘Imputed SSA Value.’’ Without 100
percent cooperation from the state
supervisory authorities in providing
detailed time studies and budget
information, the NCUA cannot calculate
a more accurate estimate. There is also
stakeholder confusion regarding the
hypothetical ‘‘as if’’ scenario that
assumes the NCUA would have to do all
the examination and supervision work.
The proposed new methodology
eliminates the examiner time study and
the ‘‘Imputed SSA Value’’ to eliminate
the confusion caused by each.
Therefore, further refinements or
changes to either are unnecessary at this
time.
One commenter recommended
establishing a Credit Union Advisory
Council that would discuss, among
other topics, the OTR. This request goes
beyond the scope of the Request for
Comment on the OTR.
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Consistency With OCC, Segregating
Functions
At least one commenter
recommended that the Board adopt a
methodology that more closely
resembles the national banking model.
The commenter suggested that the
budget of the Office of the Comptroller
of the Currency (OCC) for supervising
national banks is entirely separate from
the FDIC’s budget for insuring bank
deposits and recommended that the
Board adopt a similar approach for the
supervision of federal credit unions.
Similarly, another commenter indicated
that a majority of its member credit
unions favor the Board separating the
NCUA’s charting and supervision of
federal credit unions from its insurancerelated supervisory functions.
The Board thinks using this approach
would undermine the efficiencies
Congress intended to create. The NCUA
is both a regulator and insurer under the
organization of a single federal agency
with one budget. As noted in the
January 2016 Request for Comment, in
Title II of the Act, Congress established
the Share Insurance Fund and housed it
within the NCUA for administration by
the Board. Congress envisioned
efficiencies from this arrangement, as
well as the NCUA’s partnership with
state regulators. While the NCUA does
not have two distinctly separate
budgets, it strives to allocate the
appropriate amount to each activity
through the OTR. In contrast, the OCC
has no authority regarding the Deposit
Insurance Fund, which is managed by
the FDIC. The FDIC manages the
Deposit Insurance Fund and has no
primary regulatory responsibility for
federally chartered banks. They have
completely separate budgets because
they are distinct federal agencies.
The NCUA also notes that the funding
of the banking regulatory system has
also been the subject of criticism. For
example, in its July 2001 Report,
Reforming the Funding of Bank
Supervision, the Comptroller of the
Currency concluded the funding system
was not fair. The report states:
Under the present system, national banks
pay the full costs of their supervision,
through assessments levied on them by the
Office of the Comptroller of the Currency
(OCC), the federal agency that charters and
supervises national banks. State-chartered
banks, by contrast, pay only for that small
fraction of their supervision that is provided
by state supervisory agencies. The
predominant part of state bank supervision
actually comes from two federal agencies, the
Federal Reserve System (FRS) and the
Federal Deposit Insurance Corporation
(FDIC). These federal agencies perform
exactly the same supervisory functions for
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state banks as the OCC performs for national
banks. The main difference is that the FRS
and the FDIC do not assess state banks for the
costs of their supervisory services.29
The NCUA Board seeks to be as fair
as possible in the funding of its
Operating Budget and does not believe
the banking industry model is
appropriate for credit unions.
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Cost Savings Measures
One commenter recommended that
the Board adopt cost saving measures to
further reduce the OTR. Those measures
included accepting the results of
validated Asset Liability Management
models of credit unions subject to
supervision by the Office of National
Examinations and Supervision (ONES)
for supervisory stress testing purposes.
Suggestions regarding cost saving
measures are aimed at the NCUA’s
overall budget, not at the OTR
methodology. The budgeted amount is
beyond the scope of the Request for
Comment. While a lower budget may
reduce the amount charged to the Share
Insurance Fund through the OTR, this
effect would not be a function of
changes to the OTR methodology, which
was the focus of the request for
comment.
This commenter also recommended
that the Board investigate options to
improve the financial performance of
the Share Insurance Fund in order to
use investment gains to generate
additional earnings. This comment also
goes beyond the scope of the OTR
methodology. Further, Title II of the Act
explicitly limits the permissible
investment vehicles for the Share
Insurance Fund.30 Consistent with its
role as a steward of public insurance
funds, the NCUA adheres to the strict
investment objectives of ‘‘safety,
liquidity, and yield (i.e., income)’’ and
in that order of priority. Only after
ensuring safety of principal and
establishing that maturities coincide
with the timing of planned and
contingent funding needs are the
income objectives of the portfolio
considered. In accordance with the U.S.
Treasury’s policy for Government
Investment Accounts, the schedule of
portfolio maturities coincides with the
Agency’s anticipated disbursement
estimates (that is, our projected funding
needs) and all purchases are intended to
be held to maturity. The NCUA is bound
by U.S. Treasury Operating Circular
29 Comptroller of the Currency, Reforming the
Funding of Bank Supervision (2001), available at
ttps://www.occ.gov/static/news-issuances/newsreleases/2001/nr-occ-2001-67-paper.pdf.
30 12 U.S.C. 1783(c).
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requirements, which states in section
4060:
A Program Agency for a Government
Investment Account shall not engage in
investment practices that result in windfall
gains and losses, including but not limited to
security day-trading and large restructuring
of investment portfolios to take advantage of
short-term Interest Rate fluctuations.
One commenter recommended that
the Board explore ways to work more
closely with state supervisory
authorities to increase efficiencies and
reduce costs. The Board agrees that
working with state supervisory
authorities reduces costs and increases
efficiencies for both the NCUA and state
supervisory authorities. Therefore, as
stated in the Request for Comment, the
Board is careful to build efficiencies
related to the NCUA’s dual role as
charterer and prudential regulator of
federal credit unions and insurer of
federal credit unions and federally
insured state-chartered credit unions
wherever possible. As part of the
Examination Flexibility Initiative, the
Board established a joint NCUA-State
Regulator working group that has been
active in 2017 in exploring ways to
further improve coordination and
cooperation.
Budget Allocations
Two commenters requested
clarification on how the NCUA’s
proposed reorganization will impact
budget allocations. One commenter
specifically noted that 13 percent of the
Office of Consumer Financial Protection
and Access’ budget is allocated from the
Share Insurance Fund and that the
proposed reorganization could have a
substantial impact on that assumption.
The NCUA’s reorganization affects the
OTR’s application, not the OTR
methodology. The Board is approving
the allocation principles for the OTR
methodology. These principles are then
dynamically applied to the activities
and related costs of the agency—they
are not necessarily specific to individual
offices or the agency’s organization. For
example, costs associated with federal
credit union examinations and
supervision are aggregated. Therefore, a
reduction from five regions to three
regions will not affect the budget
allocation.
Similarly, the Office of Small Credit
Union Initiatives’ transition to the new
Office of Credit Union Resources and
Expansion and the assumption of the
NCUA’s chartering function, formerly in
the Office of Consumer Financial
Protection and Access, does not
materially impact budget allocation. The
majority of the Economic Development
Specialists from the old Office of Small
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Credit Union Initiatives are being
converted to Consumer Access Analysts
in the new Office of Credit Union
Resources and Expansion. The
Consumer Access Analysts from the
Office of Consumer Financial Protection
and Access will also be transferred to
the new Office of Credit Union
Resources and Expansion. The change
in the composition of the work of the
reorganized offices will affect their
allocation calculation but not how the
underlying costs are allocated based on
the Board approved principles. The net
result is a reallocation of the agency
resources from the Office of Consumer
Financial Protection and Financial
Access to the new Office of Credit
Union Resources and Expansion. The
same principles will apply to the
resources transferring to the new office
based on their roles.
