[Federal Register Volume 82, Number 224 (Wednesday, November 22, 2017)]
[Notices]
[Pages 55644-55652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25222]


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NATIONAL CREDIT UNION ADMINISTRATION


Overhead Transfer Rate Methodology

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final notice.

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SUMMARY: In June 2017, the NCUA Board (Board) published a notice and 
request for comment on proposed changes to its Overhead Transfer Rate 
(OTR) methodology and sought industry comments on the proposed 
changes.\1\ This Final Notice discusses the comments received and 
provides the Board's response to the comments. This Final Notice also 
sets forth the new OTR methodology the Board has chosen to adopt after 
consideration of the public comments received.
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    \1\ Request for Comment Regarding Revised Overhead Transfer Rate 
Methodology, 82 FR 29935 (June 30, 2017).

FOR FURTHER INFORMATION CONTACT: Russell Moore or Julie Decker, Loss/
Risk Analysis Officers, Office of Examination and Insurance, National 
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 
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22314 or telephone: (703) 518-6383 or (703) 518-6384.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background and Legal Authority
II. Legal Authority Comments and Responses
III. Proposed OTR Methodology Comments and Responses
IV. Final Action
V. Details of the OTR Methodology

I. Background and Legal Authority

    The NCUA administers the Federal Credit Union Act (the Act), which 
is comprised of three Titles: Title I--General Provisions, Title II--
Share Insurance, and Title III--Central Liquidity Facility. Pursuant to 
the Act, the NCUA charters, regulates, and insures shares in federal 
credit unions and insures shares and deposits in federally insured 
state-chartered credit unions through the National Credit Union Share 
Insurance Fund (Share Insurance Fund). The NCUA is responsible for 
ensuring federally insured credit unions operate safely and soundly and 
comply with all applicable laws and regulations within the NCUA's 
jurisdiction.\2\ In so doing, the agency mitigates risk to the Share 
Insurance Fund and prevents taxpayer-funded bailouts. The agency's 
mission is to ``provide, through regulation and supervision, a safe and 
sound credit union system, which promotes confidence in the national 
system of cooperative credit.'' \3\ This includes protecting member 
rights and deposits.
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    \2\ In coordination with State Supervisory Authorities with 
respect to federally insured state-chartered credit unions.
    \3\ https://www.ncua.gov/About/Pages/Mission-and-Vision.aspx.
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    To achieve its statutory mission, the agency incurs various 
expenses, including those involved in examining and supervising 
federally insured credit unions. The Board adopts an Operating Budget 
in the fall of each year to fund the vast majority of the costs of 
operating the agency.\4\ The Act authorizes two primary sources to fund 
the Operating Budget: (1) Requisitions from the Share Insurance Fund 
``for such administrative and other expenses incurred in carrying out 
the purposes of [Title II of the Act] as [the Board] may determine to 
be proper''; \5\ and (2) ``fees and assessments (including income 
earned on insurance deposits) levied on insured credit unions under 
[the Act].'' \6\ Among the fees levied under the Act are annual 
Operating Fees, which are required for federal credit unions under 12 
U.S.C. 1755 ``and may be expended by the Board to defray the expenses 
incurred in carrying out the provisions of [the Act,] including the 
examination and supervision of [federal credit unions].'' Taken 
together, these dual primary funding authorities effectively require 
the Board to determine which expenses are appropriately paid from each 
source while giving the Board broad discretion in allocating these 
expenses.
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    \4\ Some costs are directly charged to the Share Insurance Fund 
when appropriate to do so. For example, costs for training and 
equipment provided to State Supervisory Authorities are directly 
charged to the Share Insurance Fund.
    \5\ 12 U.S.C. 1783(a).
    \6\ 12 U.S.C. 1766(j)(3). Other sources of income for the 
Operating Budget include interest income, funds from publication 
sales, parking fee income, and rental income.
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    To allocate agency expenses between these two primary funding 
sources, the NCUA uses the OTR. The OTR represents the formula the NCUA 
uses to allocate insurance-related expenses to the Share Insurance Fund 
under Title II. Almost all other operating expenses are collected 
through annual Operating Fees paid by federal credit unions.\7\ Two 
statutory provisions directly limit the Board's discretion with respect 
to Share Insurance Fund requisitions for the NCUA's Operating Budget 
and, hence, the OTR. First, expenses funded from the Share Insurance 
Fund must carry out the purposes of Title II of the Act, which relate 
to share insurance.\8\ Second, the NCUA may not fund its entire 
Operating Budget through charges to the Share Insurance Fund.\9\ The 
NCUA has not imposed additional policy or regulatory limitations on its 
discretion for determining the OTR.
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    \7\ Annual Operating Fees must ``be determined according to a 
schedule, or schedules, or other method determined by the NCUA Board 
to be appropriate, which gives due consideration to the expenses of 
the [NCUA] in carrying out its responsibilities under the [Act] and 
to the ability of [FCUs] to pay the fee.'' 1755(b). The Board's 
methodology for determining the aggregate amount of Operating Fees 
was discussed in a separate Federal Register publication. 81 FR 4674 
(Jan. 27, 2016).
    \8\ 12 U.S.C. 1783(a).
    \9\ The Act in 12 U.S.C. 1755(a) states, ``[i]n accordance with 
rules prescribed by the Board, each [federal credit union] shall pay 
to the [NCUA] an annual operating fee which may be composed of one 
or more charges identified as to the function or functions for which 
assessed.'' See also 12 U.S.C. 1766(j)(3).

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[[Page 55645]]

    In 1972, the Government Accountability Office recommended the NCUA 
adopt a method for properly allocating Operating Budget costs--that is, 
the portion of the NCUA's budget funded by requisitions from the Share 
Insurance Fund and the portion covered by Operating Fees paid by 
federal credit unions.\10\ The NCUA has since used an allocation 
methodology, known as the OTR, to determine how much of the Operating 
Budget to fund with a requisition from the Share Insurance Fund.
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    \10\ http://www.gao.gov/assets/210/203181.pdf.
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    The NCUA has employed various allocation methods over the years, 
with the methodology adopted in 2003. For a chronological history of 
the OTR, refer to Overhead Transfer Rate (OTR)--Timeline at https://www.ncua.gov/About/Documents/Budget/Misc%20Documents/overhead-transfer-rate-chronology.pdf. For a detailed explanation of the prior 
methodology, refer to Federal Register--NCUA Request for Comment 
Regarding Overhead Transfer Rate Methodology at https://www.federalregister.gov/documents/2016/01/27/2016-01626/request-for-comment-regarding-overhead-transfer-rate-methodology.
    In January of 2016, the Board voluntarily published its OTR 
methodology in the Federal Register and invited industry comment.\11\ 
In June 2017, the Board proposed changes to the OTR methodology in the 
Federal Register and requested comments on the proposed changes.\12\
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    \11\ Request for Comment Regarding Overhead Transfer Rate 
Methodology, 81 FR 4804 (Jan. 27, 2016).
    \12\ Request for Comment Regarding Revised Overhead Transfer 
Rate Methodology, 82 FR 29935 (June 30, 2017). The OTR does not 
require notice-and-comment procedures. The NCUA's legal analysis 
with respect to the OTR and Administrative Procedure Act processes 
is available at the following Web page: https://www.ncua.gov/Legal/Documents/Opinion/OL2015-0818.pdf.
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    Within the 60-day comment period, the NCUA received 26 comment 
letters on the OTR methodology. The commenters included federal credit 
unions, federally insured state-chartered credit unions, national 
credit union trade organizations, state leagues, state supervisory 
authorities, and a credit union service organization (CUSO).

