The news in November that the NCUA would reduce the overheadtransfer rate for 2017 – the first such reduction since 2013 – wasencouraging for the state system (and especially for NASCUS; we'vebeen working on this issue on behalf of the state system for atleast 20 years).

Shortly after that decision was announced, agency Chairman RickMetsger and Board Member J. Mark McWatters – as well as the rest ofus – heard in a staff briefing that an insurance premium for creditunions was likely in the New Year. That was discouraging, for allparts of the credit union system.

And incredibly confusing.

The juxtaposition of the discussion about these two actions hasled to a misconception that one caused the other, or vice versa. Ican tell you, I have heard exactly that as I have spoken to statecredit union executives and regulators in the weeks following theboard meeting, as I've traveled across the country and inWashington.

So, let me clear up any misunderstanding: Simply put, the OTRand the insurance fund's equity ratio have an inverse relationship.That is: As the OTR goes down, the equity of the fund potentiallyincreases (with the opposite being true as well). A decrease in theOTR did not – and could not – force an insurance premium to beassessed.

Here's some background: The OTR represents that rate at whichthe NCUA will cover its operating expenses in funds drawn from theNational Credit Union Share Insurance Fund. (The agency can do soto cover “insurance-related expenses” it incurs going about thejobs of both safety and soundness regulator and insurer of creditunion savings. There's a whole, additional discussion related tothat set up, which we won't get into here – but it needs to bebroached as well.)

In 2016, the NCUA covered its operating expenses from theinsurance fund at the rate of 73.1%. A better way of saying that isthat the insurance fund paid for 73.1% of the agency's expensesthis year, about $212 million. Those dollars come right out of theequity of the fund. (Note: The remainder of NCUA's budget iscovered by operating fees paid by federal credit unions and othersources: Interest income, rents, publication sales, etc.)

If the agency had not changed the OTR for 2017 (instead ofreducing it to 67.7%), the insurance fund would have been chargedjust about $218 million. Instead, at the reduced rate, the bill tothe insurance fund is about $10 million less for 2017 (just a tadunder $202 million) than the previous year (and about $15 millionless than the charge would have been under the previous rate). Inany case: The difference is potentially available to contributetoward the fund's equity ratio.

Now, suppose that the NCUA had held the line on the OTR atthe 2013 rate (of 59.1%) in the years 2014 to 2016, rather thanraising it in each one of those three years – what would be theimpact on the fund equity? A quick calculation shows a significantsavings to the fund: $103.3 million in just those three years. (Bythe way, we're only using the 2013 OTR rate as a benchmark – wethink it should be, year over year, lower than that. But, again,that's another discussion for another time.)

The $103.3 million noted above, certainly, isn't enough to deteran insurance premium in 2017. As the NCUA has said, the equityratio of the fund is dropping, not because of the OTR, but becauseof the rising number of insured shares and the extended lowinterest rate environment. In other words: Insured shares aregrowing at a faster rate than income to the fund from itsinvestments, due (primarily) to low rates of return – which meansthe ratio of dollars in the fund to total shares insured isdropping to below the 1.3% “normal operating level” of theinsurance fund set by the board. By law, the normal operating levelfor the fund must fall between 1.2% and 1.5%.

Confused? You are not alone. The very fact that some folksinitially thought the decrease in the OTR is to blame for aninsurance premium only underscores the opacity of the OTR and howdifficult it is to understand.

Efforts are underway, thankfully, to ease – or end – theconfusion. To their credit, at the November board meeting, Metsgerand McWatters both voiced strong interests in adopting a future OTRmethodology for the agency that is rooted in “transparency,understandability, fairness.”

We could even see a proposal by early next year. NASCUS is verymuch supportive of their efforts.

Until next year, keep this in mind about the relationshipbetween the OTR and insurance premiums: The lower the rate at whichfunds are transferred to the NCUA budget from the insurance fund,the more remains potentially available to contribute toward thefund's equity ratio. On the flip side, the higher the OTR, the moreall credit unions – state and federal – will be on the hook forfuture premium assessments to maintain the equity ratio.

Reducing the OTR – and ending the confusion around it – is ineverybody's interests and will help drive down the need forinsurance premiums.

Lucy Ito is president/CEO of NASCUS. She canbe reached at 703-528-8688 or [email protected].