One commenter also recommended a
number of changes to the Board’s
proposed budget allocations. The
commenter recommended that the
Board use a 50 percent allocation from
the Share Insurance Fund for human
resources and Board functions. For all
other program offices, the commenter
suggested using the 60 percent
allocation from the Share Insurance
Fund generated by the hypothetical
application of the proposed OTR
methodology in the June 2017 notice.
The Board does not agree that a 50
percent allocation should be applied to
its budget and the human resources
budget. As noted in the Request for
Comment, the NCUA’s remaining offices
do not have a specific allocation
calculation because they design and
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. Further, 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 offices’
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 calculation.
The Board also notes the 60 percent
allocation, referred to by the
commenter, was illustrative based on
2017 budget information and is
therefore a methodology output, not a
principle in itself. It is not a fixed
allocation and will change from year to
year based on contemporary data and
the applicable calculation in the
proposed new OTR methodology.
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Another commenter recommended
that the Board explore how other
insurance industries allocate expenses
and adopt a 5-year rolling average of
actual costs when assessing future fees.
However, share/deposit insurance is
unique from other insurance industries
as it only insures member/customer
deposits in financial institutions. In the
United States, there are three deposit
insurers, the NCUA, the FDIC, and
American Share Insurance. Both the
NCUA and FDIC are backed by the full
faith and credit of the United States
while American Share Insurance is a
private insurer. Additionally, neither
the FDIC nor American Share Insurance
have NCUA’s chartering authority.
The NCUA is responsible for both
regulating and insuring credit unions
and has different accounting/cost
allocation needs. NCUA share insurance
is not risk-based. There are numerous
other risk-based types of insurance
companies operating in the United
States, covering such things as real
estate, automobiles, and health care.
Some insurance companies offer some
or all these business lines. Costs are
generally allocated by business line or
operating company. The NCUA’s cost
allocation approach incorporates sound
cost accounting principles and
commercial practices. However,
additional analysis of insurance
companies will not provide meaningful
information given the unique role of the
NCUA as regulator and insurer and
other differences between private sector
insurance models and the NCUA as a
government agency.
Further, using a 5-year rolling average
of actual costs to set expenses would
add a layer of complexity to the OTR
calculation. Adding complexity is not
consistent with the Board’s goal of
simplifying the calculation to improve
transparency. Additionally, a 5-year
rolling average would not support
contemporary needs based on
contemporary data because it would be
affected by past events, either increasing
or decreasing costs, over a period of five
years. The Board believes using the
proposed new methodology is more fair
and stable.
Negative Impact on Federal Credit
Unions
Several commenter’s stated the
proposed new methodology would have
a negative impact on federal credit
unions. One commenter was
particularly concerned with the impact
on small federal credit unions. While
another commenter suggested a threeyear phase-in period if adopted to
mitigate the impact this change will
have on federal credit unions.
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The NCUA staff analyzed the impact
the change in methodology would have
on federal credit union Operating Fees
using data from the 2017 budget as
discussed in the 2017 Request for
Comment. The results of the analysis
indicate the Operating Fee for federal
credit unions with asset size $1 million
and above, the increase would be less
than one basis point of average assets.
Additionally, credit unions under $1
million in assets do not pay an
Operating Fee. While the Operating Fee
will increase when the OTR decreases,
this has been true during the OTR’s
entire existence.
Simplicity Over Accuracy and Equity
Several commenters stated the
proposed new methodology favors
simplicity over accuracy and equity.
However, the Board believes the
proposed method strikes the correct
balance. The results of the proposed
new methodology, using 2017 budget
data, fall well within the historical
range of the OTR under the old method.
The average OTR since the Board
adopted the old methodology is 60.7
percent, very similar to the results of the
proposed new methodology applied to
2017 budget numbers. Table 1 illustrates
the historical OTR trend.
TABLE 1
OTR
(%)
OTR year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
......................................
59.8
57.0
57.0
53.3
52.0
53.8
57.2
58.9
59.3
59.1
69.2
71.8
73.1
67.7
One of the main criticisms of the old
OTR methodology is that it is not
transparent. This stems from the
complexity of the calculation and was
discussed in the Request for Comment.
Although all information related to the
old OTR calculation is publicly
available, the Board acknowledged that
an obstacle to transparency was the
complexity of the methodology. In an
effort to address the transparency
concern, the Board is adopting the
simplified OTR methodology. While
still formula driven, the proposed new
methodology provides for a simpler
approach that remains comprehensive,
fair, and equitable. The Board believes
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55651
the proposed new methodology, though
simplified, continues to provide an
accurate allocation of agency costs.
IV. Final Action
Based on the comments and the
NCUA’s internal assessment, the Board
is adopting the new OTR methodology
as proposed in the June 2017 notice.
These changes will reduce both the
complexity of the OTR methodology
and the resources needed to administer
it, while remaining fair and equitable to
both federal credit unions and federally
insured state-chartered credit unions.
The final OTR methodology is fully
described below.
V. Details of the OTR Methodology
a. Methodology
The OTR methodology incorporates
the following underlying principles for
allocating agency operating costs:
1. Time spent examining and
supervising federal credit unions is
allocated as 50 percent insurance
related.31
2. All time and costs the NCUA
spends supervising or evaluating the
risks posed by federally insured statechartered credit unions or other entities
the NCUA does not charter or regulate
(for example, third-party vendors and
CUSOs) is allocated as 100 percent
insurance related.32
3. Time and costs related to the
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 zero percent insurance related.33
31 The 50 percent allocation mathematically
emulates an examination and supervision program
design where the NCUA would alternate
examinations, and/or conduct joint examinations,
between its insurance function and its prudential
regulator function if they were separate units within
the NCUA. It reflects an equal sharing of
supervisory responsibilities between the 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.
It is consistent with the alternating examinations
the FDIC and state regulators conduct for insured
state-chartered banks as mandated by Congress.
Further, it reflects that the 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.
32 The NCUA does not charter state-chartered
credit unions nor serve as their prudential
regulator. The 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 are allocated as 100 percent
insurance related.
33 As the federal agency with the responsibility to
charter federal credit unions and enforce noninsurance related laws governing how credit unions
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4. Time and costs related to the
NCUA’s role in administering federal
share insurance and the Share Insurance
Fund are allocated as 100 percent
insurance related.34
These four principles represent the
principles the Board has committed to
subject to public comment every three
years and in the event it proposes a
change to one or more of the principles.
The 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 detailed below.
The NCUA will not submit the
methodology’s applications or outputs
for public comment.
b. Application
The Steps below describe how the
four principles above are applied.
Unlike the principles themselves, the
Board will not subject the application of
the principles or the OTR outputs to
notice-and-comment processes.
Step 1—Workload Program
Annually, the NCUA develops a
workload budget based on the NCUA’s
examination and supervision program to
carry out the agency’s core mission. The
workload budget reflects the 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 insurance related mission
program activities.
asabaliauskas on DSKBBXCHB2PROD with NOTICES
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’s
Strategic Plan. The Operating Budget is
based on agency priorities and
initiatives that drive resulting resource
operate in the marketplace, the NCUA resources
allocated to these functions are properly assigned
to its role as charterer and prudential regulator.
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.
