[Federal Register Volume 85, Number 169 (Monday, August 31, 2020)]
[Notices]
[Pages 53854-53862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17009]


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NATIONAL CREDIT UNION ADMINISTRATION


Request for Comment Regarding National Credit Union 
Administration Overhead Transfer Rate Methodology and Operating Fee 
Schedule Methodology

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice; request for comment.

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SUMMARY: The NCUA Board (Board) is inviting comment on the methodology 
used to determine the Overhead Transfer Rate (OTR). The Board applies 
the OTR to the NCUA's operating budget to determine the portion of the 
budget that will be funded from the National Credit Union Share 
Insurance Fund (Share Insurance Fund). The Board welcomes all comments 
but specifically invites comments on the four principles used in the 
methodology to calculate the OTR as discussed below. The Board is also 
requesting comment on proposed changes to the methodology it uses to 
determine how it apportions operating fees charged to federal credit 
unions (FCUs). The Board uses operating fees to fund part of the NCUA's 
annual budget. In this notice, the Board proposes: Clarifying the 
treatment of capital project budgets when calculating the operating 
fees; clarifying the treatment of miscellaneous revenues when 
calculating the operating fees; and modifying the approach for 
calculating the annual inflationary adjustments to the thresholds for 
the operating fee rate tiers. The Board solicits comment on these 
proposed changes and also solicits comment on several questions to 
gather information on potential future enhancements to the methodology.

DATES: Comments must be received on or before October 30, 2020 to be 
assured of consideration.

ADDRESSES: You may submit written comments by any of the following 
methods (Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Fax: (703) 518-6319. Include ``[Your Name]--Request for 
Comment: Operating Fee Schedule Methodology'' in the transmittal.
     Mail: Address to Gerard S. Poliquin, Secretary of the 
Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
    Public Inspection: You may view all public comments on the Federal 
eRulemaking Portal at http://www.regulations.gov as submitted, except 
for those we cannot post for technical reasons. The NCUA will not edit 
or remove any identifying or contact information from the public 
comments submitted. Due to social distancing measures in effect, the 
usual opportunity to inspect paper copies of comments in the NCUA's law 
library is not currently available. After social distancing measures 
are relaxed, visitors may make an appointment to review paper copies by 
calling (703) 518-6540 or emailing [email protected].

FOR FURTHER INFORMATION CONTACT: James Holm, Supervisory Budget 
Analyst, Office of the Chief Financial Officer, at (703) 518-6570, Amy 
Ward or Julie Decker, Risk Officers, Office of Examination and 
Insurance at (703) 819-1770 or (703) 518-6384.

SUPPLEMENTARY INFORMATION: The Board has separately proposed amending 
its rule for determining total assets used as the basis for calculating 
the operating fee due from any FCU. Members of the public are 
encouraged to comment on this proposed amendment by responding to the 
appropriate proposed rule. A proposed rule relating to Fees Paid by 
Federal Credit Unions is published elsewhere in this issue of the 
Federal Register.

I. Legal Background

    The NCUA charters, regulates, and insures deposits in FCUs and 
insures deposits in state-chartered credit unions that have their 
shares insured through the Share Insurance Fund (FISCUs). To cover 
expenses related to its tasks, the Board adopts an annual budget in the 
fall of each year. The Federal Credit Union Act (FCU Act) provides two 
primary sources to fund the budget: (1) Requisitions from the Share 
Insurance Fund, referred to as the OTR; \1\ and (2) Operating Fees 
charged against FCUs.\2\
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    \1\ See, e.g., 12 U.S.C. 1783(a) (making the Share Insurance 
Fund available ``for such administrative and other expenses incurred 
in carrying out the purpose of [Title II of the FCU Act] as [the 
Board] may determine to be proper.'').
    \2\ 12 U.S.C. 1755(a) (``In accordance with rules prescribed by 
the Board, each [FCU] 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.'') and 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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[[Page 53855]]

