[Federal Register Volume 85, Number 248 (Monday, December 28, 2020)]
[Notices]
[Pages 84376-84388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28487]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION


Overhead Transfer Rate Methodology and Operating Fee Schedule 
Methodology

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice.

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

SUMMARY: In July 2020, the NCUA Board (Board) invited comment on the 
methodology used to determine the Overhead Transfer Rate (OTR). The 
Board also requested comment on proposed changes to the methodology it 
uses to determine how it apportions operating fees charged to federal 
credit unions (FCUs). The Board also proposed: 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. This final notice adopts those proposals and responds to 
comments on these topics as well as other subjects on which the Board 
sought comment in the notice.

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: In July 2020, the Board issued a notice and 
request for comment on the OTR and operating fee methodologies.\1\ In 
the notice, the Board detailed the legal background and historical and 
current practice for both methodologies. The notice also described how 
each process works within the Board's annual budget process.
---------------------------------------------------------------------------

    \1\ Request for Comment Regarding National Credit Union 
Administration Overhead Transfer Rate Methodology and Operating Fee 
Schedule 85 FR 53854 (Aug. 31, 2020).
---------------------------------------------------------------------------

    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 described and sought comment on the current OTR methodology.
    The Board also described and requested comment on three 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.

[[Page 84377]]

In particular, the Board proposed: (1) Clarifying the treatment of 
capital project budgets when calculating the operating fees; (2) 
clarifying the treatment of miscellaneous revenues when calculating the 
operating fees; and (3) modifying the approach for calculating the 
annual inflationary adjustments to the thresholds for the operating fee 
rate tiers. The Board also solicited comment on adjusting the asset-
size rate tiers in the operating fee scale, increasing the current $1 
million asset-size threshold below which an FCU pays no fee, and on 
incentivizing FCUs and federally insured, state-chartered credit unions 
(FISCUs) to complete an annual, voluntary diversity survey.
    In a separate proposed rule, the Board proposed amending its 
regulation governing the determination of total assets used as the 
basis for calculating the operating fee due from any FCU and encouraged 
public comments on that proposed rule.\2\
---------------------------------------------------------------------------

    \2\ Fees Paid by Federal Credit Unions, 85 FR 53708 (Aug. 31, 
2020).
---------------------------------------------------------------------------

    The Board received eight comments on the July 2020 notice, three 
from credit union trade associations, four from credit union leagues, 
and one from a credit union service organization. The following 
sections reiterate the background from the July 2020 notice, respond to 
the comments, and adopt as proposed three changes to the operating fee 
methodology for application to the 2020-2021 NCUA budget. The Board 
will study the remainder of the issues and comments in connection with 
potential future changes to these practices.

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. 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; \3\ and (2) Operating Fees charged to 
FCUs.\4\
---------------------------------------------------------------------------

    \3\ 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.'').
    \4\ 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.
---------------------------------------------------------------------------

    The first budget funding source, the OTR, represents the 
methodology 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.\5\ Second, the NCUA may not fund its entire annual budget 
through charges to the Share Insurance Fund.\6\ The NCUA has not 
imposed additional policy or regulatory limitations on its discretion 
for determining the OTR.
---------------------------------------------------------------------------

    \5\ 12 U.S.C. 1783(a).
    \6\ 12 U.S.C. 1755.
---------------------------------------------------------------------------

    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.'' \7\ 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.'' \8\ 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.'' \9\
---------------------------------------------------------------------------

    \7\ 12 U.S.C. 1755(a).
    \8\ 12 U.S.C. 1755(b).
    \9\ Id.
---------------------------------------------------------------------------

    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].'' \10\
---------------------------------------------------------------------------

    \10\ 12 U.S.C. 1755(d).
---------------------------------------------------------------------------

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 \11\ 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.
---------------------------------------------------------------------------

    \11\ 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.
---------------------------------------------------------------------------

    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 \12\ 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.
---------------------------------------------------------------------------

    \12\ https://www.ncua.gov/files/publications/budget/2001DeloitteReportonOTRProcess.pdf

