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Addressing Transparency in Rate Calculations, Fazio Points to History of OTR
Monday, August 31, 2015 6:35 AM

A recent CU Journal article by NCUA Director of Examination and Insurance Larry Fazio discusses NCUA's Overhead Transfer Rate (OTR), addressing questions about the agency's transparency in its yearly rate calculations. In the article, Fazio suggests credit unions look at the history of the OTR.

NCUA has used the OTR since 1973, beginning with the adoption of federal share insurance for credit unions, he says. The OTR was designed to cover NCUA's costs of examining and supervising the risks to the Share Insurance Fund posed by all federally insured credit unions and the costs of administering the fund.

The OTR represents the percentage of NCUA's annual operating budget paid by a transfer from the fund. These transfers are made monthly, based on actual incurred expenses, not budgeted amounts. Federally insured credit unions are not billed for and are not required to remit those amounts transferred for insurance-related activities.

In response to suggestions from trade associations, the NCUA Board in 2003 adopted a new methodology for calculating the OTR. This methodology, with various refinements, has been in place ever since. In 2011, NCUA contracted with PricewaterhouseCoopers to independently review the OTR methodology and its supporting rationale. The report found the methodology was reasonable and favored neither federally chartered nor state-chartered credit unions.

This is a critical point. To be equitable, the OTR methodology should be neutral with respect to charter choice. To achieve this, NCUA assigns an imputed value to the work done by state regulators supervising federally insured, state-chartered credit unions. In the methodology, the imputed state regulator value reduces the OTR, and the amount is calculated on the same cost basis as the work NCUA performs supervising federal credit unions.

Read more on Fazio's article here.