    The first budget funding source, the OTR, represents the formula 
the NCUA uses to allocate insurance-related expenses to the Share 
Insurance Fund under Title II of the FCU Act. Two statutory provisions 
directly limit the Board's discretion with respect to 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.\3\ 
Second, the NCUA may not fund its entire annual budget through charges 
to the Share Insurance Fund.\4\ The NCUA has not imposed additional 
policy or regulatory limitations on its discretion for determining the 
OTR.
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    \3\ 12 U.S.C. 1783(a).
    \4\ 12 U.S.C. 1755.
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    With regard to the Operating Fee, the FCU Act requires each FCU to, 
``in accordance with rules prescribed by the Board, . . . 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.'' \5\ The fee must ``be determined according to a schedule, 
or schedules, or other method determined by the Board to be 
appropriate, which gives due consideration to the expenses of the 
[NCUA] in carrying out its responsibilities under the [FCU Act] and to 
the ability of [FCUs] to pay the fee.'' \6\ The statute requires the 
Board to, among other things, ``determine the periods for which the fee 
shall be assessed and the date or dates for the payment of the fee or 
increments thereof.'' \7\
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    \5\ 12 U.S.C. 1755(a).
    \6\ 12 U.S.C. 1755(b).
    \7\ Id.
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    Accordingly, the FCU Act imposes three requirements on the Board in 
connection with assessing an operating fee on all FCUs: (1) The fee 
must be assessed according to a schedule or schedules, or other method 
that the Board determines to be appropriate, which gives due 
consideration to NCUA's responsibilities in carrying out the FCU Act 
and the ability of FCUs to pay the fee; (2) the Board must determine 
the period for which the fee will be assessed and the due date for 
payment; and (3) the Board must deposit collected fees into the 
Treasury to defray the Board's expenses in carrying out the FCU Act. 
Once collected, Operating Fees, ``may be expended by the Board to 
defray the expenses incurred in carrying out the provisions of [the FCU 
Act,] including the examination and supervision of [FCUs].'' \8\
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    \8\ 12 U.S.C. 1755(d).
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II. Historical Practice in Determining the Overhead Transfer Rate and 
Assessing the Operating Fee

Overhead Transfer Rate

    The Share Insurance Fund was established by Title II of the FCU Act 
on October 19, 1970. Section 1783(a) of Title II authorizes the Board 
to use Share Insurance Funds to pay for ``such administrative and other 
expenses incurred in carrying out the purposes of this title as it may 
determine to be proper.''
    In 1973, a Government Accountability Office audit \9\ recommended 
the NCUA adopt a method of allocating costs between the operating fund 
and the newly formed Share Insurance Fund. Between 1973 and 1980, 
various cost allocation methods were employed, including direct charges 
to the Share Insurance Fund for insurance expenses including costs to 
liquidate or merge credit unions and examiner time spent conducting 
safety and soundness examinations. Starting in 1981, the OTR ranged 
between 30 and 34 percent, and stayed in that range through 1984.
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    \9\ Gen. Accounting Off., Examination of Financial Statements of 
the Nat'l Credit Union Admin. (Sept. 18, 1973), available at http://www.gao.gov/assets/210/203181.pdf.
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    From 1985 through 1994, the NCUA conducted annual examiner time 
surveys (ETS) to determine an appropriate factor for apportioning the 
agency's total operating expenses. The survey results supported a 
transfer rate between 50.1 percent and 60.4 percent for insurance 
related activities; however, the Board maintained the OTR at 50 
percent.
    Following the 1994 survey, the Board approved surveys that were 
conducted every three years. Three-year surveys covered fiscal years 
1995 through 1997 and fiscal years 1998 through 2000. During that 
period, the OTR was kept at 50 percent. The Board voted to resume 
annual ETS in 2000 and expanded the survey to include more examiners. 
The 2000 survey results supported an OTR of 66.72 percent and, after 15 
years of holding the OTR at 50 percent, the Board increased the OTR to 
66.72 percent for fiscal year 2001.
    In 2001, the Board hired an independent party, Deloitte & Touche, 
to assess the OTR process. Deloitte & Touche's review \10\ of the OTR 
process was issued on September 5, 2001 and included several 
recommendations to improve the OTR process. These recommendations were 
implemented in 2002.
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    \10\ https://www.ncua.gov/files/publications/budget/2001DeloitteReportonOTRProcess.pdf.
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    At the November 20, 2003 Board meeting,\11\ the Board adopted a 
revised, comprehensive methodology for calculating the OTR that was in 
place until 2017. The methodology used the results of an automated 
annual ETS process. The following were also factored into the 
methodology:
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    \11\ The methodology was refined in 2013.
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     The value to the Share Insurance Fund of the insurance-
related work performed by state supervisory authorities (SSAs).
     The cost of the NCUA resources and programs with different 
allocation factors from the examination and supervision program.
     The distribution of insured shares between FCUs and 
FISCUs.
     Operational costs charged directly to the Share Insurance 
Fund.
    In 2016, the NCUA published in the Federal Register the OTR 
methodology used to calculate the OTR and requested comments from the 
public.\12\ In conjunction with the 2016 Federal Register notice, the 
Board committed to periodically review the methodologies for 
calculating both the OTR and the Operating Fee, and to propose changes 
to the methodologies that would result in more equitable alignment of 
fees to the resource levels required to supervise and regulate both 
FCUs and FISCUs.
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    \12\ 81 FR 4804 (Jan. 27, 2016).
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    In 2017, the NCUA published in the Federal Register a request for 
comment regarding a revised OTR methodology based on the Board's 
internal assessment and comments received from the 2016 notice.\13\ The 
primary goal of the proposed changes to the OTR methodology at that 
time was to simplify and streamline the methodology and reduce the 
resources needed to administer the OTR. The simplified OTR methodology 
focused on assigning a percentage share of work to insurance costs in 
four categories of activities:
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    \13\ 82 FR 29935 (June 30, 2017).
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    1. 50 percent insurance related--Time spent examining and 
supervising FCUs.
    2. 100 percent insurance related--All time and costs the NCUA 
spends supervising or evaluating the risks posed by FISCUs or other 
entities the NCUA does not charter or regulate (e.g., third-party 
vendors and credit union service organizations).
    3. Zero percent insurance related--Time and costs related to the 
NCUA's role as charterer and enforcer of consumer protection and other 
noninsurance based laws governing the