II. Legal Authority Comments and Responses

    In response to its initial OTR notice in January 2016, the NCUA 
received a variety of comments related to the legal authority to 
requisition funds from the Share Insurance Fund to cover a portion of 
the Operating Budget. Several of the 2016 commenters stated the agency 
does not have authority or discretion to establish and determine the 
OTR. Some commenters asserted that the NCUA lacks the legal authority 
to use the Share Insurance Fund to cover costs of operating the agency. 
Other commenters claimed the NCUA has only very narrow authority to 
allocate costs, has too broadly interpreted its authority, and may 
assign to the Share Insurance Fund only those costs directly associated 
with share insurance payments for failed or troubled credit unions. 
Some commenters insisted the NCUA is required to fund the vast majority 
of the cost of operating the agency through Operating Fees charged to 
federal credit unions, claiming Congress intended that Operating Fees 
were to subsidize costs in managing risk to the Share Insurance Fund. 
Finally, some commenters insisted that the Board must use APA notice-
and-comment processes to establish the OTR. To the extent commenters 
explained their positions, they read various limitations into the 
provisions the NCUA cites in Section I above and the response below and 
pointed to the Act's legislative history.
    In response to the June 2017 Request for Comment the NCUA received 
a number of comments that reiterated the substance of or referenced 
points made in the comments received in response to the January 2016 
Request for Comment. While helpful, the comments did not advocate 
materially new legal arguments or substantively expand on ones made in 
response to the January 2016 Request for Comment. Accordingly, the 
substance of the Board's responses to comments largely tracks those 
published in the June 2017 notice, with minor alterations. The Board 
believes this will be helpful to stakeholders in addressing questions 
they may have by once again fully explaining the NCUA's legal analysis 
set forth above.
    Various commenters disagreed with the agency's legal analysis and 
argued that some combination of 12 U.S.C. 1781(b)(1), 1782(a)(5), and 
1790 also limit the NCUA's requisition of funds from the Share 
Insurance Fund for the Operating Budget. Several commenters went 
further and argued that Title II's legislative history indicates the 
savings from the NCUA's reliance on Title I and State Supervisory 
Authority examinations and reports should accrue to the benefit of the 
Share Insurance Fund. Having considered these comments, the NCUA 
maintains that a plain reading of the Act, as described in section I 
above and in both the January 2016 and June 2017 notices, supports the 
agency's legal authority and broad discretion in allocating operating 
costs. As the Board previously stated, the Act's plain language does 
not require an analysis of the legislative history.\13\ Even if 
legislative history was applicable in this case, the plain reading of 
the Act is consistent with the legislative history and does not support 
commenters' interpretation that Congress intended costs savings 
provisions to only accrue to the Share Insurance Fund as discussed 
below.
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    \13\ See, e.g., Barnhart v. Sigmon Coal Co., 534 U.S. 438, 450 
(2002).
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a. Allocation of the Cost Savings From the NCUA's Dual Roles

    Multiple commenters stated that the plain language of the Act 
requires the Board to structure examinations and Call Reports 
originally required under Title I so they may be used for Title II 
share insurance purposes. These commenters similarly stated that the 
Act places requirements on the NCUA to use state regulator examinations 
and reports to the maximum extent feasible.
    As the Board has previously explained, Title II of the Act, in 12 
U.S.C. 1781(b)(2), authorizes examinations as needed for the protection 
of the Share Insurance Fund and other credit unions in addition to 
those permitted under Title I, recognizing that the scope and timing of 
Title I examinations does not necessarily satisfy share insurance needs 
under Title II. With respect to use of state regulator exams and 
reports, the Board is careful to build efficiencies wherever reasonable 
in light of the NCUA's dual roles as (1) charterer and prudential 
regulator of federal credit unions and (2) insurer of federal credit 
unions and federally insured state-chartered credit unions. This 
ensures the NCUA uses state regulator examinations and reports to the 
maximum extent feasible for purposes of insurance. Efficiencies gained 
from the NCUA's dual role provide cost savings and help avoid 
subjecting credit unions to the burden of redundant examinations.
    Further, the Act's provisions on cost savings do not prohibit the 
NCUA from allocating insurance-related operating expenses to the Share 
Insurance Fund through the OTR under 12 U.S.C. 1783(a). Specifically, 
12 U.S.C. 1781(b)(1) requires the NCUA to adjust the way it conducts 
examinations of federal credit unions so they may be ``utilized for 
share insurance purposes.'' This provision does result in cost savings. 
However, it does not preclude the NCUA from allocating the costs of the 
``share insurance purposes'' portion of federal credit union 
examinations to

[[Page 55646]]

the Share Insurance Fund.\14\ The Board thus disagrees with commenters 
that argued the Act requires the cost-savings of the NCUA's dual roles 
to accrue specifically to the Share Insurance Fund.
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    \14\ With respect to call reports and other ongoing reports 
submitted by federally insured credit unions, 12 U.S.C. 1782(a)(5) 
is also a cost savings provision but does not preclude allocating 
insurance-related costs of the applicable data collections to the 
Share Insurance Fund.
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b. 12 U.S.C. 1790--Prohibition of Discrimination Based on Charter Type