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

[[Page 84378]]

    At the November 20, 2003 Board meeting,\13\ 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:
---------------------------------------------------------------------------

    \13\ The methodology was refined in 2013.
---------------------------------------------------------------------------

     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.\14\ 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.
---------------------------------------------------------------------------

    \14\ 81 FR 4804 (Jan. 27, 2016).
---------------------------------------------------------------------------

    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.\15\ 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 
incorporated four key principles in allocating agency operating costs:
---------------------------------------------------------------------------

    \15\ 82 FR 29935 (June 30, 2017).
---------------------------------------------------------------------------

    Principle 1: 50 percent insurance related--Time spent examining and 
supervising FCUs.
    Principle 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).
    Principle 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 operation of credit unions, 
for example, field of membership requirements.
    Principle 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.\16\ 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.
---------------------------------------------------------------------------

    \16\ 82 FR 55644 (Nov. 22, 2017).
---------------------------------------------------------------------------

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 NCUA 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.\17\
---------------------------------------------------------------------------

    \17\ 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 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.\18\ The OTR is calculated by 
dividing the total insurance-related costs determined in Step 2 by the 
NCUA's total annual budget.
---------------------------------------------------------------------------

    \18\ The percentage of actual expenses funded by the Share 
Insurance Fund as they are incurred each month.
---------------------------------------------------------------------------

IV. Responses to Comments on OTR Methodology

    In the July 2020 notice, the Board sought comment on the current 
OTR methodology. The Board noted that the 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 Board also noted that 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

[[Page 84379]]

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.
    Finally, the Board stated that the current OTR methodology is fair 
and equitable, more transparent and less complex than prior 
methodologies, reduces OTR administrative costs as compared to the 
prior OTR methodology, and recognizes that safety and soundness is not 
the sole domain of the NCUA as insurer.
    Accordingly, while the Board did not propose changes to the OTR 
methodology, it invited comments on its OTR methodology. The Board 
specifically invited comments on the four principles used in the 
methodology to calculate the OTR discussed in the preceding 
section.\19\
---------------------------------------------------------------------------

    \19\ https://www.ncua.gov/files/publications/budget/overhead-transfer-rate-summary-2020.pdf
---------------------------------------------------------------------------

    The Board received eight comments from credit union leagues, trade 
associations, and CUSOs. Many of the commenters stressed the importance 
of having an OTR methodology that allocates the agency's operating 
costs equitably among FCUs and FISCUs, but emphasized that prudent 
management of NCUA's budget is necessary to reduce costs to credit 
unions. Overall, the commenters believe apportioning a proportionate 
share of the capital budget to the NCUSIF is consistent with the 2017 
OTR methodology and presents a more equitable treatment of capital 
expenditures with respect to the OTR and the FCU's operating fees. 
Commenters who supported the inclusion of the capital budget in the OTR 
also supported including miscellaneous revenues in the OTR.

