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TUKWILA, Wash. – Claiming it had no alternative because of NCUA’s lack of response to the findings of an independent study it commissioned and released in June on the overhead transfer rate, Boeing Employees’ Credit Union Sept. 7 filed a petition with NCUA proposing that NCUA conduct a notice and comment rulemaking that would for the first time, allow NCUSIF-insured credit unions to participate in decisions relating to funding NCUA transfers from the NCUSIF to pay for NCUA administration of the insurance fund. BECU’s petition filed with NCUA’s Becky Baker also calls for a significant reduction in the amount of funding NCUA takes from NCUSIF for the agency’s budget that could otherwise provide potential dividends to insured CUs. The 33-page petition was prepared for BECU by its attorneys, Stanley Gorinson and Robert V. Pambianco, of Kilpatrick Stockton, LLP, and by Susan Geiger, of Preston Gates Ellis & Rouvelas Meeds, LLP. Both law firms are in Washington, D.C. From the outset of the petition, the lawyers make it clear concerning the OTR that,”Given the fact that NCUA presently intends to deal with this issue in October, we respectfully request that NCUA defer that consideration until completion of the rulemaking contemplated by this petition.” It continues to state that, “NCUA’s current practice of transferring those expenses from the Fund it determines to be `insurance-related’ or `associated with the benefits of insurance’ has resulted in an ever increasing portion of the NCUA budget subject to operating (examination) fees charged to federal credit unions. The funds being withdrawn from NCUSIF would otherwise be available for dividends to be paid to all federally insured credit unions. The use of funds to cover NCUA’s operations acts as a competitive tax causing unwarranted distortions in the credit union marketplace.” The petition cites “the inherently conflicting roles given to NCUA by Congress” as being “at the root of these problems.” Furthermore, it reads, “compounding the impact of NCUA’s inherent conflict is the lack of effective oversight of NCUA’s budget” and continues that, “The dual chartering system has served the credit union industry well, and federal deposit insurance has helped fuel the growth and stability of credit unions. However, if the OTR continues as it is currently structured, that success will be undercut. The need for change is urgent and must be addressed now. The petition contains successive discussions on OTR, including one that states, “NCUA’s current method of making OTR decisions is defective and will not withstand judicial scrutiny.” It also offers as proposed rule to 12 C.F.R. 790.4, Transfer of Funds from NCUSIF to NCUA’s Operating Fund: * NCUA will only withdraw administrative expenses from NCUSIF and will not withdraw more than 10% or $10 million, whichever is less, of its total operating expenses from NCUSIF to deposit into its operating fund to cover administrative and other expenses incurred in carrying out the purposes of subtitle II of the Federal Credit Union Act; * Adoption of the OTR or any changes to it will be subject to public notice and comment. Sparing no words, the petition concludes that, “The OTR process adversely affects FISCUs. It is a biased, secretive, ill-defined process that has no presumption of regularity which touches it. The OTR process is careening out of control and there is nothing that can rein it in because NCUA observes no legal bounds in the adoption of the OTR. Nor can its use ever be accorded legitimacy given the inherent conflict which NCUA faces.” BECU President/CEO Gary Oakland said sending the petition was not part of BECU’s plan when it released Prof. Lawrence White’s report, Caught in a Regulatory Vise: The Peculiar Problem Faced by Federally Insured State Chartered Credit Unions (CU Times, July 11),”but there was always the potential,” he offered. “NCUA, by their lack of response to Professor White’s study, forced our hand to file the petition,” said Oakland. “We would have preferred not to have gone this route, but NCUA has apparently ignored the study.” That study, among its many findings, showed an inherent conflict of interest existing between NCUA’s role as federal regulator and its role as administrator of the NCUSIF, and that this conflict of interest forces federally-insured state-chartered credit unions to cross-subsidize federal credit unions. What sort of response was Oakland looking for from NCUA to White’s study? At the very least, he said, a delineation and opening up “to the extent possible” of the hotly debated issues concerning the overhead transfer rate