    With respect to 12 U.S.C. 1790, the Board agrees with commenters 
stating that this provision should inform the NCUA's interpretation of 
Title II so that it consciously avoids discrimination against federally 
insured state-chartered credit unions to the benefit of federal credit 
unions.\15\ However, the Board does not believe that either the prior 
OTR process or the one adopted in this Final Notice discriminates 
against federally insured state-chartered credit unions or federal 
credit unions to the benefit of the other.
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    \15\ 12 U.S.C. 1790 (``It is not the purpose of this subchapter 
to discriminate in any manner against State-chartered credit unions 
and in favor of Federal credit unions, but it is the purpose of this 
subchapter to provide all credit unions with the same opportunity to 
obtain and enjoy the benefits of this subchapter.'').
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    As background, all federally insured credit unions are subject to 
the same requirements for funding the Share Insurance Fund. 
Specifically, Sec.  1782(c)(1)(A)(i) requires that ``[e]ach insured 
credit union shall pay to and maintain with the [Share Insurance Fund] 
a deposit in an amount equaling 1 per centum of the credit union's 
insured shares.'' Section 1782(c)(2)(A) requires that ``[e]ach insured 
credit union shall, at such times as the Board prescribes (but not more 
than twice in any calendar year), pay to the Fund a premium charge for 
insurance in an amount stated as a percentage of insured shares (which 
shall be the same for all insured credit unions).'' Thus, in funding 
the Share Insurance Fund, federal credit unions and federally insured 
state-chartered credit unions are not treated any differently. 
Similarly, requisitions from the Share Insurance Fund used to fund the 
insurance-related expenses of the NCUA's Operating Budget under Sec.  
1783(a) do not distinguish between federal credit unions and federally 
insured state-chartered credit unions.
    In response to the June 2017 Request for Comment one commenter 
stated that the primary goal of the proposed changes was to reduce the 
complexity of the OTR methodology. The commenter stated that the NCUA's 
primary goal should be to ensure fair and equitable treatment of 
federal credit unions and federally insured state-chartered credit 
unions in the allocation of insurance-related activities. However, the 
Board has always approached the OTR with the goal that it be fair and 
equitable to both charter types. The Board believes the new method 
continues to provide a fair and equitable distribution of Title I and 
Title II costs while recognizing that somewhat less precision can make 
the process more cost effective and understandable. In other words, 
fairness and equity among charter types is more than a goal, they have 
been and continue to be fundamental to the OTR methodology.

c. Title II Operating Costs

    The Act clearly permits expenses related to insurance to be funded 
by the Share Insurance Fund, regardless of charter. Specifically, 12 
U.S.C. 1783(a) allows expenses ``incurred in carrying out the purposes 
of [Title II]'' to be allocated to the Share Insurance Fund. The costs 
the NCUA incurs in safeguarding the Share Insurance Fund relate to the 
risks in federal credit unions and federally insured state-chartered 
credit unions. The Act provides the Board with specific authorities 
that relate to costs the NCUA incurs in carrying out its obligations 
under Title II. For instance, Title II of the Act authorizes the Board 
``to appoint examiners who shall have the power, on its behalf, to 
examine any insured credit union . . . whenever in the judgment of the 
Board an examination is necessary to determine the condition of any 
such credit union for insurance purposes.'' \16\ Further, Title II 
authorizes the Board to implement regulations applicable to all insured 
credit unions to address risk to the Share Insurance Fund. Title II 
states the Board may ``prescribe such rules and regulations as it may 
deem necessary and appropriate to carry out the provisions of this 
subchapter.'' \17\ Title II also grants the Board the following 
authorities relevant to agency operating costs:
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    \16\ 12 U.S.C. 1784(a).
    \17\ 12 U.S.C. 1789(a)(11).
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     ``appoint such officers and employees as are not otherwise 
provided for in this chapter;'' \18\
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    \18\ 12 U.S.C. 1789(a)(4).
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     ``employ experts and consultants or organizations 
thereof;'' \19\
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    \19\ 12 U.S.C. 1789(a)(5).
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     ``prescribe the manner in which its general business may 
be conducted and the privileges granted to it by law may be exercised 
and enjoyed;'' \20\
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    \20\ 12 U.S.C. 1789(a)(6).
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     ``exercise all powers specifically granted by the 
provisions of this subchapter and such incidental powers as shall be 
necessary to carry out the power so granted;'' \21\ and
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    \21\ 12 U.S.C. 1789(a)(7).
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     ``make examinations of and require information and reports 
from insured credit unions, as provided in this subchapter.'' \22\
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    \22\ 12 U.S.C. 1789(a)(8).
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    The Board concludes that these authorities, taken together, provide 
the NCUA as insurer with broad discretion to impose regulations on and 
examine all insured credit unions. In addition, the cost of the agency 
activities associated with exercising these and other accompanying 
authorities can properly be considered costs of carrying out Title II 
of the Act.\23\
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    \23\ For example, Title II specifically addresses a broad range 
of standards for all insured credit unions, including standards for 
insurance against burglary and defalcation, loss reserve 
requirements, investment limitations, ongoing reporting requirements 
(such as the Call Report), independent audits, accounting 
principles, national flood insurance program requirements, liquidity 
capacity, unsafe and unsound conditions or practices, security 
standards, recordkeeping, monetary transaction and recordkeeping and 
reporting, benefits to institution affiliated parties, capital 
standards, and approval of officials.
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d. APA Requirements

    The legal analysis of the NCUA's Office of General Counsel on the 
applicability of the notice and comment provisions of the 
Administrative Procedure Act (APA) to the OTR methodology is summarized 
in the January 2016 OTR notice \24\ and articulated more fully in a 
legal opinion posted on the NCUA's Web site.\25\ In soliciting comment 
on the OTR through the Federal Register, the NCUA has gone, and 
continues to go, beyond its APA obligations.
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    \24\ 81 FR 4804 (Jan. 27, 2016) (``Since its inception, NCUA has 
taken the position that the OTR is not a legislative rule under the 
Administrative Procedure Act (APA) and is, therefore, exempt from 
notice and comment rulemaking processes. As such, NCUA has never 
used notice and comment rulemaking to establish either an individual 
determination of the OTR or the general methodology used to 
calculate the OTR. However, the OTR has been explained, discussed, 
and reviewed in various public records, including in annual Board 
Action Memorandums related to budget matters, independent 
evaluations, and other documents available in public records and on 
NCUA's Web site.'' (footnotes omitted).
    \25\ The NCUA's legal analysis with respect to the OTR and APA 
process is available at the following Web page: https://www.ncua.gov/Legal/Documents/Opinion/OL2015-0818.pdf.
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    In response to the June 2017 notice, one commenter specifically 
cited the Board's characterization of the OTR

[[Page 55647]]

methodology as a rule at the June 2017 Board meeting as support for 
notice and comment procedures being required. However, as articulated 
in the Office of General Counsel's analysis \26\ cited above, the APA 
does not require notice-and-comment procedures for all rules. Instead, 
a broad variety of agency actions fall under the APA's definition of 
``rule,'' only some of which require notice and comment. As the Office 
of General Counsel's analysis states ``The APA's definition of a rule 
is very broad and applies to `nearly every statement an agency' may 
make. However, determining whether the APA notice and comment 
requirements apply to a particular agency action or rule is a separate 
inquiry.'' By referring to the OTR as a rule, the Board was not 
suggesting notice-and-comment procedures are required but was instead 
calling the OTR what it is under the APA: A rule that does not require 
notice-and-comment procedures.
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    \26\ Id.
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III. Proposed OTR Methodology Comments and Responses

a. Allocate Examination and Supervision of Federal Credit Unions as 50 
Percent Insurance Related