34 The 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 the NCUA’s role as insurer.
VerDate Sep<11>2014
18:57 Nov 21, 2017
Jkt 244001
needs and allocations. Information
related to the NCUA’s budget process,
including details on the Board-approved
Operating Budgets, is available on the
agency’s Web site.35
The agency achieves its primary
mission through the examination and
supervision program. The percentage of
insurance-related workload hours
derived from Step 1 represents the main
allocation factor used in Step 2 and is
applied to the total operating budget for
the examination and supervision
programs to calculate the insurancerelated costs of the offices conducting
field work (currently the Regions and
ONES). A few agency offices have roles
distinct enough to warrant their own
allocation factors, which are developed
by applying the four factors described
above to their respective activities. Each
of these offices tracks their activities
annually to determine their factors.
These factors are then applied to the
respective offices’ operating budgets to
determine their insurance-related costs.
A weighted average allocation factor,
calculated by dividing the aggregate
insurance-related costs for the field
offices conducting the examination and
supervision program and the agency
offices with their own unique allocation
factors by their aggregate total operating
budgets, is applied to the central offices
that design or oversee the examination
and supervision program or support the
agency’s overall operations. This factor
is then applied to the aggregate
operating budgets for the remaining
offices. As such, the proportion of
insurance-related activities for these
offices corresponds to that of the
mission offices. The NCUA’s total
insurance related costs are calculated by
summing the insurance cost calculated
for the field offices, the offices with
unique allocations factors, and the
insurance cost for all other remaining
NCUA offices.
Step 3—Calculate the OTR
The OTR represents the percentage of
the NCUA Operating Budget funded by
a transfer from the Share Insurance
Fund.36 The OTR is calculated by
dividing the total insurance-related
costs determined in Step 2 by the
NCUA’s total operating budget.
By the National Credit Union
Administration Board on November 16, 2017.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2017–25222 Filed 11–21–17; 8:45 am]
BILLING CODE 7535–01–P
NATIONAL TRANSPORTATION
SAFETY BOARD
Sunshine Act Meeting
9:30 a.m., Tuesday,
December 12, 2017.
TIME AND DATE:
NTSB Conference Center, 429
L’Enfant Plaza SW., Washington, DC
20594.
PLACE:
STATUS:
The one item is open to the
public.
MATTERS TO BE CONSIDERED:
57238 Marine Accident Report—
Sinking of US Cargo Vessel SS El
Faro, Atlantic Ocean, Northeast of
Acklins and Crooked Island,
Bahamas, October 1, 2015.
Telephone: (202)
314–6100.
The press and public may enter the
NTSB Conference Center one hour prior
to the meeting for set up and seating.
Individuals requesting specific
accommodations should contact
Rochelle McCallister at (202) 314–6305
or by email at Rochelle.McCallister@
ntsb.gov by Wednesday, December 6,
2017.
The public may view the meeting via
a live or archived webcast by accessing
a link under ‘‘News & Events’’ on the
NTSB home page at www.ntsb.gov.
Schedule updates, including weatherrelated cancellations, are also available
at www.ntsb.gov.
NEWS MEDIA CONTACT:
Candi
Bing at (202) 314–6403 or by email at
bingc@ntsb.gov.
FOR MORE INFORMATION CONTACT:
Peter
Knudson at (202) 314–6100 or by email
at peter.knudson@ntsb.gov.
FOR MEDIA INFORMATION CONTACT:
Dated: November 20, 2017.
LaSean R. McCray,
Alternate Federal Register Liaison Officer.
[FR Doc. 2017–25417 Filed 11–20–17; 4:15 pm]
BILLING CODE 7533–01–P
35 https://www.ncua.gov/About/Pages/budget-
strategic-planning/supplementary-materials.aspx.
36 The percentage of actual expenses funded by
the Share Insurance Fund as they are incurred each
month.
PO 00000
Frm 00100
Fmt 4703
Sfmt 9990
E:\FR\FM\22NON1.SGM
22NON1
Agencies
[Federal Register Volume 82, Number 224 (Wednesday, November 22, 2017)]
[Notices]
[Pages 55644-55652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25222]
=======================================================================
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NATIONAL CREDIT UNION ADMINISTRATION
Overhead Transfer Rate Methodology
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final notice.
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SUMMARY: In June 2017, the NCUA Board (Board) published a notice and
request for comment on proposed changes to its Overhead Transfer Rate
(OTR) methodology and sought industry comments on the proposed
changes.\1\ This Final Notice discusses the comments received and
provides the Board's response to the comments. This Final Notice also
sets forth the new OTR methodology the Board has chosen to adopt after
consideration of the public comments received.
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\1\ Request for Comment Regarding Revised Overhead Transfer Rate
Methodology, 82 FR 29935 (June 30, 2017).
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:
Table of Contents
I. Background and Legal Authority
II. Legal Authority Comments and Responses
III. Proposed OTR Methodology Comments and Responses
IV. Final Action
V. Details of the OTR Methodology
I. Background and Legal Authority
The 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. Pursuant to
the Act, the 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). The NCUA is responsible for
ensuring federally insured credit unions operate safely and soundly and
comply with all applicable laws and regulations within the NCUA's
jurisdiction.\2\ In so doing, the agency mitigates risk to the Share
Insurance Fund and prevents taxpayer-funded bailouts. 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.'' \3\ This includes protecting member
rights and deposits.
---------------------------------------------------------------------------
\2\ In coordination with State Supervisory Authorities with
respect to federally insured state-chartered credit unions.
\3\ https://www.ncua.gov/About/Pages/Mission-and-Vision.aspx.
---------------------------------------------------------------------------
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
in the fall of 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
``for such administrative and other expenses incurred in carrying out
the purposes of [Title II of the Act] as [the Board] may determine to
be proper''; \5\ and (2) ``fees and assessments (including income
earned on insurance deposits) levied on insured credit unions under
[the Act].'' \6\ 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.
---------------------------------------------------------------------------
\4\ Some costs are directly charged to the Share Insurance 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\ 12 U.S.C. 1783(a).
\6\ 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.
---------------------------------------------------------------------------
To allocate agency expenses between these two primary funding
sources, the NCUA uses the OTR. The OTR represents the formula the 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.\7\ Two
statutory provisions directly limit the Board's discretion with respect
to Share Insurance Fund requisitions for the 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.\8\ Second, the NCUA may not fund its entire
Operating Budget through charges to the Share Insurance Fund.\9\ The
NCUA has not imposed additional policy or regulatory limitations on its
discretion for determining the OTR.
---------------------------------------------------------------------------
\7\ 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 Board's
methodology for determining the aggregate amount of Operating Fees
was discussed in a separate Federal Register publication. 81 FR 4674
(Jan. 27, 2016).
\8\ 12 U.S.C. 1783(a).
\9\ 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).
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[[Page 55645]]
In 1972, the Government Accountability Office recommended the NCUA
adopt a method for properly allocating Operating Budget costs--that is,
the portion of the NCUA's budget funded by requisitions from the Share
Insurance Fund and the portion covered by Operating Fees paid by
federal credit unions.\10\ The 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.
---------------------------------------------------------------------------
\10\ http://www.gao.gov/assets/210/203181.pdf.
---------------------------------------------------------------------------
The NCUA has employed various allocation methods over the years,
with the methodology adopted in 2003. For a chronological 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 prior
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.
In January of 2016, the Board voluntarily published its OTR
methodology in the Federal Register and invited industry comment.\11\
In June 2017, the Board proposed changes to the OTR methodology in the
Federal Register and requested comments on the proposed changes.\12\
---------------------------------------------------------------------------
\11\ Request for Comment Regarding Overhead Transfer Rate
Methodology, 81 FR 4804 (Jan. 27, 2016).