General Comments on the OTR Methodology

Transparency; Fair and Equitable Allocation of Expenses

    Commenters appreciated NCUA's transparency in seeking comments on 
the OTR process and while they acknowledge the conflicting viewpoints 
among stakeholders throughout the industry, overall, commenters are 
seeking a fair and equitable means for determining and substantiating 
insurance-related costs and apportioning these costs among insured 
credit unions. Commenters hope the furtherance of technology will be 
beneficial in NCUA's future identification, tracking, and allocation of 
insurance-related costs among insured credit unions.
OTR Methodology Comments and Responses
    There were several comments specific to the allocations used in the 
OTR methodology and the distinction and differentiation between NCUA's 
role as a charterer/regulator and that of insurer.
50 Percent Allocation--Examining and Supervising FCUs--Distinction 
Between NCUA's Role as Regulator Versus Insurer
    One commenter questioned NCUA's assessment of a 50 percent 
allocation to the insurance-related costs of supervising FCUs when NCUA 
has not demonstrated publicly that its role as insurer reflects 50 
percent of its operating costs. The commenter requested more 
documentation to substantiate that NCUA's role as insurer truly 
encompasses 50 percent of its operating costs. One commenter suggested 
a sensible compromise would be for NCUA to examine FCUs pursuant to 
Title I of the FCU Act; and the NCUSIF-related time would be based on 
NCUA's review of those Title I examinations in the same manner as it 
does for state FISCU examinations, thus providing a clearer distinction 
between NCUA's role as regulator versus insurer. One commenter 
questioned NCUA's statement that the 50 percent allocation for FCUs 
``is consistent with the alternating examinations FDIC and state 
regulators conduct for insured state-chartered banks as mandated by 
Congress'' because there is no public evidence available to demonstrate 
that NCUA's supervision process emulates the FDIC's practice of 
alternating examinations with prudential state banking regulators. Not 
specific to the OTR calculation, the commenter stated that if NCUA's 
practice does emulate a supervision program that differentiates between 
its insurance function and its prudential regulator function, then it 
follows that there must be uniqueness or differentiation between the 
protocols of a regulatory exam and an insurance review.
    NCUA Response: The Board still believes the 50 percent allocation 
is a realistic approximation of the split between NCUA's roles as 
regulator and insurer of FCUs. NCUA's focus with each examination of an 
FCU is to assess the ongoing safety and soundness of the credit union 
and to determine if the FCU's operations pose a risk to the Share 
Insurance Fund. In instances where an FCU's financial condition or 
operations do pose a risk to the Share Insurance Fund, the workload 
naturally contributes a heavier weight toward NCUA's role of insurer. 
On the contrary, in instances where the FCU's safety and soundness is 
not a concern to the Share Insurance Fund, NCUA's insurance-related 
time spent on these credit unions is lower. The FDIC asserts its 
primary focus is to protect its insurance fund by ensuring the safety 
and soundness of the institutions it insures. Like the FDIC, NCUA's 
primary focus in its role as insurer is to protect the Share Insurance 
Fund; but unlike the FDIC, NCUA also has chartering and regulatory 
authority. Since the NCUA has the dual responsibility of serving as 
both the primary regulator with chartering authority and insurer of 
FCUs, attributing equal weights to each of NCUA's dual roles creates a 
cost sharing similar in time structure to NCUA employing FDIC's 
alternating exam cycle within one regulatory agency.

100 Percent Allocation--Examining and Supervising FISCUs

    A commenter stated that if the alternating exam practice that NCUA 
uses to describe its 50 percent allocation between its role as 
regulator versus insurer of FCUs is an actual practice and there is no 
discernable difference between an NCUA regulatory exam and an NCUSIF 
insurance review, then a state regulatory examination could serve to 
fulfill the requirements of Title II of the FCU Act, thus reducing 
budgeted NCUA workload hours for FISCUs and more properly reflecting 
the distinction between the proper authority of the state regulator and 
the insurer. One commenter questioned NCUA's 100 percent allocation for 
third-party vendors and CUSOs. The commenter noted that NCUA does not 
have supervisory authority of third-party vendors and CUSOs like other 
federal regulators and state regulators, but NCUA, as chartering 
authority for FCUs, has an obligation to ensure that FCU CUSOs and 
other third parties are operating safely and complying with applicable 
rules and regulations. Thus, NCUA's review of these entities is related 
to the FCU's examination process and does not necessarily have a direct 
impact to the NCUSIF unless noncompliance has led to a safety and 
soundness issue that impacts the Share Insurance Fund.
    NCUA Response: The Board has clearly defined NCUA's role with 
FISCUs and other entities that NCUA