[[Page 53856]]

operation of credit unions, for example, field of membership 
requirements.
    4. 100 percent insurance related--Time and costs related to the 
NCUA's role in administering federal share insurance and the Share 
Insurance Fund.
    The Board adopted this principles-based OTR methodology in 
2017.\14\ At that time, the Board committed to subject the four 
principles, but not the particulars of their application, to public 
comment every three years and in the event it proposes a change to one 
or more of the principles.
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    \14\ 82 FR 55644 (Nov. 22, 2017).
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III. Overhead Transfer Rate Methodology

    To calculate the OTR, the four principles are applied to the 
activities and costs of the agency to arrive at the portion of the 
agency's budget to be charged to the Share Insurance Fund.

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 (FICUs), 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--Annual Budget

    The annual budget represents the costs of the activities associated 
with achieving the strategic goals and objectives set forth in the 
NCUA's Strategic Plan. The annual 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 budgets, is available on the agency's website.\15\
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    \15\ https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx.
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    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 budgets 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' 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 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 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 NCUA offices.

Step 3--Calculate the OTR

    The OTR represents the percentage of the NCUA budget funded by a 
transfer from the Share Insurance Fund.\16\ The OTR is calculated by 
dividing the total insurance-related costs determined in Step 2 by the 
NCUA's total annual budget.
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    \16\ The percentage of actual expenses funded by the Share 
Insurance Fund as they are incurred each month.
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Request for Comment on OTR Methodology
    This principles-based OTR methodology has streamlined the process 
for calculating the OTR and reduced the resources needed to gather the 
cost center time allocation used in the calculation. In addition, the 
methodology established some consistency in the calculated OTR each 
year, seen previously only briefly during the three-year period ended 
2013.
    The consistency in the calculation allows for the minor variations 
in the OTR to be driven by the variables that affect the OTR, not the 
calculation itself. These variables include, but are not limited to, 
the normal fluctuations in the workload budget from one calendar year 
to the next, changes in FICU CAMEL ratings, variation in the number and 
size of FICUs that meet the annual exam and extended exam eligibility 
criteria, emerging risk indicators inherent in FICU operational 
changes, variations in individual state regulator programs, and small 
fluctuations in the timing of the examinations related to a particular 
calendar year. This streamlined and simplified approach to calculating 
the OTR has provided a level trend in the OTR, with only minor 
fluctuations due to the variables that affect the OTR.
    The Board finds the current OTR methodology to be fair and 
equitable, more transparent and less complex than prior methodologies, 
reduced administrative costs related to the OTR, and recognizes that 
safety and soundness is not the sole domain of the NCUA as insurer. As 
a result, the NCUA Board does not propose any changes to the 
methodology at this time. The Board nevertheless invites comments on 
its OTR methodology. The Board specifically invites comments on the 
four principles used in the methodology to calculate the OTR discussed 
above.\17\
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    \17\ https://www.ncua.gov/files/publications/budget/overhead-transfer-rate-summary-2020.pdf.
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Operating Fee
    The NCUA's regulations govern certain of the operating fee 
processes.\18\ The regulation establishes: (i) The basis for charging 
operating fees (total assets); (ii) a notice process; (iii) rules for 
new charters, conversions, mergers, and liquidations; and (iv) 
administrative fees and interest for late payment, among other 
principles and processes.\19\ Certain aspects of and adjustments to the 
operating fee process, such as changes to which FCUs are exempt from 
operating fees or the multipliers used to determine fees applicable to 
FCUs that fall within designated asset tiers, are usually not published 
in the Federal Register. Instead, in November 2015, the Board delegated 
authority to the NCUA's Chief Financial Officer to administer the 
Board-approved methodology, and to set the operating fees as calculated 
per the approved methodology during each annual budget cycle beginning 
with 2016. Although it is not required to do so under the 
Administrative Procedure Act,\20\ in January 2016, the Board published 
its methodology in the Federal Register and requested comment.\21\ The 
Board is doing so again now to provide notice of a clarification and 
seek comment on several potential updates to the