\12\ Request for Comment Regarding Revised Overhead Transfer
Rate Methodology, 82 FR 29935 (June 30, 2017). The OTR does not
require notice-and-comment procedures. The NCUA's legal analysis
with respect to the OTR and Administrative Procedure Act processes
is available at the following Web page: https://www.ncua.gov/Legal/Documents/Opinion/OL2015-0818.pdf.
---------------------------------------------------------------------------
Within the 60-day comment period, the NCUA received 26 comment
letters on the OTR methodology. The commenters included federal credit
unions, federally insured state-chartered credit unions, national
credit union trade organizations, state leagues, state supervisory
authorities, and a credit union service organization (CUSO).
II. Legal Authority Comments and Responses
In response to its initial OTR notice in January 2016, the 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 of the 2016 commenters stated the agency
does not have authority or discretion to establish and determine the
OTR. Some commenters asserted that the NCUA lacks the legal authority
to use the Share Insurance Fund to cover costs of operating the agency.
Other commenters claimed the 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 the 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.
Finally, some commenters insisted that the Board must use APA notice-
and-comment processes to establish the OTR. To the extent commenters
explained their positions, they read various limitations into the
provisions the NCUA cites in Section I above and the response below and
pointed to the Act's legislative history.
In response to the June 2017 Request for Comment the NCUA received
a number of comments that reiterated the substance of or referenced
points made in the comments received in response to the January 2016
Request for Comment. While helpful, the comments did not advocate
materially new legal arguments or substantively expand on ones made in
response to the January 2016 Request for Comment. Accordingly, the
substance of the Board's responses to comments largely tracks those
published in the June 2017 notice, with minor alterations. The Board
believes this will be helpful to stakeholders in addressing questions
they may have by once again fully explaining the NCUA's legal analysis
set forth above.
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 the 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 the NCUA's reliance on Title I and State Supervisory
Authority examinations and reports should accrue to the benefit of the
Share Insurance Fund. Having considered these comments, the NCUA
maintains that a plain reading of the Act, as described in section I
above and in both the January 2016 and June 2017 notices, supports the
agency's legal authority and broad discretion in allocating operating
costs. As the Board previously stated, the Act's plain language does
not require an analysis of the legislative history.\13\ 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.
---------------------------------------------------------------------------
\13\ See, e.g., Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450
(2002).
---------------------------------------------------------------------------
a. Allocation of the Cost Savings From the NCUA's Dual Roles
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. These commenters similarly stated that the
Act places requirements on the NCUA to use state regulator examinations
and reports to the maximum extent feasible.
As the Board has previously explained, Title II of the Act, 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. With respect to use of state regulator exams and
reports, the Board is careful to build efficiencies wherever reasonable
in light of the 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. This
ensures the NCUA uses state regulator examinations and reports to the
maximum extent feasible for purposes of insurance. Efficiencies gained
from the 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 the
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 the 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 the NCUA from allocating the costs of the
``share insurance purposes'' portion of federal credit union
examinations to
[[Page 55646]]
the Share Insurance Fund.\14\ The Board thus disagrees with commenters
that argued the Act requires the cost-savings of the NCUA's dual roles
to accrue specifically to the Share Insurance Fund.
---------------------------------------------------------------------------
\14\ 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.
---------------------------------------------------------------------------
b. 12 U.S.C. 1790--Prohibition of Discrimination Based on Charter Type
With respect to 12 U.S.C. 1790, the Board agrees with commenters
stating that this provision should inform the NCUA's interpretation of
Title II so that it consciously avoids discrimination against federally
insured state-chartered credit unions to the benefit of federal credit
unions.\15\ However, the Board does not believe that either the prior
OTR process or the one adopted in this Final Notice discriminates
against federally insured state-chartered credit unions or federal
credit unions to the benefit of the other.
---------------------------------------------------------------------------
\15\ 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, requisitions from the Share Insurance Fund used to fund the
insurance-related expenses of the NCUA's Operating Budget under Sec.
1783(a) do not distinguish between federal credit unions and federally
insured state-chartered credit unions.
In response to the June 2017 Request for Comment one commenter
stated that the primary goal of the proposed changes was to reduce the
complexity of the OTR methodology. The commenter stated that the NCUA's
primary goal should be to ensure fair and equitable treatment of
federal credit unions and federally insured state-chartered credit
unions in the allocation of insurance-related activities. However, the
Board has always approached the OTR with the goal that it be fair and
equitable to both charter types. The Board believes the new method
continues to provide a fair and equitable distribution of Title I and
Title II costs while recognizing that somewhat less precision can make
the process more cost effective and understandable. In other words,
fairness and equity among charter types is more than a goal, they have
been and continue to be fundamental to the OTR methodology.
c. Title II Operating Costs
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) allows expenses ``incurred in carrying out the purposes
of [Title II]'' to be allocated to the Share Insurance Fund. The costs
the 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 specific authorities
that relate to costs the 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.'' \16\ 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.'' \17\ Title II also grants the Board the following
authorities relevant to agency operating costs:
---------------------------------------------------------------------------
\16\ 12 U.S.C. 1784(a).
\17\ 12 U.S.C. 1789(a)(11).
---------------------------------------------------------------------------
``appoint such officers and employees as are not otherwise
provided for in this chapter;'' \18\
---------------------------------------------------------------------------
\18\ 12 U.S.C. 1789(a)(4).
---------------------------------------------------------------------------
``employ experts and consultants or organizations
thereof;'' \19\
---------------------------------------------------------------------------
\19\ 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;'' \20\
---------------------------------------------------------------------------
\20\ 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;'' \21\ and
---------------------------------------------------------------------------
\21\ 12 U.S.C. 1789(a)(7).
---------------------------------------------------------------------------
``make examinations of and require information and reports
from insured credit unions, as provided in this subchapter.'' \22\
---------------------------------------------------------------------------
\22\ 12 U.S.C. 1789(a)(8).
---------------------------------------------------------------------------
The Board concludes that these authorities, taken together, provide
the 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.\23\
---------------------------------------------------------------------------
\23\ 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.
---------------------------------------------------------------------------
d. APA Requirements
The legal analysis of the NCUA's Office of General Counsel on the
applicability of the notice and comment provisions of the
Administrative Procedure Act (APA) to the OTR methodology is summarized
in the January 2016 OTR notice \24\ and articulated more fully in a
legal opinion posted on the NCUA's Web site.\25\ In soliciting comment
on the OTR through the Federal Register, the NCUA has gone, and
continues to go, beyond its APA obligations.
---------------------------------------------------------------------------
\24\ 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.'' (footnotes omitted).
\25\ The 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.
