NCUA’s obstinate and myopic refusal to submit its budget to a formal and open public process took another bizarre turn yesterday. To put it nicely, the agency is demonstrating everything that can go wrong when an independent agency has too little oversight.
The ostensible issue is about the Overhead Transfer Rate. The real issue is fast becoming how much power an independent agency has to spend other people’s money without oversight.
The OTR represents money that the NCUA takes from the NCUA Share Insurance Fund to cover “Insurance Related Expenses.” According to the National Association of State Credit Union Supervisors the OTR increased 40.1% from $67.0 million in 2013 to $93.9 million for 2015. NASCUS argues that “By shifting a portion of FCUs’ share of NCUA expenses to the NCUSIF, the OTR reduces out-of-pocket expenses incurred by FCUs. The resulting reduction in FCU Operating Fees provides a singular advantage to FCUs and adversely affects the competitive position of FISCUs relative to FCUs.”
A similar debate happens in New York State every year with industry stakeholders grousing that fees ostensibly paid to fund oversight of specific industries are swept for unrelated purposes. In New York State – no paragon of transparency – you can look up the budget numbers and get a pretty good idea of how much is being swiped for other expenses. But NCUA is an independent agency with no formal budget process. What’s more, NCUA has guarded the precise methodology it uses to calculate the OTR with the gusto of a retired CIA director tasked with guarding Coke’s secret formula, or, for those of you who admit to watching Sponge Bob with your kids, the formula for making Krusty Krab burgers.
NASCUS grew so frustrated with NCUA’s obstinacy that it retained a Washington law firm to analyze the issue. The resulting opinion letter opined that the adoption of the OTR formula is a regulation that can only be promulgated by the NCUA following a Notice and Comment period.
NCUA’s General Counsel Michael McKenna responded in a July 30th letter by noting that NCUA already does put a lot of information about the OTR on its website and that NCUA’s lawyers believe that the OTR is not subject to notice and comment requirements. Fair enough: reasonable people can differ.
But the letter goes off the rails with gusto: he explains that “courts, not public forums are best suited to resolve such complex legal issues.” What? This is a lot like saying the law is too important to leave to juries. Is NCUA really saying that the OTR is too complicated for the public to understand?
He also explains that forcing NCUA to divulge its advice about the applicability of the APA to the OTR formula would require NCUA to divulge the work product of its attorneys and ultimately chill its ability to receive candid analysis. I’m not unsympathetic to this argument in theory but it rings hollow considering that the NCUA and other banking regulators refuse to extend attorney work product exemptions to the institutions they oversee. Wouldn’t credit unions benefit from unfettered legal advice to the same extent as NCUA? Furthermore, legal discussions surrounding the OTR may be privileged but the actual formula and the rational for how it is constructed and implemented certainly isn’t. Why else do regulations have preambles?
Bottom line: NCUA is doing a great job of making a mole hill into a mountain. In her testimony before Congress the Chairman was dismissive of Congressional calls for greater budget transparency and questioned the motives of anyone who would dare request greater openness. With this letter to an organization of fellow regulators NCUA is doubling down: arguing that federal law shields it from explaining to the public how it allocates the money it receives from credit unions and that technical issues are best not discussed publicly. If its interpretation of the law is correct then its time for the law to change.
The agency is coming across as politically tone-deaf and hopelessly arrogant.
Here are some links so you can decide for yourself if you think I am exaggerating or if NCUA has to calm down.