[[Page 84380]]

does not charter or regulate as 100 percent insurance-related. The 
alternating exam example is used as a description of NCUA's dual 
functions of regulator and insurer of FCUs and is not actual practice. 
NCUA has taken steps in recent history to reduce the workload budget 
and costs to FISCUs, providing greater responsibility on the State 
regulator. The Board's adoption of the Exam Flexibility Initiative in 
2016 served to lengthen the examination cycle and reduce the frequency 
with which NCUA participates on FISCU examinations. Likewise, NCUA does 
not charter or regulate CUSOs or third-party vendors and therefore the 
NCUA's role is also solely as the insurer. A CUSO and third-party 
vendor are at times subject to a limited review during a FICU 
examination. This review generally covers compliance with the CUSO's 
lending and investing regulatory requirements and a review of the 
service or function the third party provides the FICU. Examiners may 
also assess the risk a CUSO or third-party vendor's activities pose to 
the FICU as part of the FICU examination. This CUSO/third-party vendor-
related time is captured in the examination and supervision of an FCU 
under Principle 1 and a FISCU under Principle 2. The Board has no 
direct regulatory authority with respect to CUSOs and third-party 
vendors, and currently there is no support to allocate time 
specifically designated for CUSO and third-party vendor reviews as 
anything other than the NCUA's role as insurer.
Zero Percent Allocation--NCUA's Role as Charterer and Enforcer of 
Consumer Protection and Other Noninsurance-Based Laws
    One commenter questioned the zero percent allocation for consumer 
protection enforcement, stating that noncompliance with consumer 
regulations could result in a safety and soundness issue and therefore 
this function is not entirely unrelated to insurance.
    NCUA Response: The Board recognizes the importance of ensuring 
compliance with consumer protection laws and regulations. As such each 
full scope examination of a FICU includes a review of the FICUs' 
compliance with consumer laws and regulations. This review time is 
allocated to examining and supervising FCUs and FISCUs in Principle 1 
and Principle 2, respectively. The zero percent allocation is 
associated with the non-examination aspect of consumer protection 
focused on supporting low-income and minority FICUs and all FICUs 
seeking growth and development in areas of charter conversions and 
expansions, bylaw amendments, field of membership expansions, and low-
income designations. The safety and soundness and risk to the Share 
Insurance Fund considered in the growth and development areas is a very 
small portion of NCUA's workload budget and does not warrant an 
allocation factor.

Other Office Allocation

    One commenter requested NCUA to provide more clarity on the unique 
allocation factors used by certain offices within NCUA's central 
office. The commenter suggested that rather than relying on weighed 
allocation factors to determine the OTR, simply calculating how much 
time each regional and central office spends on insurance-related 
activities each year might be a more straightforward method of 
determining how much of the operating budget should be borne by the 
NCUSIF.
    NCUA Response: The weighted average allocation applied to the 
central offices is based on the aggregate insurance-related costs for 
the field offices and agency offices with their own unique allocation 
factors. NCUA uses a weighted average allocation factor applied to the 
central offices' aggregate total budget because these offices provide 
direct support to the field offices in their examination and 
supervision of FICUs and to the other central offices. Therefore, the 
central offices' time is allocated proportionate to the weighted 
average of these offices. Central offices that have ``unique allocation 
factors'' have chartering functions that are not entirely related to 
insurance, so their insurance-related time is allocated separately. The 
Asset Management Assistance Center, on the other hand, manages 
liquidation payouts and assets acquired from liquidations on behalf of 
the Share Insurance Fund. Since AMAC's role is 100 percent insurance 
related, AMAC's ``unique allocation factor'' is based on its sole 
function being insurance related.