---------------------------------------------------------------------------
In response to the June 2017 notice, one commenter specifically
cited the Board's characterization of the OTR
[[Page 55647]]
methodology as a rule at the June 2017 Board meeting as support for
notice and comment procedures being required. However, as articulated
in the Office of General Counsel's analysis \26\ cited above, the APA
does not require notice-and-comment procedures for all rules. Instead,
a broad variety of agency actions fall under the APA's definition of
``rule,'' only some of which require notice and comment. As the Office
of General Counsel's analysis states ``The APA's definition of a rule
is very broad and applies to `nearly every statement an agency' may
make. However, determining whether the APA notice and comment
requirements apply to a particular agency action or rule is a separate
inquiry.'' By referring to the OTR as a rule, the Board was not
suggesting notice-and-comment procedures are required but was instead
calling the OTR what it is under the APA: A rule that does not require
notice-and-comment procedures.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
III. Proposed OTR Methodology Comments and Responses
a. Allocate Examination and Supervision of Federal Credit Unions as 50
Percent Insurance Related
Approximately half of the comments received addressed the first
principle that examination and supervision of federal credit unions
should be treated as 50 percent insurance-related. Those that did
address it were split. Commenters supporting the proposed principle
argued that it appeared to be a rough approximation of the time the
NCUA should spend between its prudential and insurance-related
responsibilities with respect to federal credit unions. One commenter
specifically opined that the NCUA's analysis appeared reasonable and
that the principle would be simple to apply. Another commenter
supported the proposed principle, but suggested that it may be ``too
modest'' of an assessment of the time the NCUA devotes to prudential
supervision of federal credit unions.
Commenters that opposed the proposed principle argued that the
Board's policy rationale is not clearly set out in the notice and,
therefore, the change in policy appears to be without ``a reasoned
basis.'' Some of these commenters also argued that the proposed
principle is arbitrary, capricious, and not supported by substantial
evidence. One commenter stated that it was not based on observable and
measurable data inputs. The same commenter argued that the principle
reflects the NCUA's position of ``how things should be'' but not how
things are in reality. Another commenter argued that the principle
ignores the Federal Deposit Insurance Corporation's (FDIC) actual
practices, citing the following: (1) Pronouncements from the FDIC
asserting its primary focus and intention is to protect the insurance
fund by ensuring the safety and soundness of its member institutions;
(2) conducting annual joint examinations with state regulators in many
cases rather than alternating examinations, suggesting the FDIC
considers protection of the insurance fund through its own examinations
as a critical responsibility; and (3) the FDIC conducts a substantial
and increasing amount of offsite monitoring, examination and
supervision on all its institutions for safety and soundness purposes
on an ongoing basis. Several other commenters recommended that the
Board take additional time to study this assumption to develop a more
empirically supportable principle and that the Board continue to refine
this principle in the future to be more accurate.
The Board believes the rationale for the first principle is
supportable and easy to understand. It attributes equal weight to each
of NCUA's dual roles as regulator and insurer of federal credit unions.
It creates a cost sharing similar to what would result if NCUA
conducted alternating examinations of federal credit unions, acting as
the regulator during one exam cycle and the insurer the next.
Additionally, joint examinations between the regulator and insurer are
generally staffed equally, resulting in a 50-50 time split. Whether
alternating examinations or participating in joint examinations, the
examination and supervision time of the insurer still ends up
approximately 50 percent. As noted in the request for comment, it is
consistent with the alternating examinations the FDIC and state
regulators conduct for insured state-chartered banks, as mandated by
Congress.
As one commenter noted, the FDIC prominently asserts its primary
focus is to protect its insurance fund by ensuring the safety and
soundness of its member institutions, in many cases through annual
joint examinations. Like the FDIC, the NCUA's primary focus in its role
as insurer is to protect the Share Insurance Fund. However, unlike the
FDIC, the NCUA also has chartering authority. Since the NCUA
examination staff perform all examinations of federal credit
unions,\27\ the NCUA as insurer can fully rely on all federal credit
union examination reports for insurance purposes where the FDIC deals
with many different state regulators. The FDIC conducts annual/joint
examinations where it perceives elevated risks. The NCUA also increases
examination activity where it perceives elevated risk and may choose to
increase supervision for federal credit unions or conduct joint
examinations for federally insured state-chartered credit unions.
Further, the NCUA conducts a substantial amount of offsite monitoring
and supervision of both federal credit unions and federally insured
state-chartered credit unions, increasing this oversight when risk
warrants. All examination and supervision time, both onsite and
offsite, for all credit unions, whether they are healthy or troubled,
is covered by the methodology in the workload hours portion of the
calculation. This is consistent with Principle 1 and the FDIC model.
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\27\ The Consumer Financial Protection Bureau also performs
compliance examinations on credit unions with assets greater the $10
billion.
---------------------------------------------------------------------------
Using a principle-based approach simplifies the OTR calculation and
reduces the resources needed to administer it. Further, it reflects
that the NCUA as insurer 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.
Importantly, the simplified assumption of equal sharing reflects
the offsetting benefits for each role under a framework emulating an
alternating examination program like the one used by FDIC. In other
words, 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. It reflects an equal sharing of supervisory
responsibilities between the 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.
b. Allocate Examination and Supervision of All Others as 100 Percent
Insurance Related
Few commenters addressed the second principle that all time and
costs the NCUA spends supervising or evaluating the risks posed by
federally insured state-chartered credit unions or other entities the
NCUA does not charter or regulate (for example, third-
[[Page 55648]]
party vendors and CUSOs) should be treated as 100 percent insurance
related. The majority of responsive comments supported the proposed
principle. One commenter recommended that the Board allocate the
supervision of CUSOs as 50 percent prudential regulatory and 50 percent
insurance related. Another commenter recommended that the Board
allocate CUSOs and third-party supervision as 25 percent prudential
regulatory and 75 percent as insured-related. The commenter reasoned
that, since the safety and soundness of federal credit unions is
partially allocated to Title I, it would follow that some hours for
CUSOs and third-party reviews should reflect the NCUA's safety and
soundness responsibility as charterer and prudential regulator.
Additionally, at least one commenter opposed the proposed second
principle, arguing the Board has not explained its policy rationale
clearly in the notice and, therefore, the change in policy is without a
``reasoned basis.''
The Board disagrees that it has not explained its policy rationale.
The NCUA has specifically defined its role with federally insured
state-chartered credit unions and other entities the NCUA does not
charter or regulate, including CUSOs. The NCUA does not charter, nor is
it the prudential regulator of, federally insured state-chartered
credit unions; therefore, the NCUA's role is solely as the insurer.
Further, the Board does not believe singling out CUSO activities is
necessary or appropriate under the first or second proposed principle.
Doing so would revert back to the prior approach of more particular
designation of examination activities as insurance or regulatory based,
which the proposed principles are designed to lessen for the reasons
discussed above.
A CUSO itself is at times subject to a limited review during the
examination of a federally insured credit union. This review generally
covers the documentation required by NCUA or state regulation that
credit unions must execute prior to investing in or lending to a CUSO.
Examiners may also assess the risk a CUSO's activities pose to the
credit union as part of the credit union examination. The CUSO related
time within the scope of the examination and supervision of federally
insured credit unions is captured under Principle 1 for federal credit
unions and Principle 2 for federally insured state-chartered credit
unions. The time designated for separate, stand-alone reviews of CUSOs
and third-party vendors is accounted for separately in the NCUA's
workload budget and is covered by Principle 2 only. The Board has no
direct regulatory authority with respect to CUSOs and there is no
support to allocate time specifically designated for CUSO and third-
party vender reviews as anything other than the NCUA's role as insurer.
c. Allocate Time and Costs Related to the NCUA's Role as Charterer and
Enforcer of Consumer Protection and Other Non-Insurance Based Laws
Governing the Operations of Credit Unions as Zero Percent Insurance
Related
Only a few commenters addressed the third proposed principle that
all time and costs related to the NCUA's role as charterer and enforcer
of consumer protection and other non-insurance based laws governing the
operations of credit unions should be treated as not insurance related.
