Why the NCUA’s OTR Calculation Methodology is Incomplete
Earlier this year, Debbie Matz invited comment on the methodologies for calculating the overhead transfer rate (OTR) and the federal credit union operating fee. In thinking about the detail I would expect to see in the NCUA release of the OTR calculation I am drawn to the very basics on which much of the data and calculation depend (time spent acting in its duties as an insurer), and find a lack of detail and information to justify the amount spent.
First, some background on the overhead transfer rate. The OTR is the percentage of NCUA’s operating budget which comes from the Share Insurance Fund for the “administration and other expenses” related to federal share insurance. It essentially helps to determine what portion of the NCUA is operating as an “insurer” vs. a “regulator” in order to determine how funds should be allocated to the agency. This is determined by an analysis of: 1) an Examination Time Survey (determination of the hours examiners spend on insurance and non-insurance related activities), 2) the workload budget (hours), 3) the operating budget (dollars), and 4) the imputed value of the state supervisory authority work.
Second, consider the following… In a 2013 study performed by PwC, they found that of the 637 NCUA rules and regulations, 252 are considered to be exam related. Of those 252 , 161 or 64% have been classified as being insurance related and the remaining 91 or 36 % are non-insurance and consumer regulatory related.
Also consider that Title II of the Federal Credit Union Act requires “That examinations required under subchapter I of this chapter shall be so conducted that the information derived therefrom may be utilized for share insurance purposes, and examinations conducted by State regulatory agencies shall be utilized by the Board for such purposes to the maximum extent feasible [emphasis added].” Section 1781 (b) (1). Pretty soft language, but still enough for us to force the issue and ask them to prove “what is feasible?”
My question to NCUA is, if multiple Sections (e.g. 701.21, 715, 723, etc.) are considered by the NCUA to be “insurance related” exam rules, and if the same or similar rules are part of state credit union acts and subject to examination review by the state regulator, then what exactly does the NCUA examiner do that doesn’t duplicate the efforts of the state? Is the state exam incomplete? Are there factors for consideration from the insurer’s point of view that differ from the state exam output? Does NCUA find the state examination methodologies lacking in competency or integrity?
Could the NCUA tell us exactly what examination activities of the SSAs are used to calculate the SSA Insurance Work Imputed Value for oversight of Section 723, and what activities and NCUA work hours are required to supplement the work already done by the State to meet the oversight requirements of the Federal Insurer? We want to know how much of their work is duplicative, and we want to know how much of their work is unique.
Any explanations of the OTR calculation without this depth of detail are just a pile of BS. Without this detail from the very foundation of the examination process I don’t see how you can even hope to purport any accuracy in the calculations of Steps 1, 2, 3, and 4 in the OTR formula. Like they say, “Garbage in, garbage out.”
This whole exercise is ridiculous without a survey of state methods and work time, and that has never happened to the best of my knowledge. That means that they use their own guess as to the valuation of state-imputed value (which I would be embarrassed to admit if I were them). It also means that as an industry we are all likely paying for worst practices rather than best practices.
What if some state method performs a professionally acceptable review of business loans for 20% less than the feds; shouldn’t we credit unions (state and fed) expect that to become a standard for all regulators? Haven’t we taken seriously our fiduciary obligations to our members? If we can show evidence that the technological tools and methods we are proposing in examination innovation reduce the cost of compliance for both the regulator and the regulated while increasing the quality of oversight, aren’t we legally responsible to make every effort to adopt those changes? Shouldn’t we demand that the NCUA exercise the intent of the Federal Credit Union Act to use the work product of SSAs or show hard evidence of why they chose not to?
If this makes any sense then we should publicize our expectations. We need to make it well known what we consider to be “transparency.”
If you think I’m all wet, tell me why I’m wrong!