Other Comments

Inequity in the OTR Methodology

    Other comments focused on the OTR's inequity between FISCUs and 
FCUs. One commenter noted the importance of the OTR methodology because 
FISCUs pay the full cost of their state examinations and then through 
the OTR pay 100 percent of NCUA's insurance reviews of FISCUs, as well 
as a portion of FCU examinations and CUSO and third-party reviews. One 
commenter noted that FISCUs make up only 37 percent of the total number 
of credit unions, but because FISCUs encompass approximately 50 percent 
of insured shares, the cost of the OTR is borne equally from the funds 
of both FISCUs and FCUs even though there are more FCUs whose 
examination costs are being charged to the NCUSIF. While this commenter 
recognized the alternative argument that FCUs would assert that they 
pay an aggregate greater amount of NCUA's overall budget when 
aggregating the total expense to FCUs from the operating fee and the 
OTR, the commenter noted the assertion ignores the fact that the NCUSIF 
is not expending resources to conduct examinations on a majority of 
FICUs because it relies on exam work conducted by the state regulators; 
exam work that is paid for entirely by FISCUs. The commenter noted that 
historically, the majority of NCUA's annual budget has been paid by the 
OTR, reaching a high of nearly 75 percent of NCUA's 2016 budget. The 
commenter highlighted the significance of the OTR funding the majority 
of the budget because of the perceived inequities within the 
methodology that result in FISCUs shouldering an ``inordinate cost of 
supervising the safety and soundness of the credit union system.'' The 
commenter also noted its concern with the overall increase in the OTR 
from the current proposal.
    NCUA Response: The Board fully supports an equitable distribution 
of costs among FICUs. The Board continues to believe the current OTR 
methodology is a fair and equitable means of allocating costs to the 
Share Insurance Fund. The operating fee is charged to FCUs based on a 
tiered assessment structure that recognizes the FCU's ability to pay 
the operating fee based on its total assets. The operating fee funds a 
portion of NCUA's operations similar to the assessments some State 
regulatory agencies charge FISCUs to fund the respective State 
agencies' operations. Since NCUA also serves in the role as insurer, 
the FCU Act permits for a portion of NCUA's operations to be funded by 
the Share Insurance Fund. This funding is not a direct cost to the 
FISCUs or the FCUs.

Principles-Based Methodology vs Metric-Based Methodology--Precision vs 
Assumption

    A commenter noted that the adoption of the current principles-based 
methodology marked a departure from the well-established ETS, which was 
a metrics-based approach designed to capture examiner time spent on 
insurance related matters versus non-insurance related through the 
assessment of individual regulations and other measures. The commenter 
felt

[[Page 84381]]

the ETS approach was, by necessity, more complex than the current 
principles-based allocation methodology, but it also made fewer 
assumptions about the allocation of the NCUA's insurer and examiner 
resources. The commenter noted that eliminating the data-oriented 
assessment of insurance-related activities under the ETS would make it 
harder to track how much time examiners actually spend on insurance-
related activities. In the absence of the ETS data, the commenter 
opined it is now harder to evaluate the effectiveness of the current 
methodology. The commenter highlighted the potential inequities 
resulting from using the current assumption-based methodology versus 
the precision from the older model.
    NCUA Response: While the current OTR methodology is less complex 
than the ETS, the OTR methodology is objective and remains formula 
driven. The NCUA's goal in using a formula-driven OTR methodology is to 
provide a comprehensive, fair, and equitable allocation of costs within 
a framework that can be administered at a relatively low cost such as 
the current methodology. As noted in the Final Notice for the current 
methodology, this methodology is simpler than its predecessor and is 
still both objective and formula driven. Additionally, the ETS and the 
assignment of time as insurance, insurance regulatory, and consumer 
regulatory has been an area of debate. The Board noted that continued 
refinement of the categories would not alleviate this debate or 
eliminate the confusion that existed around the process.\20\ Further, 
while the OTR is formula driven, the Board can adjust the methodology 
at any time to ensure it continues to reflect the most equitable and 
suitable approach to allocating costs.
---------------------------------------------------------------------------

    \20\ 82 FR 55655 (November 2017).
---------------------------------------------------------------------------

Quantification of Benefits Derived From the Current OTR Methodology

    One commenter acknowledged the administrative benefit in adopting a 
simpler methodology, but stated NCUA has not sought to quantify its 
statement that the adoption of a principles-based OTR has ``reduced the 
resources needed to gather the cost center time allocation used in the 
OTR calculation.'' The commenter continued by saying there has also 
been no attempt to compare the noted savings with those predicted by 
the agency when it first proposed the principles-based methodology. The 
commenter's expectation is that when NCUA says there are cost savings 
associated with a particular rule or policy change, it should endeavor 
to maintain a level of transparency and supply estimates and 
retrospective data for the industry to consider.
    NCUA Response: When the Board adopted the revised OTR methodology 
in 2017,\21\ the NCUA saw an immediate cost savings in 2018 due to the 
elimination of the ETS. As noted in the 2017 OTR Final Notice, under 
the prior OTR methodology, ETS were conducted annually. The process 
included regulatory mapping prior to the beginning of the ETS cycle to 
make any necessary adjustments to classifications.\22\ Additionally, 
the examiners and their supervisors participating in the ETS received 
training on how to complete the survey. Examination or supervision time 
was also increased at each contact where an ETS was completed by 
roughly one hour. The process also included aggregation and analysis of 
the data by the Office of Examination and Insurance (E&I). Eliminating 
the ETS from the OTR methodology resulted in a resource savings in 
examiner time, training time, and office analysis and support.
---------------------------------------------------------------------------