Each commenter to address the proposed principle favored the Board's
approach but did not offer substantive commentary.
d. Allocate Administration of the Share Insurance Fund as 100 Percent
Insurance Related
Only a few commenters addressed the fourth principle that time and
costs related to the NCUA's role in administering federal share
insurance and the Share Insurance Fund should be treated as 100 percent
insurance related. Each commenter to address the proposed principle
favored the Board's approach but did not offer substantive commentary.
e. Soliciting Public Comment on the OTR Methodology
Less than half of the commenters addressed whether the Board should
solicit public comment on the OTR methodology every three years and
whenever the Board seeks to change the OTR methodology. All of those
commenting favored soliciting public comment. One commenter recommended
that the Board adopt a standardized five-year review period for the
calculation. Another commenter recommended that the Board also solicit
public comment on the OTR methodology for any year the OTR changes more
than two percent. A third commenter recommended that the Board codify
the OTR methodology as part of the NCUA's regulations, believing this
would subject the OTR methodology to the notice-and-comment
requirements of the APA. A fourth commenter recommended that the Board
include the OTR methodology in the NCUA's rolling regulatory review
under the Economic Growth and Regulatory Paperwork Reduction Act of
1996. Finally, another commenter argued that the Board should subject
the OTR methodology to periodic verification from an independent third
party.
The Board is committed to seeking public comment on the OTR
methodology every three years or when there are changes to the
methodology. The Board reiterates that changes to the methodology means
changes to the four principles or abandonment of the principles in
favor of another methodology, not changes to the NCUA's organizational
structure. The results of the calculation are not static and will
change from year to year based on the contemporaneous information from
the workload and financial budgets. The results are updated and
reviewed annually and are applied to actual expenses. The Board does
not agree that the OTR application should be submitted for public
comment, regardless of whether it results in a material year-over-year
change to the rate. Changes to the OTR output would be a result of the
methodology's application to organizational changes or internal
resource allocations, not a result of changes to the methodology. Even
if the Board wanted to subject output changes to notice-and-comment,
the time required for such processes would almost certainly impede the
Board's budget processes.
The Board acknowledges that application of the current methodology
has resulted in material changes in the OTR from year to year. This was
a factor the Board considered in simplifying the calculations and the
Board expects that the proposed methodology should result in less
volatility in OTR outputs going forward. As noted in the legal analysis
contained in the Request for Comment, the NCUA's position remains that
the OTR methodology is not subject to the APA's notice-and-comment
requirements. The Board maintains that the same is true with respect to
its application. Further, this conclusion does not depend on whether
the OTR methodology is included in the NCUA regulations. Whether a
Board action is codified does not determine whether it is subject to
notice-and-comment processes.\28\
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\28\ Interested parties can review the NCUA's position on this
in the opinion found on the NCUA's Web site at the following
address: https://www.ncua.gov/Legal/Documents/Opinion/OL2015-0818.pdf.
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Regarding subjecting the proposed methodology to periodic
verification from an independent third-party, the Board will consider
the cost versus the benefits of such a review. Given the greatly
simplified methodology, such reviews may provide limited benefits.
[[Page 55649]]
f. Maintaining Current Staff Delegations
Only a few commenters addressed whether the Board should maintain
the current staff delegation to administer the OTR methodology but
require public board briefings every year. Each commenter to address
the proposal to maintain current staff delegations favored the Board's
approach but did not offer substantive commentary.
g. Additional Comments
50/50 Split Between OTR and Operating Fees
One commenter opposed the OTR methodology and recommended the
NCUA's operating budget be funded 50 percent by requisition from the
Share Insurance Fund via the OTR and 50 percent from federal credit
union operating fees. This commenter suggested that this was the
Board's long-standing approach to funding the NCUA's operating budget
prior to the current OTR methodology. Another commenter, however,
indicated that a majority of its member credit unions would not favor
such an approach.
As stated in the Request for Comment, the Board does not believe it
is transparent or appropriate to set the OTR at any level, such as 50
percent, without a reasoned basis to demonstrate that level of agency
operating costs are properly allocated to Title II activities. Even if
it was, the Board thinks such a rough justice approach is unnecessarily
simple while providing negligible, if any, additional administrative
ease. The Board believes the principles-based methodology adopted in
this Final Notice provides a reasoned basis for the OTR and is fair and
equitable. The proposed new OTR methodology also provides a good
balance between understandability, ease of administration, and
precision.
Revise or Replace
At least one commenter strongly opposed the proposed OTR
methodology in its entirety, arguing that the Board should revise and
refine, not replace, the current methodology. Some refinements this
commenter suggested included a clearer distinction between insurance
and safety and soundness activities.
The Board does not agree that further distinction between insurance
and safety and soundness is warranted. The proposed new OTR methodology
revises the former OTR methodology and addresses concerns raised in the
first request for comment as well as this one related to the
distinction between insurance related and safety and soundness. The
NCUA recognizes that safety and soundness is not the sole domain of the
insurer. Rather, both the prudential regulator and insurer have
responsibilities for safety and soundness. In the June 2017 Request for
Comment, the NCUA acknowledged 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. To better reflect that the prudential
regulator and insurer both have responsibilities for safety and
soundness, the Board is adjusting the OTR methodology accordingly. This
is reflected in the first principle of the proposed new methodology.
Further, the old methodology also recognized this to some extent
through the Imputed SSA Value component.
Another commenter also recommended retaining the old methodology,
stating it is an objective, formula-based model that uses measurable
data inputs, which prioritizes fairness, accuracy, and equity. Instead
of replacing the old methodology, the commenter suggested the Board
refine the examiner time survey and reevaluate the Imputed SSA Value.
The Board disagrees with this recommendation and favors the proposed
new methodology.
The proposed new methodology, though simpler, is still objective
and formula driven. The examiner time study and the assignment of time
as insurance, insurance regulatory, and consumer regulatory has been an
area of great debate and the Board does not believe any amount of
refining of these categories will alleviate the criticism and confusion
around the process. The same criticism and confusion pertains to the
``Imputed SSA Value.'' Without 100 percent cooperation from the state
supervisory authorities in providing detailed time studies and budget
information, the NCUA cannot calculate a more accurate estimate. There
is also stakeholder confusion regarding the hypothetical ``as if''
scenario that assumes the NCUA would have to do all the examination and
supervision work. The proposed new methodology eliminates the examiner
time study and the ``Imputed SSA Value'' to eliminate the confusion
caused by each. Therefore, further refinements or changes to either are
unnecessary at this time.
One commenter recommended establishing a Credit Union Advisory
Council that would discuss, among other topics, the OTR. This request
goes beyond the scope of the Request for Comment on the OTR.
Consistency With OCC, Segregating Functions
At least one commenter recommended that the Board adopt a
methodology that more closely resembles the national banking model. The
commenter suggested that the budget of the Office of the Comptroller of
the Currency (OCC) for supervising national banks is entirely separate
from the FDIC's budget for insuring bank deposits and recommended that
the Board adopt a similar approach for the supervision of federal
credit unions. Similarly, another commenter indicated that a majority
of its member credit unions favor the Board separating the NCUA's
charting and supervision of federal credit unions from its insurance-
related supervisory functions.
