What To Do With The Overhead Transfer Rate?

March 1, 2016 at 9:55 am 2 comments

Did you know that NCUA takes a portion of the funds in the Share Insurance Fund for its own budget? You should, particularly if you are a state charter.

The Overhead Transfer Rate (OTR) is the formula used by NCUA to determine the percentage of its budget activities that are share insurance related and therefore can be paid out of the Share Insurance Fund.  Its impact on credit union finances is substantial.   In 2016, 73.1% of NCUA’s budget will be paid out of the National Credit Union Share Insurance Fund.  The remaining 26.9% of its operating budget is paid with the federal credit union operating fee. 

Is the issue really important enough to spend time on? Is there a better way to divide up the costs?   I’ve decided that the answer to the first question is yes.  My answer to the second question is I would hope so, but I’m not sure what it is, which is why I am writing this blog.

After much badgering from NASCUS, NCUA has put out for public comment an analysis of the methodology it uses to determine the OTR.  Comments are due by April 25 and I urge all of you to take a look at the methodology.  It’s easy to say what’s wrong with the current system but a lot more difficult to come up with worthwhile solutions.

The fact that there even is an OTR is another bizarre quirk in the credit union system.  It wasn’t until 1970 that federal share insurance coverage was even extended to credit unions.  Rather than create a separate body like the FDIC to oversee the Share Insurance Fund, Congress empowered the NCUA to oversee the fund and incredibly broad powers to take money from it “for such administrative and other expenses incurred in carrying out its purposes as it may determine to be proper.” 12 U.S.C.A. § 1783 (West).  There is not even a requirement for there to be an OTR formula, but over the years NCUA created and refined one following a recommendation in a 1972 GAO report. 

All this means that NCUA is left with trying to define how much of its activities are “Insurance related” and can be reimbursed from the Share Insurance Fund and how much of its activities are related to its supervisory and regulatory activities of federal credit unions.  In fairness to NCUA, there is really no way to make an objective distinction between these two responsibilities.

The OTR is the formula it uses to perform this calculation.  Its methodology uses:  an Examiner Time Survey to approximate the amount of supervision and examination time spent on insurance and non-insurance issues by NCUA’s examiners; an NCUA workload budget in which it calculates how many work hours will be spent on various activities; and a financial budget that translates these workload hours and other expenses into a final figure.  These expenses are allocated between state and federal credit unions based on their shares of the Insurance Fund.  In making this final calculation, NCUA reduces the share of state credit unions by the estimated amount of workload hours that state regulators have contributed to share insurance supervision.     

Despite NCUA’s efforts to refine the formula, there is no getting around the fact that it creates an incentive to prioritize insurance related activities.  For those of us who feel that NCUA has already preempted too much state authority, this is a problem.  There is also no getting around the fact that, as pointed out by PriceWaterHouseCooper in 2011, the OTR could have a significant impact between state and federal regulators and credit unions:  “[a] lower federal operating fee makes the federal charter more attractive” and “extends a competitive edge to the federal charter over the state charter.”    

Entry filed under: Compliance, General, Regulatory. Tags: , .

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2 Comments Add your own

  • 1. Paula  |  April 5, 2016 at 2:17 am

    37 year old Panelbeater Javier Venegas from Omerville,
    has several pursuits which include snooker, music and cigar smoking.
    Last month very recently traveled to Røros Mining Town and the Circumference.

  • 2. new york's state of mind  |  June 26, 2017 at 8:43 am

    […] is NCUA making this proposal? Let’s take a trip down memory lane.  NCUA is unique among financial regulators in that it is charged with overseeing both the Share […]


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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