    \21\ Ibid.
    \22\ Information on the last regulatory mapping performed by the 
NCUA in 2017 can be found on the NCUA's website https://www.ncua.gov/files/publications/about/mapping-ncua-regulations-2017.pdf.
---------------------------------------------------------------------------

Working Group or Advisory Committee To Oversee the OTR
    Some commenters suggested NCUA establish a working group or 
advisory committee made up of equal representation of NCUA and state 
regulators to establish a new OTR methodology that accurately and 
fairly represents the shared work and contributions of the insurer and 
the state regulator. The commenters suggested this committee would be 
charged with continuing oversight and review of all factors 
contributing to the OTR methodology and recommendation of future OTR 
charges. Another commenter offered that the establishment of a credit 
union advisory committee would provide a means for the debate and 
exchange of ideas about the OTR that is difficult to facilitate in the 
notice and comment process.
    NCUA Response: The Board believes the current OTR is transparent 
and provides for stakeholder input, therefore, a committee to oversee 
the OTR is not needed. Further, while not required by the 
Administrative Procedure Act, the Board remains committed to solicit 
through the Federal Register public comment on the OTR methodology at 
least every three years, and whenever the NCUA seeks to change the OTR 
methodology.

V. Operating Fee for FCUs

    The NCUA's regulations govern certain of the operating fee 
processes.\23\ 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.\24\ 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,\25\ in January 2016, the Board published 
its methodology in the Federal Register and requested comment.\26\ The 
Board provided notice of a clarification to the operating fee 
methodology in July 2020, and sought comment on several potential 
updates to the methodology. This notice provides the NCUA's response to 
comments about the July 2020 methodology, and documents the Board's 
final revisions to the operating fee methodology.
---------------------------------------------------------------------------

    \23\ 12 CFR 701.6.
    \24\ Id.
    \25\ 5 U.S.C. 551 et seq.
    \26\ 81 FR 4674 (Jan. 27, 2016).
---------------------------------------------------------------------------

    The Board proposed the current operating fee methodology in 1979, 
after Congress passed the Financial Institutions Regulatory and 
Interest Rate Control Act of 1978.\27\ 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.'' \28\ 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

[[Page 84382]]

asset tiers.\29\ It later published a final rule in the Federal 
Register, which included a finalized fee schedule for 1979.\30\
---------------------------------------------------------------------------

    \27\ 44 FR 11785 (Mar. 2, 1979).
    \28\ Id. at 11786.
    \29\ Id. at 11787.
    \30\ 44 FR 27379 (May 10, 1979).
---------------------------------------------------------------------------

    On four additional occasions prior to the July 2020 notice, the 
Board had 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.\31\ 
Second, in 1992, the Board requested comments on a plan to limit 
operating fees to the first $1 billion of each FCU's assets.\32\ 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.\33\ 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.\34\
---------------------------------------------------------------------------

    \31\ 55 FR 29857 (July 23, 1990).
    \32\ 57 FR 34152 (Aug. 3, 1992).
    \33\ 60 FR 32925 (June 26, 1995).
    \34\ Id.
---------------------------------------------------------------------------

    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.\35\ 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.\36\ In 
addition, the NCUA's regulation on operating fee processes includes a 
standing invitation for written comments from FCUs on existing fee 
schedules \37\ 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.
---------------------------------------------------------------------------

    \35\ Board Action Memorandum on 2013 Operating Fee (Nov. 15, 
2012).
    \36\ 12 U.S.C. 1755(b).
    \37\ 12 CFR 701.6(c).
---------------------------------------------------------------------------

VI. 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.\38\ 
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.
---------------------------------------------------------------------------

    \38\ 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.
---------------------------------------------------------------------------

    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.\39\ 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.
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 1783(a).
---------------------------------------------------------------------------

    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), 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

[[Page 84383]]

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.