[[Page 53857]]

methodology, as described in more detail in Section V below.
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    \18\ 12 CFR 701.6.
    \19\ Id.
    \20\ 5 U.S.C. 551 et seq.
    \21\ 81 FR 4674 (Jan. 27, 2016).
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    The Board proposed the current operating fee methodology in 1979, 
after Congress passed the Financial Institutions Regulatory and 
Interest Rate Control Act of 1978.\22\ This legislation permitted the 
Board to consolidate previously separate chartering, supervision, and 
examination fees into a single operating fee, charged ``in accordance 
with schedules, and for time periods, as determined by the Board, in an 
amount necessary to offset the expenses of the Administration at a rate 
consistent with a credit union's ability to pay.'' \23\ In combination 
with a proposed change to Sec.  701.6 of the NCUA's regulations in 
1979, the Board proposed an initial fee schedule in the Federal 
Register, including rates for 12 asset tiers.\24\ It later published a 
final rule in the Federal Register, which included a finalized fee 
schedule for 1979.\25\
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    \22\ 44 FR 11785 (Mar. 2, 1979).
    \23\ Id. at 11786.
    \24\ Id. at 11787.
    \25\ 44 FR 27379 (May 10, 1979).
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    On four additional occasions, the Board has requested comments on 
potential changes to the operating fee schedule through a Federal 
Register notice, independent of any changes to 12 CFR 701.6. First, in 
1990, the Board provided notice to the public that it was considering 
consolidating the operating fee schedule from 14 asset tiers to two 
asset tiers, retaining an exemption for FCUs under $50,000 in assets 
and implementing a $100 minimum fee.\26\ Second, in 1992, the Board 
requested comments on a plan to limit operating fees to the first $1 
billion of each FCU's assets.\27\ Third, in 1995, the Board requested 
comments on a plan to restructure the operating fee schedule for 
natural person FCUs, to exempt FCUs with assets of $500,000 or less 
based on concern about small FCUs' ability to pay the fees.\28\ The 
Board also requested comments on imposing a minimum fee of $100 on all 
natural person FCUs with assets over $500,000 but less than or equal to 
$750,000.\29\
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    \26\ 55 FR 29857 (July 23, 1990).
    \27\ 57 FR 34152 (Aug. 3, 1992).
    \28\ 60 FR 32925 (June 26, 1995).
    \29\ Id.
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    Most recently, in 2016, the Board published its current methodology 
in detail in the Federal Register and solicited comment. The Board made 
no changes in response to comments on the methodology published in 2016 
and delegated authority to the NCUA Chief Financial Officer to apply 
the published methodology. Since then, the Chief Financial Officer has 
applied the published Operating Fee methodology and explained its 
application in the NCUA's annual budget documents.
    In general, the Board has not used Federal Register notices in 
connection with annual adjustments to the asset tiers and rates of the 
operating fee schedule. Instead, the Board has opted to adopt such 
changes at open meetings. As recently as 2012, for example, the Board 
increased the asset threshold used to exempt FCUs from operating fees 
from $500,000 to $1 million at an open meeting, without requesting 
advance comment in the Federal Register.\30\ While the Board has varied 
its practice with respect to fee schedule changes, it has done so 
within the FCU Act's broad directive that the fee schedule should be as 
``determined by the Board to be appropriate,'' subject to its 
consideration of its expenses and the ability of FCUs to pay.\31\ In 
addition, the NCUA's regulation on operating fee processes includes a 
standing invitation for written comments from FCUs on existing fee 
schedules \32\ and each year the Board invites comments on the draft 
NCUA budget, which includes a detailed explanation of how the operating 
fee is calculated and how changes to the operating fee rate are 
determined based on application of the published methodology.
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    \30\ Board Action Memorandum on 2013 Operating Fee (Nov. 15, 
2012).
    \31\ 12 U.S.C. 1755(b).
    \32\ 12 CFR 701.6(c).
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IV. Methodology for Determining the Aggregate Operating Fee Amount

