The Administrative Procedures Act required the NCUA to submitthe calculations it uses to develop its overhead transfer rate topublic notice and comment, according to a legal analysis preparedfor NASCUS. The OTR is the percentage of funds the NCUA transfers to itsoperating budget from the NCUSIF each year to cover insurancerelated agency expenses.

The Washington law firm of Schwartz and Ballen prepared theanalysis for the state regulators' association.

“As the analysis points out, by shifting a portion of federalcredit unions' share of NCUA expenses to the NCUSIF, the OTRreduces out-of-pocket expenses incurred by federal credit unions,”NASCUS President/CEO Lucy Ito said. “Our fundamental point is that the resultingreduction in federal credit union operating fees provides asingular advantage to those credit unions, and adversely affectsthe competitive position of state charters relative to federalcharters.”

NASCUS said it has consistently questioned NCUA's calculation ofthe OTR and that, since 1986, the OTR has mostly fluctuated around50% to 60% of the NCUA's annual budget. However, in recentyears, it has grown dramatically, accounting now for 71.8% of theagency's total budget, NASCUS said.

The analysis said that the NCUA's adoption of the OTRconstitutes a major rule subject to the Administrative ProcedureAct notice and comment requirements. A major rule indicates theagency action will have a substantial impact on costs, prices orcompetition in the industry, and specifically requires the agencyto consider the costs and benefits of the rule and any possiblealternatives, the analysis said.

“The NCUA board has never published a proposed OTR in theFederal Register for public comment, nor has it requested in theFederal Register public comment on its methodology for calculatingthe OTR or any change to its methodology,” the analysis stated.“Accordingly, we believe the process the NCUA board uses toimplement the OTR violates the APA.”

NASCUS pointed that, earlier this month, it supported H.R. 2287,introduced by Rep. Mick Mulvaney (R-S.C.), which would require theNCUA to open its entire budget process to notice and comment fromstakeholders and the public. The association expressed thatsupport in a letter to leaders of the House Financial Services'Financial Institutions subcommittee.

The 29-page analysis – the first to link OTR to the APArequirements of public notice and comment related – noted thatan APA-compliant notice and comment process would require the NCUAboard to explain and demonstrate the OTR and the methodology usedto calculate it was reasonable, NASCUS said.

Ito explained that the publication of the analysis was awatershed event in the long history of state regulators' desire toprovide more input into the development of the annual OTR from theinsurance fund to the NCUA's annual budget.

“Opening the OTR to public notice and comment will giveall stakeholders – whether state or federally chartered – theopportunity to evaluate and respond to the NCUA's allocation ofexpenses across the industry,” she said.

“We recognize the setting of the overhead transfer rate is animportant issue for all federally insured credit unions,” the NCUAsaid in statement about the analysis. “We, therefore, haveregularly reviewed and received stakeholder input and independentthird party analysis on the OTR methodology since the currentmethodology was adopted in 2001 and most recently in 2011. The NCUAalso is in compliance with the Administrative ProcedureAct.

“Nevertheless, the NCUA will carefully consider the NASCUSstudy's conclusions to determine whether more formalizedstakeholder input about the OTR methodology iswarranted.”