VII. 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: (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 within 30 days of 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 required by the FCU Act, the NCUA will deposit the collected 
fees in the United States Treasury.\40\
---------------------------------------------------------------------------

    \40\ https://www.ncua.gov/files/agenda-items/AG20191212Item1b.pdf, pages 57 to 64.
---------------------------------------------------------------------------

VIII. Changes to Operating Fee Methodology

    As summarized above, the Board sought comment on three proposed 
changes to the Operating Fee methodology and is adopting each change as 
proposed.

1. Treatment of Capital Budget

    Under current practice, the Board initially funds the NCUA's 
planned capital projects budget entirely through operating fees 
assessed on FCUs. The Board proposed 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

[[Page 84384]]

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.
    Accordingly, in the July 2020 notice, the Board proposed 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.
    As provided in the July 2020 notice, the following table compares 
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.

[[Page 84385]]

[GRAPHIC] [TIFF OMITTED] TN28DE20.503

    Comments Received: None of the commenters objected to the proposed 
change to the treatment of capital project budgets for purposes of 
computing the operating fee. One commenter recommended that the costs 
of capital projects whose sole benefit accrues to the NCUA should not 
be subject to the OTR and provided as an example the fact that the 
agency will discontinue its NCUSIF computer lease program for State 
Supervisory Authorities in 2021, meaning that capital project funds 
will be used to provide computers only to NCUA employees.
    NCUA Response: While it is a factual statement that the NCUA will 
discontinue its NCUSIF computer lease program for State Supervisory 
Authorities in 2022, the agency believes it misstates the purpose of 
applying the OTR to the capital budget. The computed OTR is an estimate 
of the share of the NCUA's work that relates to its role as insurer. 
Although the NCUA will not provide computers for State Supervisory 
Authorities in the future, that does not eliminate the share of 
insurance-related work that NCUA employees perform. As a result, even 
though some capital projects such as the agency's computer lease 
provides direct benefit only to NCUA employees, it is still appropriate 
to apply the OTR to such project costs since the purpose of the OTR is 
to pay for the insurance-related share of the NCUA's budget via 
reimbursement from the SIF. Accordingly, the Board adopts this change 
to the operating fee methodology without modification.

[[Page 84386]]

2. Treatment of Miscellaneous Revenues

    Under current practice, miscellaneous revenues collected by the 
NCUA reduce operating fees charged to FCUs. The Board proposed to 
change the treatment of miscellaneous revenues, reducing the percentage 
of the NCUA budget funded by the OTR transfer from the Share Insurance 
Fund.
    As discussed in the preceding sections, 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 proposed 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 stated 
that it 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.
    As provided in the July 2020 notice, the following table compares 
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.
[GRAPHIC] [TIFF OMITTED] TN28DE20.504


[[Page 84387]]


    Comments Received: The majority of the commenters that supported 
the inclusion of the capital budget in the OTR also commented on and 
stressed the importance of including the projected miscellaneous 
revenues in the OTR calculation to reduce the overall amount of funding 
needed from the Share Insurance Fund. Accordingly, the Board adopts 
this change to the operating fee methodology.

3. Annual Inflationary Updates to Operating Fee Schedule Asset Tier 
Thresholds

    Separately from the July 2020 notice, the Board proposed to amend 
its rule at 12 CFR 701.6 for determining total assets used as the basis 
for calculating the operating fee due from any FCU.\41\ 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. 
The Board has adopted that proposed rule without change, and it will go 
into effect 30 days after publication in the Federal Register.
---------------------------------------------------------------------------

    \41\ 85 FR 53708 (Aug. 31, 2020).
---------------------------------------------------------------------------

    In the July 2020 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 proposed 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.
    Comments Received: None of the commenters objected to the proposed 
change to adjusting the operating fee rate tier thresholds. 
Accordingly, the Board adopts this change to the operating fee 
methodology.