    The Board adopts an annual budget in the fall of each year, which 
includes as an operating budget the costs of day-to-day operations such 
as employee compensation, travel and training expenses, support 
purchased through contracts with service providers that have expertise 
outside of the agency's core capabilities, and other miscellaneous 
administrative expenses. The annual budget also includes as a capital 
budget the estimated spending on capital projects, such as for computer 
hardware and software, and for investments in agency owned real 
property and equipment, and provides the resources required to execute 
the goals and objectives as outlined in the NCUA's strategic plan.\33\ 
As discussed above, two primary sources fund the annual budget: (1) 
Requisitions from the Share Insurance Fund, determined through the OTR 
and (2) operating fees paid by FCUs.
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    \33\ Additional information on the NCUA budget may be found at 
the following Web address: http://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx.
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    Adjustments to the Budget. When calculating the aggregate annual 
operating fee requirements, the Board first subtracts amounts 
transferred from the Share Insurance Fund through the OTR and other 
expected income amounts, as discussed below, from the operating budget, 
which funds the day-to-day needs for the upcoming year.
    Overhead Transfer Rate: As discussed above, the FCU Act authorizes 
the NCUA to expend funds from the Share Insurance Fund for 
administrative and other expenses related to federal share 
insurance.\34\ An overhead transfer from the Share Insurance Fund 
covers the expenses associated with insurance-related functions of the 
NCUA's operations. The OTR is one of the funding sources for the 
budget, but the OTR does not affect the amount of the annual budget. 
The Board approves the annual budget separately and without regard to 
the OTR. The OTR is applied to actual expenses incurred each month.
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    \34\ 12 U.S.C. 1783(a).
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    Other Income: Other income reduces the required operating fees by 
providing an additional source of funds to cover regulatory (i.e., non-
insurance) related aspects of operating the NCUA. Other income is 
projected based on the latest financial statements and includes 
interest income and miscellaneous revenues. Interest income includes 
interest on operating fund balances invested in short-term Treasury 
securities because the funds are not immediately required to pay 
expenses. Other income includes miscellaneous revenues, such as 
revenues from the production or sale of NCUA reports and publications, 
rent collected from other federal agencies that share NCUA facilities, 
and parking fee revenues. The NCUA owns a share of the parking garage 
underneath the complex of buildings that includes the agency's Central 
Office, and the NCUA receives its share of the revenue collected from 
fees charged to those who park in the garage.
    Adjustments for capital project budgets and notes payable. The 
budgets for capital projects and notes payable are added to the balance 
remaining after deducting the estimated overhead transfer share of the 
operating budget. These budgets include capital acquisitions planned 
for the year and the annual payment of the note payable for the NCUA 
Central Office building on King Street.
    Capital Projects. Each year the NCUA conducts a rigorous assessment 
of its needs for information technology (IT),

[[Page 53858]]

facility improvements and repairs, and other multi-year capital 
investments. Routine repairs and lifecycle-driven property renovations 
are necessary to properly maintain investments in the NCUA's Central 
Office building in Alexandria, Virginia, and the agency's office 
building in Austin, Texas. IT systems and hardware are another 
significant capital expenditure for modern organizations, and the 
budget includes investments both for maintaining and upgrading 
currently operational systems and networks as well for developing 
replacements for systems and hardware that has reached the end of its 
useful life.
    Repayment of NCUA Central Office on King Street, Note Payable. In 
1992, the Operating Fund entered into a commitment to borrow up to 
$42.0 million in a 30-year secured term note with the Share Insurance 
Fund to fund the costs of constructing the NCUA's Central Office in 
1993. Since the Operating Fund borrowed monies from the Share Insurance 
Fund, the annual scheduled principal payments are excluded from the OTR 
and overhead transfer amount. The annual scheduled principal payments 
are treated as a cash need and applied as an increase to operating fee 
requirements.
    Operating Fee Requirements. The result after adjustments for 
capital project and notes payable needs is the total budget subject to 
the operating fee and payable by both natural person and corporate 
FCUs. The natural person FCU operating fees are determined by deducting 
the corporate FCU operating fees from the total budget operating fee 
requirements.