and a disclosure of what Deloitte & Touche is doing with its study on the OTR, said Oakland. Oakland said NCUA’s June 28 announcement of the agency’s plan to begin holding public hearings with the NCUA’s 2002 budget “helps, it’s a good step, along with things like expanded incidental powers. But it doesn’t get to the core of the problem of the overhead transfer rate.” What the problem boils down to, Oakland explained, is the “inherent conflict” between NCUA’s role as the federal regulator and overseer of the National Credit Union Share Insurance Fund. “The more activities NCUA cites as being insurance related that justify it transferring more funds to pay for NCUA expenses, the greater control NCUA stands to have over the state-chartered credit union system and directly impact state-chartered credit unions. This is a threat to the dual-chartering system, which is not what Congress intended in 1934 when it passed the first Federal Credit Union Act, nor when it passed H.R. 1151,” said Oakland. Oakland admitted it will prove difficult to delineate NCUA’s NCUSIF role and regulatory role. The solution then, he said, it to limit the overhead transfer rate “so that there isn’t a mechanism to disadvantage one charter over another.” “The process is fundamentally flawed because it is based on internal, subjective assessments made by NCUA staff that have never been open for examination and comment by the credit unions directly affected by OTR decisions,” said Oakland. Oakland charged NCUA with making “inappropriate use of regulatory competition while at the same time decreasing the fees federal credit unions pay.” This, he said, disadvantages state chartered credit unions. The real losers in all of this, said Oakland are all federally insured state chartered credit unions, for four reasons: the OTR eats up credit unions’ dividends; it creates additional regulatory burdens; it limits innovation in the dual-chartering system; and it takes a lot of budget discipline out of the process. Oakland took the opportunity to comment on the letter to the editor published in the Sept. 7 issue of American Banker from CUNA President/CEO Dan Mica-Attack on NCUA’s Transfer Rate is Needlessly Divisive”-in response to Prof. White’s Aug. 31 column in the paper, “State Credit Unions Shouldn’t Have to Subsidize Federal.” White argued in his column that the NCUA should abolish the overhead transfer rate and discontinue using the NCUSIF to support the agency’s insurance-related examination costs. “While some state-chartered credit unions undoubtedly would agree, many federally chartered credit unions would take strong exception to this proposal and Professor White’s characterization of the overhead transfer as `one-sided,” Mica wrote. “CUNA.believes Mr. White’s recommendation would necessarily divide the credit union system when better solutions can be found that would bring credit unions together on this matter,” Mica continued. Oakland said “that is one person’s opinion,” referring to Mica’s comments. Mica in his letter to the editor agreed that the current 66.75% rate is too high “and was never sufficiently explained to credit unions. But rather than debating the proper level for the overhead transfer rate, CUNA would prefer to work with NCUA to develop a process for setting the rate that’s fair to all federally insured credit unions. “We feel the key is for the NCUA board to ensure the agency has only included legitimate, substantiated insurance-related costs in its determination of the transfer rate. To that end the agency’s retention of Deloitte Touche to examine its overhead transfer process was a very positive step. Equally important, NCUA’s analysis should be fully communicated each year to credit unions before setting transfer rate so that credit unions can have an opportunity to comment back to the agency.” Mica wrote. “That’s exactly our point,” said Oakland. “But if we hadn’t raised the point and commissioned the study by Prof. White, Dan wouldn’t have written his letter.” “NCUA needs to open up the overhead transfer rate dialogue and expose the process to NCUSIF users and NCUA constituents, that is federal credit unions, so there’s a clear understanding, and that understanding is communicated to examiners,” said Oakland. The problem, said Oakland, is that NCUA is keeping the Deloitte & Touche study close to its chest. “If we wait until the study comes out to comment on it, it will be too late for us to raise any objections,” said Oakland. Oakland said BECU doesn’t have a backup plan in mind if NCUA denies the credit union’s petition. “I hope they won’t ignore it,” he said. -

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