Pay attention to the FCU Act; today’s Board could make bold choices
We should soon be seeing the response from the NCUA to the Request for Comment on the Overhead Transfer Rate calculation methodology posted over one year ago, January 26, 2016. The comment period for that request ended on April 26, 2016, and even though the NCUA has apparently slow walked their response, it was a significant event on which credit unions, their associations, and state regulatory agencies were asked to comment and make recommendations.
As we know, the OTR is the methodology that supports the agency’s reimbursement for expenses directly related to its management responsibilities of the NCUSIF. This authority to transfer funds from the NCUSIF to the operational budget of the NCUA is found in Title II of the FCU Act.
Let’s take a look at the pertinent section of Title II if the FCU Act. Sec 1781, b(1)
- The act allows for the payment to the NCUA any reasonable costs is incurred to determine eligibility for insurance coverage. The legislation states that such payment shall be based upon “reasonable costs”.
- The act states that information gathered in a regulatory examination process shall be derived so that it may be utilized for purposes of the insurance review. This is obviously intended to streamline the examination process in federally chartered CUs, all of whom are also federally insured. This also explains why you can’t find any instruction in NCUA Examiner Guidelines that differentiates the process, protocol or evaluation of data between a “regulatory exam” and an “insurance exam.” For federally chartered CUs the clear legislative intent is that the NCUA examination be one in the same, covering both the requirements of Title I and Title II.
- The act clearly recognizes the existence of a dual chartering model that permits SCCU participation in a Federal Share Insurance Program. It recognizes the regulatory authority of the states and requires that NCUA, in its role as insurer, use state regulatory exams, “to the maximum extent feasible;” to carry out its responsibilities as insurer.
How do we create a new insurance business model and examination process that reinforces the principles of the Act? What will be the benefits of scrapping the current OTR calculation and the measured activities of the agency that have driven it to its current unacceptable state? How will it impact the security and stability of the Share Insurance Fund?
A bold opportunity for a regulatory renaissance
The months since the departure of Chairman Matz have shown evidence of board leadership which is willing and capable of driving the kind of innovative change that our co-operative model needs and the changing times demands. The agency has promised that we will see a new and more transparent OTR protocol. Unfortunately, I will be very surprised if the changes amount to much more than a few tweaks. There are way too many oxen that need to be gored to expect revolutionary and evolutionary change to a process currently being leveraged to the disadvantage of the credit unions who foot the NCUA bill. We can only hope that this new board grabs the opportunity to be bold, to re-engineer a process that currently ignores history and the clear written intent of the Federal Credit Union Act.
The usual MO of a government agency, seldom or never evaluates the opportunity to go back to the basics of the legislative intent, burn down and gut the current process and start over. Instead the usual, less painful, process is to make less drastic modifications that pacifies the internal pressure to fight change, protects jobs and adds costs to a process that does nothing to realign a regulatory environment that produces improved oversight at lower costs.
Can we change that mindset? Can we muscle up the courage and effort to support such an effort? How do we get from here to there?
Get serious about taking a meat cleaver to the NCUA budget
Like most organizations, the greatest expense of the NCUA budget is personnel and associated expenses. The majority of personnel costs are related to the regulatory and insurance related examination process. In 2016 the budgeted workhours (Request for Comment regarding OTR, January, 26, 2016, Table 5) related to these core programs (Federal Examination, Federal Supervision, State Exam & Supervision, State Exam Review, Federal 5300 Program and State 5300 Program) was 728,556 or 350 FTEs. The portion of that 2016 budget allocated to FISCU related activities was 190,251 workhours or 91 FTEs.
The agency does deserve credit for making a reduction in the allocated workhours related to these core programs in 2017 (2017 Overhead Transfer Rate Summary, Fazio, November 17, 2016). Total core programs workhours in 2017 are 655,641 or 320 FTEs. This represents a 10% decrease from 2016. The FISCU related activities have been reduced by 12%, to 167,414 work hours or 80 FTEs.
Good start, but hardly bold. Why isn’t there a small team of maybe 20 FTEs responsible for the insurance oversight of FISCUs? Why isn’t there a strategic objective to drive this kind of reduction? Why isn’t the clear intent of Title II being faithfully exercised by using the examination work product of state regulators to the maximum extent possible? Why isn’t the agency using modern technology strategies to remotely receive and review state regulator work product? Why isn’t the agency receiving real-time alerts from Camel 3, 4 and 5 CUs (most likely CUs to impact NCUSIF) when performance standards exceed acceptable ranges? Why are there reports that Camel 1 and 2 rated small state-chartered CUs are being visited by small teams of federal examiners for the first time in years? Are they suddenly a threat to the NCUSIF? What are the characteristics or criteria of an “insurance examination” that make it any different from the “regulatory exams” being performed by state examiners? Where is the legislative direction that authorizes a duplication of effort at SCCUs?
Agency realignment overdue
I know credit unions are not happy about the increasing regulatory financial burdens imposed on them, their self-funded share insurance fund and their member/owners. The current NCUA board has an opportunity to be strategic, bold and innovative by addressing these concerns of their constituents. They alone can impose an institutional objective that reduces oversight costs while simultaneously increasing the quality of that same oversight. As member owned co-operatives we are live daily with this same expectation and we should demand the same from NCUA as the benefactors of their activities
I hope they start this renaissance immediately. I hope they use a new OTR strategy as their example of their effort to be the best stewards possible of credit union capital and credit union principles.
Tell me why I’m wrong!