V. Methodology for Determining the Operating Fee Schedule

    The corporate credit union fee schedule was established in 1979 and 
has changed little over the years. Corporate FCUs hold assets of 
natural person credit unions, which are already assessed under the 
natural person operating fees for those members that are FCUs. 
Assessing corporate FCUs at the same rate would, effectively, assess 
the same assets twice for natural person FCU members of corporate FCUs. 
Corporate FCUs return a large portion of their earnings to natural 
person credit unions in the form of lower fees and higher dividends. 
Raising operating fee assessments for corporate FCUs would result in 
higher expenses for corporate FCUs. Corporate FCUs would need to pass 
the higher expenses to natural person credit unions in the form of 
higher fees and lower investment yields. The corporate FCU fee schedule 
is a method of charging corporate FCUs a supervisory fee to defray 
costs and is now published annually in the budget.
    The Board delegated authority to the Chief Financial Officer to 
administer the methodology approved by the Board for calculating the 
operating fees, and to set the fee schedule as calculated per the 
approved methodology, beginning in 2016. After determining the 
operating fee requirements for natural person FCUs, the Chief Financial 
Officer creates the natural person FCU operating fee schedule for the 
upcoming year. The FCU operating fee schedule is published annually in 
the budget.
    The current fee schedule for natural person FCUs uses three asset 
tiers. A different assessment rate is applied to each tier, and the 
threshold for each tier is adjusted annually to reflect inflationary 
growth of the credit union system. FCUs with $1 million or less in 
assets pay no operating fee.
    There are two steps used to determine adjustments to the operating 
fee schedule for the upcoming year. They are: (1) Updating the prior-
year asset tier thresholds using the projected asset growth rate and 
(2) updating the prior-year assessment rates for each asset tier by 
determining the average assessment rate adjustment.
    Updating prior year asset levels. The first step in determining the 
new operating fee schedule is to increase the threshold for each asset 
tier from the prior-year by the projected asset growth rate. Tier 
thresholds are adjusted annually to preserve the same relative 
relationship of the scale to the applicable asset base.
    The projected asset growth rate is a forecast of FCU asset growth 
rates for a year. The NCUA's Office of Chief Economist (OCE) uses three 
different methods to forecast asset growth and combines them to 
generate an overall asset growth rate forecast.
    Forecasting method one uses Call Report data for the first half of 
the year to predict full-year asset growth. This is done by first 
calculating the ratio of first-half asset growth to full-year asset 
growth. The percentage of full-year growth accounted for by first-half 
asset growth varies from year to year but, on average, nearly 80 
percent of the asset growth for FCUs occurs in the first half of the 
year. Using the growth rate in the first half of the year, OCE projects 
the full-year growth rate.
    Forecasting Method two uses Call Report data to determine the most 
recent four-quarter growth rate and sets this rate to the full-year 
asset growth rate. This approach is based on the idea that an FCU is 
likely to establish and maintain a relatively constant growth rate over 
a short period, after accounting for variations in the growth rate that 
is attributable to seasonal fluctuations. This implies that a good 
forecast of full-year asset growth is the most recently available four-
quarter asset growth.
    Forecasting method three uses a time series statistical model. 
Using quarterly Call Report data, NCUA predicts future four-quarter 
asset growth using the four-quarter growth in assets for the period 
ending two quarters earlier (that is, four-quarter asset growth lagged 
two quarters).
    In general, forecasting literature shows that combining forecasts 
from different approaches can improve forecast accuracy and decrease 
the likelihood of forecast errors. Using the root mean squared error 
statistic to calculate the accuracy of the individual approaches and 
combined forecast approaches, NCUA has found that the combined forecast 
approach is better at predicting the final asset growth rate than any 
of the individual approaches. NCUA therefore averages the forecasts 
from the three approaches to maximize accuracy.
    Updating the prior year's assessment rates. After updating the 
prior-year asset tier thresholds, the next step is to project operating 
fees using the updated asset tier thresholds and the prior year 
assessment rates charged for each tier. The percentage difference 
between the projected operating fee collections and the operating fee 
collections required to support the budget is the average rate 
adjustment.
    The average rate adjustment is used to amend the prior-year's 
assessment rates for each asset tier either upwards or downwards. If 
the projected amount of operating fees is less than the required 
budgeted amount, then the assessment rates for each asset tier are 
adjusted upwards. If the projected amount is more than the required 
budgeted amount, then the assessment rates for each asset tier are 
adjusted downwards.
    The resulting new operating fee schedule and due date are 
communicated via a Letter to Federal Credit Unions and posted to 
NCUA.gov at least 30 days after Board approval of the annual budget. 
The Board also makes available an online operating fee calculator on 
the NCUA website for FCUs to estimate their individual fees for the 
upcoming year. No later than March of each year, natural person FCUs 
with assets greater than $1 million will receive an invoice for their 
operating fee. Operating fees are based on actual assets reported as of 
December 31 of the previous year. The NCUA combines operating fee and 
capitalization deposit adjustment into a single invoice normally due in 
April. As