4. Other Requests for Comment on Operating Fee Methodology

    The Board also solicited comment on three additional topics to 
inform potential future enhancements to the methodology. The Board will 
study these comments and consider future changes in these areas.
    First, the Board noted that it 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 sought comment 
on approaches to this issue.
    Comments Received: None of the commenters provided specific 
recommendations for how or whether to revise the current three-tier 
operating fee schedule. Two commenters recommended that the NCUA review 
its operating fee schedule in a fully transparent process. The first 
commenter recommended that the NCUA convene a representative working 
group of credit union executives who could provide their perspectives 
on adjustment to the operating fee schedule. The second commenter 
recommended that the NCUA consider how share growth that resulted from 
the COVID-19 pandemic could affect the intent of proposed changes to 
the operating fee schedule.
    NCUA Response: The Board agrees with the respondents to this 
question that recommend following a fully transparent process for 
developing a new operating fee schedule. The Board will study the issue 
further and consider potential future changes. The Board is not making 
any changes to the current operating fee schedule at this time.
    Second, the Board sought comment on changing the threshold below 
which FCUs are not required to pay an operating fee. 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 sought comment on what factors it 
might consider when adjusting this threshold. The Board provided the 
following table to inform the public of the potential impact of raising 
the exemption threshold to various levels above the current $1 million 
threshold:

[[Page 84388]]

[GRAPHIC] [TIFF OMITTED] TN28DE20.505

    Comments Received: Five commenters provided their views about the 
exemption threshold. One commenter did not believe the exemption 
threshold should be changed, three commenters recommended raising the 
exemption threshold from $1 million to $10 million, and one commenter 
noted they were not opposed to raising the exemption threshold but 
argued that any foregone revenue should result in a dollar-for-dollar 
reduction to the NCUA budget.
    NCUA Response: Given the lack of consensus between the respondents 
to this question, the Board will study the operating fee exemption 
threshold further and consider potential future changes. The Board is 
not making any changes to the current exemption threshold at this time.
    Third, the Board sought comment on ways to encourage FCUs and 
FISCUs to complete an annual diversity survey. The NCUA provides credit 
unions an annual voluntary diversity self-assessment, as authorized by 
law.\42\ The Board sought comment on whether and in what amount FCUs 
that complete an annual voluntary diversity self-assessment should 
receive a modest discount on the FCU operating fee due in the 
subsequent year. The Board also sought comment on appropriate 
incentives in this area for FISCUs, which do not pay an annual 
operating fee to the NCUA. Alternatively, the Board sought comment on 
other non-financial incentives that might encourage both FCUs and 
FISCUs to participate in the survey.
---------------------------------------------------------------------------

    \42\ Section 342(b)(2)(C) of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Public Law 111-203.
---------------------------------------------------------------------------

    Comments Received: The NCUA received six comments in response to 
questions about incentives for completing the voluntary diversity self-
assessment. None of the commenters provided specific or actionable 
recommendations for incentives that would encourage participation in 
the self-assessment. Four commenters encouraged the NCUA to ensure that 
equal incentives are provided to both FCUs and FISCUs, while one 
commenter raised concerns that any incentive provided to FCUs not 
result in changes to the OTR without appropriate notice to the public. 
One commenter opposed any incentives for participating in the 
assessment.
    NCUA Response: Given the lack of clear consensus among respondents 
to this question, the Board believes it must study further how to 
create incentives for completing the voluntary diversity self-
assessment. The Board will be mindful of those commenters that 
suggested that there should be equity between FCUs and FICUs for any 
incentive program. The Board is not establishing any incentives for 
completing the diversity self-assessment at this time.

    By the National Credit Union Administration Board on December 
17, 2020.
Melane Conyers-Ausbrooks,
Secretary of the Board.
[FR Doc. 2020-28487 Filed 12-23-20; 8:45 am]
BILLING CODE 7535-01-P