A letter from NASCUS to the NCUA may have drawn just the kind of attention to the OTR methodology that NASCUS President/CEO Lucy Ito had hoped for.

Ito released a statement Monday calling out the NCUA after General Counsel Mike McKenna told NASCUS in a letter that the NCUA would not release all documents pertaining to the methodology and how it calculates the overhead transfer rate due to “attorney work product.” The NCUA deemed it privileged and confidential information that was exempted from the Freedom of Information Act.

NASCUS disagreed.

Ito claimed the NCUA “is choosing to shield its reasoning regarding its legal responsibilities under the Administrative Procedure Act from stakeholders.”

“Earlier this year, NASCUS released a detailed legal analysis from a respected Washington, D.C., law firm which concluded that the OTR is a 'rule' under the APA definition and, therefore, properly subject to formal public notice and comment to the same extent as NCUA's proposed RBC and MBL rules,” Ito wrote. “In your letter, you dismiss NASCUS' 'continuing' requests, citing budgetary exemptions to the APA and the confidentiality of your work product in a manner that implies NASCUS' attempt to bring complete transparency to this important issue lacks good faith.”

“To be clear, the OTR is no mere budgetary issue involving an agency's internal allocation of funds granted by Congress. The OTR is a cost allocation mechanism that takes credit union money from the insurance fund – money that could be available to cover losses, or to generate earnings to accelerate repayment of Treasury borrowings and hasten a return to dividends for credit unions,” she continued. “Furthermore, that NCUA is using those funds to fully subsidize the safety and soundness examination of federal credit unions rather than charging those examination costs in the form of an operating fee means state chartered credit unions are subsidizing the federal system. These are very real, and very significant issues, deserving of a thorough legal and policy explanation from NCUA.”

On Tuesday, NCUA Public Affairs Specialist John Fairbanks clarified the NCUA's position and said there were 23 documents related to the OTR posted on the NCUA website, including three independent analyses of the OTR methodology.

The NCUA argued that internal legal memos from the general counsel to the NCUA board were protected by attorney-client privilege.

What is the difference between McKenna's description of attorney work product and Fairbanks' description of attorney-client privilege?

According to the Administrative Office of the U.S. Courts on behalf of the Federal Judiciary, attorney-client privilege is used when legal advice is sought, while work product covers “materials prepared by anyone at the direction of attorney where future litigation was (a) distinct possibility.”

“Under NCUA rules (Section 792.11(a) (5)), the agency may withhold written materials prepared by NCUA attorneys,” Fairbanks wrote in response to CU Times. “This rule preserves the ability of agency attorneys to engage in full and frank written communications with NCUA officials and employees. It is therefore under NCUA rules under which we have determined that the written advice provided by the Office of General Counsel to the board on the applicability of APA notice and comment processes to the OTR be withheld, regardless of any party's decision to pursue litigation.”

Fairbanks said the NCUA recognizes the need for transparency related to the OTR, which is why the agency posted more than 20 documents in the budget section of NCUA's website.

“In the near future, (the) NCUA will also issue and post on our website a legal opinion about the applicability of the Administrative Procedure Act's notice and comment process to determining the OTR,” he said.

“(The) NCUA has gone to great lengths to ensure the impartiality of the OTR. During Chairman (Debbie) Matz' terms on the NCUA board, (the) NCUA has submitted the OTR methodology to three independent analyses. PricewaterhouseCoopers in 2011 concluded, 'Based on PwC's review, there was no reasonable basis to conclude that the OTR Methodology … favors or disadvantages any one type of credit unions (i.e. federal versus state chartered) over another.

“In 2013, PwC said, 'The NCUA rules and regulations matrix aligns consistently with the insurance and regulatory activities and provides a documented basis supporting the allocation of examiner time between insurance and regulatory activities.'”

NCUA Board Member Mark McWatters sided with NASCUS, and said absent truly compelling circumstances to the contrary, he saw no reason for the NCUA to not submit the OTR for public comment. He further said the NCUA should not “hide behind a legal opinion regarding the supposed inapplicability of the APA, and disclose the OTR methodology without invoking an attorney-client or work-product privilege.”

“Further, the agency should not rely on an accounting firm for legal advice concerning the OTR. Simply put, the agency should thoughtfully and thoroughly describe the OTR methodology and let the credit union community and general public comment for the record. The agency will make the final determination as to the calculation of the OTR and I see no harm in subjecting the agency's OTR methodology to public comment as a proposed rule under the APA,” McWatters said.

McWatters said he will continue to advocate for transparency and said the NCUA's refusal to articulate the methodology undermines its credibility.

“As I have stated before, (the) NCUA should not use a 'document dump' as the functional equivalent of a thoughtfully drafted APA proposed rule,” he said. “Also, there's an inherent inconsistency between claims of transparent disclosure on the one hand and hiding behind an attorney-client and work-product privilege on the other. So, what's the standard of transparency suggested by the agency – full transparency regarding the OTR methodology or some type of sort of/kind of disclosure subject to redactions by attorneys? We saw what redactions accomplished in the PwC report – key elements of the PwC analysis were removed from public scrutiny simply because of the embarrassment factor to the agency.”

Fairbanks said that in response to feedback from the credit union community, as well as to obtain more frequent public input going forward, Matz testified that the NCUA will solicit comments on the OTR methodology every three years in conjunction with the public review of the agency's strategic plan, starting in January 2016.

“(The) NCUA will carefully consider and respond to all comments received as part of this process,” he said.

Ito argued that wasn't good enough.

“While I appreciate Chairman Matz' pledge to solicit and consider public comment on the OTR methodology every three years as part of NCUA's strategic planning process, that approach does not allow stakeholders to comment before the OTR changes and does not obligate the NCUA to respond to the concerns raised,” she wrote in her letter to the NCUA.

Instant Insights /

McWatters, NCUA Weigh In on OTR Transparency

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