[[Page 53859]]

required by the FCU Act, the NCUA will deposit the collected fees in 
the United States Treasury.\35\
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    \35\ https://www.ncua.gov/files/agenda-items/AG20191212Item1b.pdf, pages 57 to 64.
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VI. Proposed Changes to Methodology

    As summarized above, the Board seeks comment on three proposed 
changes to the Operating Fee methodology and details each below. The 
Board will review the comments received through this notice and 
consider adopting these changes through subsequent Board action prior 
to assessment of the 2021 Operating Fees.

1. Treatment of Capital Budget

    Currently, the Board initially funds the NCUA's planned capital 
projects budget entirely through operating fees assessed on FCUs. The 
Board proposes to change this practice by reimbursing the appropriate 
portion of these expenditures through the OTR.
    In recent years, the NCUA Office of the Chief Financial Officer 
(OCFO) has worked to improve the agency's financial management 
processes and modified some of its practices to align with contemporary 
Federal financial management standards. This allows the agency to 
manage its cash flow more effectively and to record appropriately on 
its books the contractual commitments its makes, particularly for 
complex and multi-year capital projects.
    As a result of these improvements and modifications, in the 2018 
budget NCUA clarified how non-cash transactions such as the estimated 
value of employees' earned but unused annual leave and projected 
depreciation expenses for capital assets would be treated from a 
budgetary perspective. Namely, such amounts would no longer be included 
in annual budgets presented to the Board as they result in no 
expenditure tied to the recognition of an expense under GAAP. Since 
that time, the calculation for the operating fee has also excluded such 
items when determining the allocation of the annual budget between the 
share paid through the OTR and the share paid through the operating 
fee.
    The NCUA Board now proposes to clarify that for the purposes of 
calculating the operating fee, the budget for capital projects will be 
included within the total annual budget subject to the OTR. This 
approach ensures that the cost of new capital acquisitions is borne 
equitably between FCUs and FISCUs at the time such acquisitions are 
made and is consistent with the 2018 change that excluded other non-
cash expenses from the budget. Under the existing methodology, the 
Share Insurance Fund reimburses the operating fund for capital projects 
at the OTR and over several years according to depreciation schedules, 
which are non-cash transactions. Including capital project budgets in 
the total annual amount subject to the OTR at the point of acquisition 
effectively accelerates OTR reimbursements for capital project spending 
to the point at which such expenditures occur. This change also 
increases consistency with the current OTR methodology, which generally 
requires that a proportionate share of expenses not exclusively related 
to the regulation of FCUs be borne in part by the Share Insurance Fund.
    The following table provides a comparison of how the operating fee 
calculation for the 2020 budget would have differed had funds for 
capital projects been subject to the OTR like for the other parts of 
the annual budget for that year.
BILLING CODE 7535-01-P

[[Page 53860]]

[GRAPHIC] [TIFF OMITTED] TN31AU20.002

2. Treatment of Miscellaneous Revenues

    Currently, miscellaneous revenues collected by the NCUA reduce 
operating fees charged to FCUs. The Board proposes changing the 
treatment of miscellaneous revenues, reducing the percentage of the 
NCUA budget funded by the OTR transfer from the Share Insurance Fund.
    As discussed above miscellaneous revenues includes revenues from 
the production and sale of NCUA reports and publications, rent 
collected from other federal agencies that share NCUA facilities, and 
parking fee revenues. The NCUA's miscellaneous revenues vary from year 
to year, but typically total approximately $1,000,000.
    The Board proposes to clarify that for the purposes of calculating 
the operating fee, projected miscellaneous revenues will be included 
within the total annual budget subject to the OTR. The Board believes 
this approach is consistent with its proposed change to the treatment 
of capital project budgets, and that it better reflects the equitable 
distribution of the agency's net expenses between FCUs and FISCUs.
    The table below provides a comparison of how the operating fee 
calculation for the 2020 budget would have differed had miscellaneous 
revenues reduced the amount of the budget funded through the OTR for 
that year.