The Board thinks using this approach would undermine the
efficiencies Congress intended to create. The NCUA is both a regulator
and insurer under the organization of a single federal agency with one
budget. As noted in the January 2016 Request for Comment, in Title II
of the Act, Congress established the Share Insurance Fund and housed it
within the NCUA for administration by the Board. Congress envisioned
efficiencies from this arrangement, as well as the NCUA's partnership
with state regulators. While the NCUA does not have two distinctly
separate budgets, it strives to allocate the appropriate amount to each
activity through the OTR. In contrast, the OCC has no authority
regarding the Deposit Insurance Fund, which is managed by the FDIC. The
FDIC manages the Deposit Insurance Fund and has no primary regulatory
responsibility for federally chartered banks. They have completely
separate budgets because they are distinct federal agencies.
The NCUA also notes that the funding of the banking regulatory
system has also been the subject of criticism. For example, in its July
2001 Report, Reforming the Funding of Bank Supervision, the Comptroller
of the Currency concluded the funding system was not fair. The report
states:
Under the present system, national banks pay the full costs of
their supervision, through assessments levied on them by the Office
of the Comptroller of the Currency (OCC), the federal agency that
charters and supervises national banks. State-chartered banks, by
contrast, pay only for that small fraction of their supervision that
is provided by state supervisory agencies. The predominant part of
state bank supervision actually comes from two federal agencies, the
Federal Reserve System (FRS) and the Federal Deposit Insurance
Corporation (FDIC). These federal agencies perform exactly the same
supervisory functions for
[[Page 55650]]
state banks as the OCC performs for national banks. The main
difference is that the FRS and the FDIC do not assess state banks
for the costs of their supervisory services.\29\
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\29\ Comptroller of the Currency, Reforming the Funding of Bank
Supervision (2001), available at ttps://www.occ.gov/static/news-issuances/news-releases/2001/nr-occ-2001-67-paper.pdf.
The NCUA Board seeks to be as fair as possible in the funding of
its Operating Budget and does not believe the banking industry model is
appropriate for credit unions.
Cost Savings Measures
One commenter recommended that the Board adopt cost saving measures
to further reduce the OTR. Those measures included accepting the
results of validated Asset Liability Management models of credit unions
subject to supervision by the Office of National Examinations and
Supervision (ONES) for supervisory stress testing purposes.
Suggestions regarding cost saving measures are aimed at the NCUA's
overall budget, not at the OTR methodology. The budgeted amount is
beyond the scope of the Request for Comment. While a lower budget may
reduce the amount charged to the Share Insurance Fund through the OTR,
this effect would not be a function of changes to the OTR methodology,
which was the focus of the request for comment.
This commenter also recommended that the Board investigate options
to improve the financial performance of the Share Insurance Fund in
order to use investment gains to generate additional earnings. This
comment also goes beyond the scope of the OTR methodology. Further,
Title II of the Act explicitly limits the permissible investment
vehicles for the Share Insurance Fund.\30\ Consistent with its role as
a steward of public insurance funds, the NCUA adheres to the strict
investment objectives of ``safety, liquidity, and yield (i.e.,
income)'' and in that order of priority. Only after ensuring safety of
principal and establishing that maturities coincide with the timing of
planned and contingent funding needs are the income objectives of the
portfolio considered. In accordance with the U.S. Treasury's policy for
Government Investment Accounts, the schedule of portfolio maturities
coincides with the Agency's anticipated disbursement estimates (that
is, our projected funding needs) and all purchases are intended to be
held to maturity. The NCUA is bound by U.S. Treasury Operating Circular
requirements, which states in section 4060:
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\30\ 12 U.S.C. 1783(c).
A Program Agency for a Government Investment Account shall not
engage in investment practices that result in windfall gains and
losses, including but not limited to security day-trading and large
restructuring of investment portfolios to take advantage of short-
---------------------------------------------------------------------------
term Interest Rate fluctuations.
One commenter recommended that the Board explore ways to work more
closely with state supervisory authorities to increase efficiencies and
reduce costs. The Board agrees that working with state supervisory
authorities reduces costs and increases efficiencies for both the NCUA
and state supervisory authorities. Therefore, as stated in the Request
for Comment, the Board is careful to build efficiencies related to the
NCUA's dual role as charterer and prudential regulator of federal
credit unions and insurer of federal credit unions and federally
insured state-chartered credit unions wherever possible. As part of the
Examination Flexibility Initiative, the Board established a joint NCUA-
State Regulator working group that has been active in 2017 in exploring
ways to further improve coordination and cooperation.
Budget Allocations
Two commenters requested clarification on how the NCUA's proposed
reorganization will impact budget allocations. One commenter
specifically noted that 13 percent of the Office of Consumer Financial
Protection and Access' budget is allocated from the Share Insurance
Fund and that the proposed reorganization could have a substantial
impact on that assumption.
The NCUA's reorganization affects the OTR's application, not the
OTR methodology. The Board is approving the allocation principles for
the OTR methodology. These principles are then dynamically applied to
the activities and related costs of the agency--they are not
necessarily specific to individual offices or the agency's
organization. For example, costs associated with federal credit union
examinations and supervision are aggregated. Therefore, a reduction
from five regions to three regions will not affect the budget
allocation.
Similarly, the Office of Small Credit Union Initiatives' transition
to the new Office of Credit Union Resources and Expansion and the
assumption of the NCUA's chartering function, formerly in the Office of
Consumer Financial Protection and Access, does not materially impact
budget allocation. The majority of the Economic Development Specialists
from the old Office of Small Credit Union Initiatives are being
converted to Consumer Access Analysts in the new Office of Credit Union
Resources and Expansion. The Consumer Access Analysts from the Office
of Consumer Financial Protection and Access will also be transferred to
the new Office of Credit Union Resources and Expansion. The change in
the composition of the work of the reorganized offices will affect
their allocation calculation but not how the underlying costs are
allocated based on the Board approved principles. The net result is a
reallocation of the agency resources from the Office of Consumer
Financial Protection and Financial Access to the new Office of Credit
Union Resources and Expansion. The same principles will apply to the
resources transferring to the new office based on their roles.
One commenter also recommended a number of changes to the Board's
proposed budget allocations. The commenter recommended that the Board
use a 50 percent allocation from the Share Insurance Fund for human
resources and Board functions. For all other program offices, the
commenter suggested using the 60 percent allocation from the Share
Insurance Fund generated by the hypothetical application of the
proposed OTR methodology in the June 2017 notice.
The Board does not agree that a 50 percent allocation should be
applied to its budget and the human resources budget. As noted in the
Request for Comment, the NCUA's remaining offices do not have a
specific allocation calculation because they design and 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. Further, 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 offices' 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 calculation. The Board also notes the 60 percent allocation,
referred to by the commenter, was illustrative based on 2017 budget
information and is therefore a methodology output, not a principle in
itself. It is not a fixed allocation and will change from year to year
based on contemporary data and the applicable calculation in the
proposed new OTR methodology.
[[Page 55651]]
Another commenter recommended that the Board explore how other
insurance industries allocate expenses and adopt a 5-year rolling
average of actual costs when assessing future fees. However, share/
deposit insurance is unique from other insurance industries as it only
insures member/customer deposits in financial institutions. In the
United States, there are three deposit insurers, the NCUA, the FDIC,
and American Share Insurance. Both the NCUA and FDIC are backed by the
full faith and credit of the United States while American Share
Insurance is a private insurer. Additionally, neither the FDIC nor
American Share Insurance have NCUA's chartering authority.