    Approximately half of the comments received addressed the first 
principle that examination and supervision of federal credit unions 
should be treated as 50 percent insurance-related. Those that did 
address it were split. Commenters supporting the proposed principle 
argued that it appeared to be a rough approximation of the time the 
NCUA should spend between its prudential and insurance-related 
responsibilities with respect to federal credit unions. One commenter 
specifically opined that the NCUA's analysis appeared reasonable and 
that the principle would be simple to apply. Another commenter 
supported the proposed principle, but suggested that it may be ``too 
modest'' of an assessment of the time the NCUA devotes to prudential 
supervision of federal credit unions.
    Commenters that opposed the proposed principle argued that the 
Board's policy rationale is not clearly set out in the notice and, 
therefore, the change in policy appears to be without ``a reasoned 
basis.'' Some of these commenters also argued that the proposed 
principle is arbitrary, capricious, and not supported by substantial 
evidence. One commenter stated that it was not based on observable and 
measurable data inputs. The same commenter argued that the principle 
reflects the NCUA's position of ``how things should be'' but not how 
things are in reality. Another commenter argued that the principle 
ignores the Federal Deposit Insurance Corporation's (FDIC) actual 
practices, citing the following: (1) Pronouncements from the FDIC 
asserting its primary focus and intention is to protect the insurance 
fund by ensuring the safety and soundness of its member institutions; 
(2) conducting annual joint examinations with state regulators in many 
cases rather than alternating examinations, suggesting the FDIC 
considers protection of the insurance fund through its own examinations 
as a critical responsibility; and (3) the FDIC conducts a substantial 
and increasing amount of offsite monitoring, examination and 
supervision on all its institutions for safety and soundness purposes 
on an ongoing basis. Several other commenters recommended that the 
Board take additional time to study this assumption to develop a more 
empirically supportable principle and that the Board continue to refine 
this principle in the future to be more accurate.
    The Board believes the rationale for the first principle is 
supportable and easy to understand. It attributes equal weight to each 
of NCUA's dual roles as regulator and insurer of federal credit unions. 
It creates a cost sharing similar to what would result if NCUA 
conducted alternating examinations of federal credit unions, acting as 
the regulator during one exam cycle and the insurer the next. 
Additionally, joint examinations between the regulator and insurer are 
generally staffed equally, resulting in a 50-50 time split. Whether 
alternating examinations or participating in joint examinations, the 
examination and supervision time of the insurer still ends up 
approximately 50 percent. As noted in the request for comment, it is 
consistent with the alternating examinations the FDIC and state 
regulators conduct for insured state-chartered banks, as mandated by 
Congress.
    As one commenter noted, the FDIC prominently asserts its primary 
focus is to protect its insurance fund by ensuring the safety and 
soundness of its member institutions, in many cases through annual 
joint examinations. Like the FDIC, the NCUA's primary focus in its role 
as insurer is to protect the Share Insurance Fund. However, unlike the 
FDIC, the NCUA also has chartering authority. Since the NCUA 
examination staff perform all examinations of federal credit 
unions,\27\ the NCUA as insurer can fully rely on all federal credit 
union examination reports for insurance purposes where the FDIC deals 
with many different state regulators. The FDIC conducts annual/joint 
examinations where it perceives elevated risks. The NCUA also increases 
examination activity where it perceives elevated risk and may choose to 
increase supervision for federal credit unions or conduct joint 
examinations for federally insured state-chartered credit unions. 
Further, the NCUA conducts a substantial amount of offsite monitoring 
and supervision of both federal credit unions and federally insured 
state-chartered credit unions, increasing this oversight when risk 
warrants. All examination and supervision time, both onsite and 
offsite, for all credit unions, whether they are healthy or troubled, 
is covered by the methodology in the workload hours portion of the 
calculation. This is consistent with Principle 1 and the FDIC model.
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    \27\ The Consumer Financial Protection Bureau also performs 
compliance examinations on credit unions with assets greater the $10 
billion.
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    Using a principle-based approach simplifies the OTR calculation and 
reduces the resources needed to administer it. Further, it reflects 
that the NCUA as insurer is responsible for managing risk to the Share 
Insurance Fund and therefore should not rely solely on examinations and 
supervision conducted by the prudential regulator.
    Importantly, the simplified assumption of equal sharing reflects 
the offsetting benefits for each role under a framework emulating an 
alternating examination program like the one used by FDIC. In other 
words, the insurer may evaluate compliance matters as part of a 
reciprocal arrangement with the prudential regulator in evaluating 
matters specific to insurance as part of the overall shared supervision 
of a credit union. It reflects an equal sharing of supervisory 
responsibilities between the NCUA's dual roles as charterer/prudential 
regulator and insurer given both roles have a vested interest in the 
safety and soundness of federal credit unions.

b. Allocate Examination and Supervision of All Others as 100 Percent 
Insurance Related

    Few commenters addressed the second principle that all time and 
costs the NCUA spends supervising or evaluating the risks posed by 
federally insured state-chartered credit unions or other entities the 
NCUA does not charter or regulate (for example, third-

[[Page 55648]]

party vendors and CUSOs) should be treated as 100 percent insurance 
related. The majority of responsive comments supported the proposed 
principle. One commenter recommended that the Board allocate the 
supervision of CUSOs as 50 percent prudential regulatory and 50 percent 
insurance related. Another commenter recommended that the Board 
allocate CUSOs and third-party supervision as 25 percent prudential 
regulatory and 75 percent as insured-related. The commenter reasoned 
that, since the safety and soundness of federal credit unions is 
partially allocated to Title I, it would follow that some hours for 
CUSOs and third-party reviews should reflect the NCUA's safety and 
soundness responsibility as charterer and prudential regulator. 
Additionally, at least one commenter opposed the proposed second 
principle, arguing the Board has not explained its policy rationale 
clearly in the notice and, therefore, the change in policy is without a 
``reasoned basis.''
    The Board disagrees that it has not explained its policy rationale. 
The NCUA has specifically defined its role with federally insured 
state-chartered credit unions and other entities the NCUA does not 
charter or regulate, including CUSOs. The NCUA does not charter, nor is 
it the prudential regulator of, federally insured state-chartered 
credit unions; therefore, the NCUA's role is solely as the insurer. 
Further, the Board does not believe singling out CUSO activities is 
necessary or appropriate under the first or second proposed principle. 
Doing so would revert back to the prior approach of more particular 
designation of examination activities as insurance or regulatory based, 
which the proposed principles are designed to lessen for the reasons 
discussed above.
    A CUSO itself is at times subject to a limited review during the 
examination of a federally insured credit union. This review generally 
covers the documentation required by NCUA or state regulation that 
credit unions must execute prior to investing in or lending to a CUSO. 
Examiners may also assess the risk a CUSO's activities pose to the 
credit union as part of the credit union examination. The CUSO related 
time within the scope of the examination and supervision of federally 
insured credit unions is captured under Principle 1 for federal credit 
unions and Principle 2 for federally insured state-chartered credit 
unions. The time designated for separate, stand-alone reviews of CUSOs 
and third-party vendors is accounted for separately in the NCUA's 
workload budget and is covered by Principle 2 only. The Board has no 
direct regulatory authority with respect to CUSOs and there is no 
support to allocate time specifically designated for CUSO and third-
party vender reviews as anything other than the NCUA's role as insurer.