[[Page 53861]]

[GRAPHIC] [TIFF OMITTED] TN31AU20.003

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    3. Annual inflationary updates to operating fee schedule asset tier 
thresholds
    The Board has separately proposed amending its rule at 12 CFR 701.6 
for determining total assets used as the basis for calculating the 
operating fee due from any FCU. Under the proposed rule, total assets 
would be calculated as the average of total assets reported on an FCU's 
previous four Call Reports available at the time the NCUA Board 
approves the agency's budget for the upcoming year. Members of the 
public are encouraged to comment on this proposed amendment by 
responding to the appropriate Federal Register notice.
    To maintain consistency between the total assets used for billing 
the operating fee to an individual FCU and the asset thresholds used 
for determining the rate tier into which each FCU falls, the Board 
proposes changing its approach for adjusting the rate tier thresholds. 
Specifically, for purposes of determining the annual adjustment to the 
rate tier thresholds, the Board proposes comparing the average of total 
system assets reported in Call Reports for the four quarters available 
at the time it approves the budget to the average of total system 
assets in Call Reports for the four quarters of the respective previous 
years. In this way, the tier thresholds shown on the operating fee 
schedule would be increased each year based on the same reporting data 
that will be used for computing individual FCU invoice amounts.
Request for Comments
    The Board solicits public comment on the proposed changes discussed 
above.

[[Page 53862]]

In addition, the Board solicits comment on the following questions to 
inform potential future enhancements to the methodology:
    1. As discussed above, the Board has not substantially modified the 
current three-tier operating fee schedule since 1993. The current fee 
schedule is regressive; that is, credit unions with a larger amount of 
total assets pay a lower marginal rate on those assets above the 
threshold levels for the lower tiers. Given growth and consolidation in 
the credit union system, the Board is interested in whether such an 
approach is an equitable method for allocating the agency's operating 
costs. There is a potentially wide range of approaches for distributing 
the cost of the NCUA's budget that is funded by the operating fee. For 
example, the Board could adopt a single, flat-rate operating fee for 
all credit unions with total assets that exceed a standard exemption 
threshold. Overall, a flat-rate operating fee would shift costs away 
from relatively smaller credit unions to relatively larger ones, making 
the fee schedule less regressive. The Board could also make the 
operating fee schedule less regressive by increasing the rates for the 
second and third tiers on the schedule. Alternatively, adjusting the 
rates upward for the first and second tiers of the current operating 
fee would create a more regressive schedule. The Board is interested in 
receiving public comments on whether or how it should consider 
modifying the operating fee schedule and what specific aspects and 
conditions of the credit union system it should evaluate when making 
such decisions.
    2. Currently, the Board does not assess an operating fee to FCUs 
with assets less than $1 million. This level was most recently adjusted 
in 2012 for the 2013 assessment. In the past, the Board has accounted 
for the ability of small FCUs to pay the fees by exempting those under 
this threshold from paying any fee. In light of growth in total FCU 
assets, and of consolidation among FCUs, the Board is interested in 
understanding what factors it might consider when adjusting this 
threshold. For example, growth in the credit union system since 2012 
would suggest an exemption threshold of approximately $1,500,000. 
Alternatively, the FCU Act establishes that FCUs with less than 
$10,000,000 in assets do not have to apply Generally Accepted 
Accounting Principles, and is also the level below which a credit union 
could still be considered ``new'' under the FCU Act's prompt corrective 
action provisions. To inform respondents to this inquiry, the table 
below illustrates the number of FCUs and potential reallocated revenue, 
based on 2020 operating fee invoices that would result from changing 
the exemption threshold to various new levels.
[GRAPHIC] [TIFF OMITTED] TN31AU20.004

    3. The NCUA provides credit unions an annual voluntary diversity 
self-assessment, as authorized by law.\36\ The NCUA Board believes that 
diversity coupled with inclusion should be a strategic business goal 
for credit unions. The Board is interested in views on whether federal 
credit unions that complete an annual voluntary diversity self-
assessment should receive a modest discount on the FCU operating fee 
due in the subsequent year. How much of a discount on operating fees 
would be a sufficient incentive to encourage participation in the 
voluntary diversity self-assessment? Because Federally Insured State-
Chartered Credit Unions (FISCUs) pay an operating fee to their state 
regulatory agency rather than to the NCUA, what appropriate incentives 
could the Board provide to encourage FISCUs to participate in the 
survey? Alternatively, what other non-financial incentives might 
encourage both FCUs and FISCUs to participate?
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    \36\ Section 342(b)(2)(C) of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Public Law 111-203.

    By the National Credit Union Administration Board on July 30, 
2020.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2020-17009 Filed 8-28-20; 8:45 am]
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