The NCUA is responsible for both regulating and insuring credit
unions and has different accounting/cost allocation needs. NCUA share
insurance is not risk-based. There are numerous other risk-based types
of insurance companies operating in the United States, covering such
things as real estate, automobiles, and health care. Some insurance
companies offer some or all these business lines. Costs are generally
allocated by business line or operating company. The NCUA's cost
allocation approach incorporates sound cost accounting principles and
commercial practices. However, additional analysis of insurance
companies will not provide meaningful information given the unique role
of the NCUA as regulator and insurer and other differences between
private sector insurance models and the NCUA as a government agency.
Further, using a 5-year rolling average of actual costs to set
expenses would add a layer of complexity to the OTR calculation. Adding
complexity is not consistent with the Board's goal of simplifying the
calculation to improve transparency. Additionally, a 5-year rolling
average would not support contemporary needs based on contemporary data
because it would be affected by past events, either increasing or
decreasing costs, over a period of five years. The Board believes using
the proposed new methodology is more fair and stable.
Negative Impact on Federal Credit Unions
Several commenter's stated the proposed new methodology would have
a negative impact on federal credit unions. One commenter was
particularly concerned with the impact on small federal credit unions.
While another commenter suggested a three-year phase-in period if
adopted to mitigate the impact this change will have on federal credit
unions.
The NCUA staff analyzed the impact the change in methodology would
have on federal credit union Operating Fees using data from the 2017
budget as discussed in the 2017 Request for Comment. The results of the
analysis indicate the Operating Fee for federal credit unions with
asset size $1 million and above, the increase would be less than one
basis point of average assets. Additionally, credit unions under $1
million in assets do not pay an Operating Fee. While the Operating Fee
will increase when the OTR decreases, this has been true during the
OTR's entire existence.
Simplicity Over Accuracy and Equity
Several commenters stated the proposed new methodology favors
simplicity over accuracy and equity. However, the Board believes the
proposed method strikes the correct balance. The results of the
proposed new methodology, using 2017 budget data, fall well within the
historical range of the OTR under the old method. The average OTR since
the Board adopted the old methodology is 60.7 percent, very similar to
the results of the proposed new methodology applied to 2017 budget
numbers. Table 1 illustrates the historical OTR trend.
Table 1
------------------------------------------------------------------------
OTR year OTR (%)
------------------------------------------------------------------------
2004.................................................... 59.8
2005.................................................... 57.0
2006.................................................... 57.0
2007.................................................... 53.3
2008.................................................... 52.0
2009.................................................... 53.8
2010.................................................... 57.2
2011.................................................... 58.9
2012.................................................... 59.3
2013.................................................... 59.1
2014.................................................... 69.2
2015.................................................... 71.8
2016.................................................... 73.1
2017.................................................... 67.7
------------------------------------------------------------------------
One of the main criticisms of the old OTR methodology is that it is
not transparent. This stems from the complexity of the calculation and
was discussed in the Request for Comment. Although all information
related to the old OTR calculation is publicly available, the Board
acknowledged that an obstacle to transparency was the complexity of the
methodology. In an effort to address the transparency concern, the
Board is adopting the simplified OTR methodology. While still formula
driven, the proposed new methodology provides for a simpler approach
that remains comprehensive, fair, and equitable. The Board believes the
proposed new methodology, though simplified, continues to provide an
accurate allocation of agency costs.
IV. Final Action
Based on the comments and the NCUA's internal assessment, the Board
is adopting the new OTR methodology as proposed in the June 2017
notice. These changes will reduce both the complexity of the OTR
methodology and the resources needed to administer it, while remaining
fair and equitable to both federal credit unions and federally insured
state-chartered credit unions. The final OTR methodology is fully
described below.
V. Details of the OTR Methodology
a. Methodology
The OTR methodology incorporates the following underlying
principles for allocating agency operating costs:
1. Time spent examining and supervising federal credit unions is
allocated as 50 percent insurance related.\31\
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\31\ The 50 percent allocation mathematically emulates an
examination and supervision program design where the NCUA would
alternate examinations, and/or conduct joint examinations, between
its insurance function and its prudential regulator function if they
were separate units within the NCUA. It reflects an equal sharing of
supervisory responsibilities between the 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. It is consistent with the alternating examinations the FDIC
and state regulators conduct for insured state-chartered banks as
mandated by Congress. Further, it reflects that the 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.
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2. All time and costs the NCUA spends supervising or evaluating the
risks posed by federally insured state-chartered credit unions or other
entities the NCUA does not charter or regulate (for example, third-
party vendors and CUSOs) is allocated as 100 percent insurance
related.\32\
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\32\ The NCUA does not charter state-chartered credit unions nor
serve as their prudential regulator. The 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 are
allocated as 100 percent insurance related.
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3. Time and costs related to the 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 zero percent insurance related.\33\
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\33\ 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, the NCUA
resources allocated to these functions are properly assigned to its
role as charterer and prudential regulator. 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.
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[[Page 55652]]
4. Time and costs related to the NCUA's role in administering
federal share insurance and the Share Insurance Fund are allocated as
100 percent insurance related.\34\
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\34\ The 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 the NCUA's role as insurer.
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These four principles represent the principles the Board has
committed to subject to public comment every three years and in the
event it proposes a change to one or more of the principles. The
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 detailed below. The NCUA will not submit
the methodology's applications or outputs for public comment.
b. Application
The Steps below describe how the four principles above are applied.
Unlike the principles themselves, the Board will not subject the
application of the principles or the OTR outputs to notice-and-comment
processes.
Step 1--Workload Program
Annually, the NCUA develops a workload budget based on the NCUA's
examination and supervision program to carry out the agency's core
mission. The workload budget reflects the 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 insurance related mission program activities.
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's Strategic Plan. The Operating Budget is based on agency
priorities and initiatives that drive resulting resource needs and
allocations. Information related to the NCUA's budget process,
including details on the Board-approved Operating Budgets, is available
on the agency's Web site.\35\
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\35\ https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx.
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The agency achieves its primary mission through the examination and
supervision program. The percentage of insurance-related workload hours
derived from Step 1 represents the main allocation factor used in Step
2 and is applied to the total operating budget for the examination and
supervision programs to calculate the insurance-related costs of the
offices conducting field work (currently the Regions and ONES). A few
agency offices have roles distinct enough to warrant their own
allocation factors, which are developed by applying the four factors
described above to their respective activities. Each of these offices
tracks their activities annually to determine their factors. These
factors are then applied to the respective offices' operating budgets
to determine their insurance-related costs.
A weighted average allocation factor, calculated by dividing the
aggregate insurance-related costs for the field offices conducting the
examination and supervision program and the agency offices with their
own unique allocation factors by their aggregate total operating
budgets, is applied to the central offices that design or oversee the
examination and supervision program or support the agency's overall
operations. This factor is then applied to the aggregate operating
budgets for the remaining offices. As such, the proportion of
insurance-related activities for these offices corresponds to that of
the mission offices. The NCUA's total insurance related costs are
calculated by summing the insurance cost calculated for the field
offices, the offices with unique allocations factors, and the insurance
cost for all other remaining NCUA offices.
Step 3--Calculate the OTR
The OTR represents the percentage of the NCUA Operating Budget
funded by a transfer from the Share Insurance Fund.\36\ The OTR is
calculated by dividing the total insurance-related costs determined in
Step 2 by the NCUA's total operating budget.
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\36\ The percentage of actual expenses funded by the Share
Insurance Fund as they are incurred each month.
By the National Credit Union Administration Board on November
16, 2017.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2017-25222 Filed 11-21-17; 8:45 am]
BILLING CODE 7535-01-P