c. Allocate Time and Costs Related to the NCUA's Role as Charterer and 
Enforcer of Consumer Protection and Other Non-Insurance Based Laws 
Governing the Operations of Credit Unions as Zero Percent Insurance 
Related

    Only a few commenters addressed the third proposed principle that 
all time and costs related to the NCUA's role as charterer and enforcer 
of consumer protection and other non-insurance based laws governing the 
operations of credit unions should be treated as not insurance related. 
Each commenter to address the proposed principle favored the Board's 
approach but did not offer substantive commentary.

d. Allocate Administration of the Share Insurance Fund as 100 Percent 
Insurance Related

    Only a few commenters addressed the fourth principle that time and 
costs related to the NCUA's role in administering federal share 
insurance and the Share Insurance Fund should be treated as 100 percent 
insurance related. Each commenter to address the proposed principle 
favored the Board's approach but did not offer substantive commentary.

e. Soliciting Public Comment on the OTR Methodology

    Less than half of the commenters addressed whether the Board should 
solicit public comment on the OTR methodology every three years and 
whenever the Board seeks to change the OTR methodology. All of those 
commenting favored soliciting public comment. One commenter recommended 
that the Board adopt a standardized five-year review period for the 
calculation. Another commenter recommended that the Board also solicit 
public comment on the OTR methodology for any year the OTR changes more 
than two percent. A third commenter recommended that the Board codify 
the OTR methodology as part of the NCUA's regulations, believing this 
would subject the OTR methodology to the notice-and-comment 
requirements of the APA. A fourth commenter recommended that the Board 
include the OTR methodology in the NCUA's rolling regulatory review 
under the Economic Growth and Regulatory Paperwork Reduction Act of 
1996. Finally, another commenter argued that the Board should subject 
the OTR methodology to periodic verification from an independent third 
party.
    The Board is committed to seeking public comment on the OTR 
methodology every three years or when there are changes to the 
methodology. The Board reiterates that changes to the methodology means 
changes to the four principles or abandonment of the principles in 
favor of another methodology, not changes to the NCUA's organizational 
structure. The results of the calculation are not static and will 
change from year to year based on the contemporaneous information from 
the workload and financial budgets. The results are updated and 
reviewed annually and are applied to actual expenses. The Board does 
not agree that the OTR application should be submitted for public 
comment, regardless of whether it results in a material year-over-year 
change to the rate. Changes to the OTR output would be a result of the 
methodology's application to organizational changes or internal 
resource allocations, not a result of changes to the methodology. Even 
if the Board wanted to subject output changes to notice-and-comment, 
the time required for such processes would almost certainly impede the 
Board's budget processes.
    The Board acknowledges that application of the current methodology 
has resulted in material changes in the OTR from year to year. This was 
a factor the Board considered in simplifying the calculations and the 
Board expects that the proposed methodology should result in less 
volatility in OTR outputs going forward. As noted in the legal analysis 
contained in the Request for Comment, the NCUA's position remains that 
the OTR methodology is not subject to the APA's notice-and-comment 
requirements. The Board maintains that the same is true with respect to 
its application. Further, this conclusion does not depend on whether 
the OTR methodology is included in the NCUA regulations. Whether a 
Board action is codified does not determine whether it is subject to 
notice-and-comment processes.\28\
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    \28\ Interested parties can review the NCUA's position on this 
in the opinion found on the NCUA's Web site at the following 
address: https://www.ncua.gov/Legal/Documents/Opinion/OL2015-0818.pdf.
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    Regarding subjecting the proposed methodology to periodic 
verification from an independent third-party, the Board will consider 
the cost versus the benefits of such a review. Given the greatly 
simplified methodology, such reviews may provide limited benefits.

[[Page 55649]]

f. Maintaining Current Staff Delegations

    Only a few commenters addressed whether the Board should maintain 
the current staff delegation to administer the OTR methodology but 
require public board briefings every year. Each commenter to address 
the proposal to maintain current staff delegations favored the Board's 
approach but did not offer substantive commentary.

