ARLINGTON, Va. – Hailing it as the first definitive study on the legal authority of the NCUA Board granted by the Federal Credit Union Act to set the overhead transfer rate, NASCUS’ long awaited study – “Overhead Transfer: The Authority of the National Credit Union Administration to Allocate Costs to the National Credit Union Share Insurance Fund.” – has been delivered into the hands of the NCUA Board, as well as state supervisors, state-chartered credit unions, leagues and other CU trade associations. The study commissioned by NASCUS was prompted by the NCUA Board’s decision Oct. 19, 2000 to raise the OTR from 50% to 66.72%. How consistent were NCUA’s cost allocation decisions with the Federal Credit Union Act? That’s the question the study hoped to answer. The study conducted by the CUNA Legal Department also compared the justifications for the policy against the provisions of the FCU Act and tested the policy against the obligation the act imposes on NCUA to serve federal and state-chartered credit unions equitably. NASCUS President Doug Duerr said the timing of the release of the study to the NCUA Board and the October 9 meetings of the past, present and future NASCUS Chairmen – Sarah Vega, director of credit union division, Illinois; Jim Forney, superintendent of credit unions, Iowa credit union division; and Jerrie Lattimore, administrator, North Carolina credit union division, respectively – with NCUA Chairman Dennis Dollar and board member Geoff Bacino was deliberately timed to precede the agency’s October Board meeting and discussion of its 2002 budget, including the overhead transfer rate. Duerr said NASCUS wanted to be certain the NCUA Board had the study in its hands to use when it makes its 2002 budget decision. Among the salient points of the study, according to NASCUS: * The Federal Credit Union Act provides meaningful limitations on the ability of the NCUA Board to transfer agency expenses to the NCUSIF. The NCUA does not have carte blanche authority to pass expenses on to the NCUSIF; * Congress directed NCUA to balance the interests of state and federal credit unions; * Title I of the FCU Act requires NCUA to prepare an examination on each federal credit union. Title II of the Act requires the agency to fashion its Title I examination reports in a way usable by the NCUSIF. The NCUA does not have the authority to ignore the language of Title I which requires NCUA to complete examination reports, or of Title II which requires the agency to make its Title I reports usable to fulfill its Title II responsibilities. * Title I obligates the agency to rely on operating fees to underwrite the costs of its supervisory activities for FCUs. It was never envisioned that redundant costs would be allocated to the NCUSIF. * The terms “safety and soundness” and “insurance-related” actions are not synonymous. * The NCUA’s decision to rely on an internal staff study to justify the increases in the rate approved in October 1999 was questionable and raises concern that the decision was ill advised. * The process the NCUA Board uses to determine the OTR raises separate legal issues. * Because the NCUA is directed to rely on examinations under Title I and those required by state regulator alike, it’s reasonable to assume that the NCUSIF should reimburse state regulators to the same extent it reimburses NCUA. “The authors of the study conclude that there have been lapses of fiscal and regulatory discipline that have allowed the federal agency to batten on unexamined authority. No matter the choice of charter, credit unions must have an insurance provider in whose conduct and fairness they can have confidence,” Duerr wrote in the study’s Executive Summary. In addition, the study reads, “if the agency continues to enlarge the proportion of `insurance-related’ costs it allocates to the NCUSIF, serious concerns may be raised as to the need for a separate agency to supervise federal credit unions.” In light of the NCUA Board’s actions, “the use of the current overhead transfer rate mechanism has resulted in consequences for the credit union system that are unfortunate and unintended by the Act.” Forney described the discussions the NASCUS representatives had with Dollar and Bacino about the study’s findings as “meaningful.” Both had received advanced copies of the study and had the opportunity to review it before their meetings with NASCUS. Forney said he was led to believe NCUA would take up the 2002 overhead transfer rate at the board’s November meeting. He reiterated to Credit Union Times that NASCUS’ issue is not with the NCUSIF but with the calculation used by NCUA to determine the rate of transfer. “As the study reports, the rate of transfer is not an open ended amount,” said Forney. “The rub comes in determining what is the NCUSIF reimbursing NCUA for.” What formula would NASCUS like NCUA to use to determine the OTR? Forney admits it’s no easy task to determine the right amount. There’s a lot of gray areas, he said. What is the responsibility of supervisors to provide information to the insurance fund that is paid for by the credit unions being supervised? Among the provisions of Title II of the FCU Act it requires NCUA to rely on the examination reports prepared by state CU regulators in the same way it must rely on the agency’s Title I examination reports. Therefore, said Forney, state supervisors should be reimbursed from the NCUSIF just as the NCUA is. Forney realizes it’s not going to be an easy task to come up with a solution to the overhead transfer dilemma, but he’s confident that “reasonable people will come up with a reasonable solution. There’s every indication that NCUA is open to discussion on the issue,” he said. Georgia Banking Commissioner Steve Bridges-a former NASCUS Board member in the late 1980s-agrees there is no magic formula the NCUA should use to determine the overhead transfer rate, and he acknowledged that the overhead transfer has been a concern to state CUs and regulators since NCUA first began allocating expenses to the NCUSIF. In 1993, Bridges served with two other credit union regulators on a task force that studied the cost allocation records of NCUA. The goal, he explained, was to determine the direct cost of functions performed by NCUA in its role as the administrator of the NCUSIF and to determine if those direct costs justified the OTR, which at the time was 50%. According to Bridges, “after much study, we could not substantiate NCUA’s claim that half of its work was performed exclusively for the benefit of the insurance fund. Many of the job functions, the cost of which NCUA had allocated to the insurance fund, were clearly regulatory functions that any prudent safety and soundness regulator, with no insurance fund responsibility, would perform.” Bridges said there needs to be two separate categories of NCUA functions – one for the activities NCUA performs as a result of being the administrator of the insurance fund; another for its functions as the federal credit union regulator. “Of course, if all of the agency’s functions were that clear and easy to assign to one category or the other, all NCUA would have to do to determine the overhead transfer would be to add up the costs for both categories and then determine what percentage of that total was insurance related,” Bridges said. Understandably, there are some functions of NCUA that benefit both categories. In those case, said Bridges, “You have to make judgment calls. There’s room for reasonable people to disagree.” Bridge said he commends NCUA for its plans to hold open hearings for the agency’s 2002 budget. He’s cautious about how successful that will be though. “It will depend on how forthcoming NCUA is,” he said. -ekingoff@cutimes.com