g. Additional Comments

50/50 Split Between OTR and Operating Fees
    One commenter opposed the OTR methodology and recommended the 
NCUA's operating budget be funded 50 percent by requisition from the 
Share Insurance Fund via the OTR and 50 percent from federal credit 
union operating fees. This commenter suggested that this was the 
Board's long-standing approach to funding the NCUA's operating budget 
prior to the current OTR methodology. Another commenter, however, 
indicated that a majority of its member credit unions would not favor 
such an approach.
    As stated in the Request for Comment, the Board does not believe it 
is transparent or appropriate to set the OTR at any level, such as 50 
percent, without a reasoned basis to demonstrate that level of agency 
operating costs are properly allocated to Title II activities. Even if 
it was, the Board thinks such a rough justice approach is unnecessarily 
simple while providing negligible, if any, additional administrative 
ease. The Board believes the principles-based methodology adopted in 
this Final Notice provides a reasoned basis for the OTR and is fair and 
equitable. The proposed new OTR methodology also provides a good 
balance between understandability, ease of administration, and 
precision.
Revise or Replace
    At least one commenter strongly opposed the proposed OTR 
methodology in its entirety, arguing that the Board should revise and 
refine, not replace, the current methodology. Some refinements this 
commenter suggested included a clearer distinction between insurance 
and safety and soundness activities.
    The Board does not agree that further distinction between insurance 
and safety and soundness is warranted. The proposed new OTR methodology 
revises the former OTR methodology and addresses concerns raised in the 
first request for comment as well as this one related to the 
distinction between insurance related and safety and soundness. The 
NCUA recognizes that safety and soundness is not the sole domain of the 
insurer. Rather, both the prudential regulator and insurer have 
responsibilities for safety and soundness. In the June 2017 Request for 
Comment, the NCUA acknowledged that safety and soundness is not the 
sole domain of the insurer; prudential regulators have various 
responsibilities with respect to the safety and soundness of 
institutions they oversee. To better reflect that the prudential 
regulator and insurer both have responsibilities for safety and 
soundness, the Board is adjusting the OTR methodology accordingly. This 
is reflected in the first principle of the proposed new methodology. 
Further, the old methodology also recognized this to some extent 
through the Imputed SSA Value component.
    Another commenter also recommended retaining the old methodology, 
stating it is an objective, formula-based model that uses measurable 
data inputs, which prioritizes fairness, accuracy, and equity. Instead 
of replacing the old methodology, the commenter suggested the Board 
refine the examiner time survey and reevaluate the Imputed SSA Value. 
The Board disagrees with this recommendation and favors the proposed 
new methodology.
    The proposed new methodology, though simpler, is still objective 
and formula driven. The examiner time study and the assignment of time 
as insurance, insurance regulatory, and consumer regulatory has been an 
area of great debate and the Board does not believe any amount of 
refining of these categories will alleviate the criticism and confusion 
around the process. The same criticism and confusion pertains to the 
``Imputed SSA Value.'' Without 100 percent cooperation from the state 
supervisory authorities in providing detailed time studies and budget 
information, the NCUA cannot calculate a more accurate estimate. There 
is also stakeholder confusion regarding the hypothetical ``as if'' 
scenario that assumes the NCUA would have to do all the examination and 
supervision work. The proposed new methodology eliminates the examiner 
time study and the ``Imputed SSA Value'' to eliminate the confusion 
caused by each. Therefore, further refinements or changes to either are 
unnecessary at this time.
    One commenter recommended establishing a Credit Union Advisory 
Council that would discuss, among other topics, the OTR. This request 
goes beyond the scope of the Request for Comment on the OTR.
Consistency With OCC, Segregating Functions
    At least one commenter recommended that the Board adopt a 
methodology that more closely resembles the national banking model. The 
commenter suggested that the budget of the Office of the Comptroller of 
the Currency (OCC) for supervising national banks is entirely separate 
from the FDIC's budget for insuring bank deposits and recommended that 
the Board adopt a similar approach for the supervision of federal 
credit unions. Similarly, another commenter indicated that a majority 
of its member credit unions favor the Board separating the NCUA's 
charting and supervision of federal credit unions from its insurance-
related supervisory functions.
    The Board thinks using this approach would undermine the 
efficiencies Congress intended to create. The NCUA is both a regulator 
and insurer under the organization of a single federal agency with one 
budget. As noted in the January 2016 Request for Comment, in Title II 
of the Act, Congress established the Share Insurance Fund and housed it 
within the NCUA for administration by the Board. Congress envisioned 
efficiencies from this arrangement, as well as the NCUA's partnership 
with state regulators. While the NCUA does not have two distinctly 
separate budgets, it strives to allocate the appropriate amount to each 
activity through the OTR. In contrast, the OCC has no authority 
regarding the Deposit Insurance Fund, which is managed by the FDIC. The 
FDIC manages the Deposit Insurance Fund and has no primary regulatory 
responsibility for federally chartered banks. They have completely 
separate budgets because they are distinct federal agencies.
    The NCUA also notes that the funding of the banking regulatory 
system has also been the subject of criticism. For example, in its July 
2001 Report, Reforming the Funding of Bank Supervision, the Comptroller 
of the Currency concluded the funding system was not fair. The report 
states:

    Under the present system, national banks pay the full costs of 
their supervision, through assessments levied on them by the Office 
of the Comptroller of the Currency (OCC), the federal agency that 
charters and supervises national banks. State-chartered banks, by 
contrast, pay only for that small fraction of their supervision that 
is provided by state supervisory agencies. The predominant part of 
state bank supervision actually comes from two federal agencies, the 
Federal Reserve System (FRS) and the Federal Deposit Insurance 
Corporation (FDIC). These federal agencies perform exactly the same 
supervisory functions for

[[Page 55650]]

state banks as the OCC performs for national banks. The main 
difference is that the FRS and the FDIC do not assess state banks 
for the costs of their supervisory services.\29\
---------------------------------------------------------------------------

    \29\ Comptroller of the Currency, Reforming the Funding of Bank 
Supervision (2001), available at ttps://www.occ.gov/static/news-issuances/news-releases/2001/nr-occ-2001-67-paper.pdf.

    The NCUA Board seeks to be as fair as possible in the funding of 
its Operating Budget and does not believe the banking industry model is 
appropriate for credit unions.
Cost Savings Measures
    One commenter recommended that the Board adopt cost saving measures 
to further reduce the OTR. Those measures included accepting the 
results of validated Asset Liability Management models of credit unions 
subject to supervision by the Office of National Examinations and 
Supervision (ONES) for supervisory stress testing purposes.
    Suggestions regarding cost saving measures are aimed at the NCUA's 
overall budget, not at the OTR methodology. The budgeted amount is 
beyond the scope of the Request for Comment. While a lower budget may 
reduce the amount charged to the Share Insurance Fund through the OTR, 
this effect would not be a function of changes to the OTR methodology, 
which was the focus of the request for comment.
    This commenter also recommended that the Board investigate options 
to improve the financial performance of the Share Insurance Fund in 
order to use investment gains to generate additional earnings. This 
comment also goes beyond the scope of the OTR methodology. Further, 
Title II of the Act explicitly limits the permissible investment 
vehicles for the Share Insurance Fund.\30\ Consistent with its role as 
a steward of public insurance funds, the NCUA adheres to the strict 
investment objectives of ``safety, liquidity, and yield (i.e., 
income)'' and in that order of priority. Only after ensuring safety of 
principal and establishing that maturities coincide with the timing of 
planned and contingent funding needs are the income objectives of the 
portfolio considered. In accordance with the U.S. Treasury's policy for 
Government Investment Accounts, the schedule of portfolio maturities 
coincides with the Agency's anticipated disbursement estimates (that 
is, our projected funding needs) and all purchases are intended to be 
held to maturity. The NCUA is bound by U.S. Treasury Operating Circular 
requirements, which states in section 4060:
---------------------------------------------------------------------------

    \30\ 12 U.S.C. 1783(c).

    A Program Agency for a Government Investment Account shall not 
engage in investment practices that result in windfall gains and 
losses, including but not limited to security day-trading and large 
restructuring of investment portfolios to take advantage of short-
---------------------------------------------------------------------------
term Interest Rate fluctuations.

    One commenter recommended that the Board explore ways to work more 
closely with state supervisory authorities to increase efficiencies and 
reduce costs. The Board agrees that working with state supervisory 
authorities reduces costs and increases efficiencies for both the NCUA 
and state supervisory authorities. Therefore, as stated in the Request 
for Comment, the Board is careful to build efficiencies related to the 
NCUA's dual role as charterer and prudential regulator of federal 
credit unions and insurer of federal credit unions and federally 
insured state-chartered credit unions wherever possible. As part of the 
Examination Flexibility Initiative, the Board established a joint NCUA-
State Regulator working group that has been active in 2017 in exploring 
ways to further improve coordination and cooperation.
Budget Allocations
    Two commenters requested clarification on how the NCUA's proposed 
reorganization will impact budget allocations. One commenter 
specifically noted that 13 percent of the Office of Consumer Financial 
Protection and Access' budget is allocated from the Share Insurance 
Fund and that the proposed reorganization could have a substantial 
impact on that assumption.
    The NCUA's reorganization affects the OTR's application, not the 
OTR methodology. The Board is approving the allocation principles for 
the OTR methodology. These principles are then dynamically applied to 
the activities and related costs of the agency--they are not 
necessarily specific to individual offices or the agency's 
organization. For example, costs associated with federal credit union 
examinations and supervision are aggregated. Therefore, a reduction 
from five regions to three regions will not affect the budget 
allocation.
    Similarly, the Office of Small Credit Union Initiatives' transition 
to the new Office of Credit Union Resources and Expansion and the 
assumption of the NCUA's chartering function, formerly in the Office of 
Consumer Financial Protection and Access, does not materially impact 
budget allocation. The majority of the Economic Development Specialists 
from the old Office of Small Credit Union Initiatives are being 
converted to Consumer Access Analysts in the new Office of Credit Union 
Resources and Expansion. The Consumer Access Analysts from the Office 
of Consumer Financial Protection and Access will also be transferred to 
the new Office of Credit Union Resources and Expansion. The change in 
the composition of the work of the reorganized offices will affect 
their allocation calculation but not how the underlying costs are 
allocated based on the Board approved principles. The net result is a 
reallocation of the agency resources from the Office of Consumer 
Financial Protection and Financial Access to the new Office of Credit 
Union Resources and Expansion. The same principles will apply to the 
resources transferring to the new office based on their roles.
    One commenter also recommended a number of changes to the Board's 
proposed budget allocations. The commenter recommended that the Board 
use a 50 percent allocation from the Share Insurance Fund for human 
resources and Board functions. For all other program offices, the 
commenter suggested using the 60 percent allocation from the Share 
Insurance Fund generated by the hypothetical application of the 
proposed OTR methodology in the June 2017 notice.
    The Board does not agree that a 50 percent allocation should be 
applied to its budget and the human resources budget. As noted in the 
Request for Comment, the NCUA's remaining offices do not have a 
specific allocation calculation because they design and oversee the 
agency's mission and its related offices or provide necessary support 
to mission offices or the entire agency. As such, the proportion of 
insurance-related activities for these offices corresponds to that of 
the mission offices. Further, it would be administratively burdensome 
to attempt to account for any variation in activity levels from the 
mission functions and would not result in a material difference in 
outcomes. Therefore, these offices' costs are allocated based on the 
weighted average of insurance-related activities calculated in the 
subtotal of agency costs for the offices above that have a distinct 
allocation calculation. The Board also notes the 60 percent allocation, 
referred to by the commenter, was illustrative based on 2017 budget 
information and is therefore a methodology output, not a principle in 
itself. It is not a fixed allocation and will change from year to year 
based on contemporary data and the applicable calculation in the 
proposed new OTR methodology.

[[Page 55651]]

    Another commenter recommended that the Board explore how other 
insurance industries allocate expenses and adopt a 5-year rolling 
average of actual costs when assessing future fees. However, share/
deposit insurance is unique from other insurance industries as it only 
insures member/customer deposits in financial institutions. In the 
United States, there are three deposit insurers, the NCUA, the FDIC, 
and American Share Insurance. Both the NCUA and FDIC are backed by the 
full faith and credit of the United States while American Share 
Insurance is a private insurer. Additionally, neither the FDIC nor 
American Share Insurance have NCUA's chartering authority.
    The NCUA is responsible for both regulating and insuring credit 
unions and has different accounting/cost allocation needs. NCUA share 
insurance is not risk-based. There are numerous other risk-based types 
of insurance companies operating in the United States, covering such 
things as real estate, automobiles, and health care. Some insurance 
companies offer some or all these business lines. Costs are generally 
allocated by business line or operating company. The NCUA's cost 
allocation approach incorporates sound cost accounting principles and 
commercial practices. However, additional analysis of insurance 
companies will not provide meaningful information given the unique role 
of the NCUA as regulator and insurer and other differences between 
private sector insurance models and the NCUA as a government agency.
    Further, using a 5-year rolling average of actual costs to set 
expenses would add a layer of complexity to the OTR calculation. Adding 
complexity is not consistent with the Board's goal of simplifying the 
calculation to improve transparency. Additionally, a 5-year rolling 
average would not support contemporary needs based on contemporary data 
because it would be affected by past events, either increasing or 
decreasing costs, over a period of five years. The Board believes using 
the proposed new methodology is more fair and stable.
Negative Impact on Federal Credit Unions
    Several commenter's stated the proposed new methodology would have 
a negative impact on federal credit unions. One commenter was 
particularly concerned with the impact on small federal credit unions. 
While another commenter suggested a three-year phase-in period if 
adopted to mitigate the impact this change will have on federal credit 
unions.
    The NCUA staff analyzed the impact the change in methodology would 
have on federal credit union Operating Fees using data from the 2017 
budget as discussed in the 2017 Request for Comment. The results of the 
analysis indicate the Operating Fee for federal credit unions with 
asset size $1 million and above, the increase would be less than one 
basis point of average assets. Additionally, credit unions under $1 
million in assets do not pay an Operating Fee. While the Operating Fee 
will increase when the OTR decreases, this has been true during the 
OTR's entire existence.
Simplicity Over Accuracy and Equity
    Several commenters stated the proposed new methodology favors 
simplicity over accuracy and equity. However, the Board believes the 
proposed method strikes the correct balance. The results of the 
proposed new methodology, using 2017 budget data, fall well within the 
historical range of the OTR under the old method. The average OTR since 
the Board adopted the old methodology is 60.7 percent, very similar to 
the results of the proposed new methodology applied to 2017 budget 
numbers. Table 1 illustrates the historical OTR trend.

                                 Table 1
------------------------------------------------------------------------
                        OTR year                              OTR (%)
------------------------------------------------------------------------
2004....................................................            59.8
2005....................................................            57.0
2006....................................................            57.0
2007....................................................            53.3
2008....................................................            52.0
2009....................................................            53.8
2010....................................................            57.2
2011....................................................            58.9
2012....................................................            59.3
2013....................................................            59.1
2014....................................................            69.2
2015....................................................            71.8
2016....................................................            73.1
2017....................................................            67.7
------------------------------------------------------------------------

    One of the main criticisms of the old OTR methodology is that it is 
not transparent. This stems from the complexity of the calculation and 
was discussed in the Request for Comment. Although all information 
related to the old OTR calculation is publicly available, the Board 
acknowledged that an obstacle to transparency was the complexity of the 
methodology. In an effort to address the transparency concern, the 
Board is adopting the simplified OTR methodology. While still formula 
driven, the proposed new methodology provides for a simpler approach 
that remains comprehensive, fair, and equitable. The Board believes the 
proposed new methodology, though simplified, continues to provide an 
accurate allocation of agency costs.

IV. Final Action

    Based on the comments and the NCUA's internal assessment, the Board 
is adopting the new OTR methodology as proposed in the June 2017 
notice. These changes will reduce both the complexity of the OTR 
methodology and the resources needed to administer it, while remaining 
fair and equitable to both federal credit unions and federally insured 
state-chartered credit unions. The final OTR methodology is fully 
described below.

V. Details of the OTR Methodology

a. Methodology

    The OTR methodology incorporates the following underlying 
principles for allocating agency operating costs:
    1. Time spent examining and supervising federal credit unions is 
allocated as 50 percent insurance related.\31\
---------------------------------------------------------------------------

    \31\ The 50 percent allocation mathematically emulates an 
examination and supervision program design where the NCUA would 
alternate examinations, and/or conduct joint examinations, between 
its insurance function and its prudential regulator function if they 
were separate units within the NCUA. It reflects an equal sharing of 
supervisory responsibilities between the NCUA's dual roles as 
charterer/prudential regulator and insurer, given both roles have a 
vested interest in the safety and soundness of federal credit 
unions. It is consistent with the alternating examinations the FDIC 
and state regulators conduct for insured state-chartered banks as 
mandated by Congress. Further, it reflects that the NCUA is 
responsible for managing risk to the Share Insurance Fund and 
therefore should not rely solely on examinations and supervision 
conducted by the prudential regulator.
---------------------------------------------------------------------------

    2. All time and costs the NCUA spends supervising or evaluating the 
risks posed by federally insured state-chartered credit unions or other 
entities the NCUA does not charter or regulate (for example, third-
party vendors and CUSOs) is allocated as 100 percent insurance 
related.\32\
---------------------------------------------------------------------------

    \32\ The NCUA does not charter state-chartered credit unions nor 
serve as their prudential regulator. The NCUA's role with respect to 
federally insured state-chartered credit unions is as insurer. 
Therefore, all examination and supervision work and other agency 
costs attributable to insured state-chartered credit unions are 
allocated as 100 percent insurance related.
---------------------------------------------------------------------------

    3. Time and costs related to the NCUA's role as charterer and 
enforcer of consumer protection and other non-insurance based laws 
governing the operation of credit unions (like field of membership 
requirements) are allocated as zero percent insurance related.\33\
---------------------------------------------------------------------------

    \33\ As the federal agency with the responsibility to charter 
federal credit unions and enforce non-insurance related laws 
governing how credit unions operate in the marketplace, the NCUA 
resources allocated to these functions are properly assigned to its 
role as charterer and prudential regulator. This includes any 
reviews of credit unions focused solely on compliance, such as a 
fair lending exam. It does not include the more broadly based 
examinations and supervision contacts of federal credit unions 
covered by principle 1. It also does not include enforcing laws, 
like Prompt Corrective Action, that are part of share insurance 
under Title II as covered by principle 4.

---------------------------------------------------------------------------

[[Page 55652]]

    4. Time and costs related to the NCUA's role in administering 
federal share insurance and the Share Insurance Fund are allocated as 
100 percent insurance related.\34\
---------------------------------------------------------------------------

    \34\ The NCUA conducts liquidations of credit unions, insured 
share payouts, and other resolution activities in its role as 
insurer. Also, activities related to share insurance, such as 
answering consumer inquiries about insurance coverage, are a 
function of the NCUA's role as insurer.
---------------------------------------------------------------------------

    These four principles represent the principles the Board has 
committed to subject to public comment every three years and in the 
event it proposes a change to one or more of the principles. The 
principles are applied to the activities and costs of the agency to 
arrive at the portion of the agency's Operating Budget to be charged to 
the Share Insurance Fund as detailed below. The NCUA will not submit 
the methodology's applications or outputs for public comment.

b. Application

    The Steps below describe how the four principles above are applied. 
Unlike the principles themselves, the Board will not subject the 
application of the principles or the OTR outputs to notice-and-comment 
processes.
Step 1--Workload Program
    Annually, the NCUA develops a workload budget based on the NCUA's 
examination and supervision program to carry out the agency's core 
mission. The workload budget reflects the time necessary to examine and 
supervise federally insured credit unions, along with other related 
activities, and therefore the level of field staff needed to implement 
the exam program. Applying principles 1, 2, and 3 (those relevant to 
the workload budget) to the applicable elements of the workload budget 
results in a composite rate that reflects the portion of the agency's 
overall insurance related mission program activities.
Step 2--Operating Budget
    The Operating Budget represents the costs of the activities 
associated with achieving the strategic goals and objectives set forth 
in the NCUA's Strategic Plan. The Operating Budget is based on agency 
priorities and initiatives that drive resulting resource needs and 
allocations. Information related to the NCUA's budget process, 
including details on the Board-approved Operating Budgets, is available 
on the agency's Web site.\35\
---------------------------------------------------------------------------

    \35\ https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx.
---------------------------------------------------------------------------

    The agency achieves its primary mission through the examination and 
supervision program. The percentage of insurance-related workload hours 
derived from Step 1 represents the main allocation factor used in Step 
2 and is applied to the total operating budget for the examination and 
supervision programs to calculate the insurance-related costs of the 
offices conducting field work (currently the Regions and ONES). A few 
agency offices have roles distinct enough to warrant their own 
allocation factors, which are developed by applying the four factors 
described above to their respective activities. Each of these offices 
tracks their activities annually to determine their factors. These 
factors are then applied to the respective offices' operating budgets 
to determine their insurance-related costs.
    A weighted average allocation factor, calculated by dividing the 
aggregate insurance-related costs for the field offices conducting the 
examination and supervision program and the agency offices with their 
own unique allocation factors by their aggregate total operating 
budgets, is applied to the central offices that design or oversee the 
examination and supervision program or support the agency's overall 
operations. This factor is then applied to the aggregate operating 
budgets for the remaining offices. As such, the proportion of 
insurance-related activities for these offices corresponds to that of 
the mission offices. The NCUA's total insurance related costs are 
calculated by summing the insurance cost calculated for the field 
offices, the offices with unique allocations factors, and the insurance 
cost for all other remaining NCUA offices.
Step 3--Calculate the OTR
    The OTR represents the percentage of the NCUA Operating Budget 
funded by a transfer from the Share Insurance Fund.\36\ The OTR is 
calculated by dividing the total insurance-related costs determined in 
Step 2 by the NCUA's total operating budget.
---------------------------------------------------------------------------

    \36\ The percentage of actual expenses funded by the Share 
Insurance Fund as they are incurred each month.

    By the National Credit Union Administration Board on November 
16, 2017.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2017-25222 Filed 11-21-17; 8:45 am]
 BILLING CODE 7535-01-P