Ito said the NCUA's role as both competing chartering authority and administrator of the NCUSIF obligates it to treat federally insured, state chartered credit unions equally.

However, NAFCU President/CEO Dan Berger said the industry's concerns with the OTR stem from the agency's operating budget increases and the resulting perception that the OTR is being used to offset those increases.

Berger said that perception is not entirely unjustified.

"NAFCU and other industry stakeholders have repeatedly questioned why the agency's budget has increased despite the fact that the entire financial services industry is performing well," he said.

He cited the Federal Deposit Insurance Corporation's budget reduction of 4.7% from fiscal year 2015, which noted an increased improvement in the industry and a decline in the number of bank failures. The NCUA, however, has increased its budget for nine years in a row, despite similar improvements in the credit union industry, he said.

As part of the budgeting process, NAFCU called on the regulator to state the rationale behind each budget allocation increase.

"The trade believes this effort will help mitigate concern about the OTR and will be the most prudent way forward in gaining stakeholder contentment," Berger wrote.

In the preamble of the Federal Register comment request, the NCUA said the OTR is not a legislative rule under the Administrative Procedure Act and is exempt from notice and comment rulemaking processes.

However, Ito disagreed with that statement. She said the NCUA is required to provide an opportunity for notice and comment for its rulemaking, unless an exemption is in effect.

Her letter included a legal analysis from the Washington-based firm Schwartz & Ballen, which said the OTR and the methodology used by the NCUA board to calculate the OTR is an NCUA board statement of general applicability and future effect designed to implement and interpret FCUA provisions relating to the OTR.

She wrote, "We do not believe the OTR qualifies for any of the exemptions from notice and comment rulemaking provided for under the APA."

Trade leaders also asked the regulator to not delegate its OTR authority to staff. During its Nov. 19, 2015 board meeting, the NCUA board voted to approve giving the NCUA Office of Examination and Insurance the authority to administer the methodology to calculate the OTR.

"This was a mistake," Ito wrote.

Berger agreed. He wrote that any formula needs general oversight to protect against any unintentional misalignment.

"Allowing for annual board oversight of the OTR enables the board to consider and evaluate trends that might have greater implications," he added. "Although NAFCU urges the agency to continue basing the OTR on a published and transparent methodology, we believe the board should continue to use its judgement and perspective when reviewing the OTR, especially as there are still components of the OTR that are not entirely objective or transparent."

Doug Kileen, president/CEO for the $422 million, Bakersfield, Calif.-based Safe 1 Credit Union, also shared concerns over the board's potential relinquishing of its authority over the OTR. He said the NCUA should rescind any actions to delegate OTR determinations to NCUA staff.

"The NCUA board alone should make all determinations regarding the OTR," he wrote.

Berger further called on the agency to focus its examination and supervision activities on credit unions that present high risks to the NCUSIF. Berger said the agency currently examines all federally insured, state chartered credit unions with $250 million or more in assets every year without considering those risks.

"This is costly to both the agency and FISCUs," Berger added.

Additionally, Berger asked the agency to conduct onsite follow-up examinations if necessary after reviewing federally insured, state chartered credit unions' State Supervisory Authority exams, rather than conducting automatic exams every year.

The NCUA posed several questions as part of its request for comments. Its primary question was whether the OTR's determination should continue following a formula-driven approach or if it should be determined largely at the discretion of the board.

CUNA Senior Director of Advocacy and Counsel Andrew T. Price wrote the regulator should continue to use a formula-driven approach to the OTR.

However, Price noted, "The methodology should be revised by the board, via notice and comment, to provide only legitimate, substantiated, insurance-related costs, pursuant to the respective FCUA title, and consistent with fairness to state and federal credit unions and the FCUA."

In addition to pointing out flaws, commenters offered suggestions on how to correct weaknesses in the OTR.

North Dakota Department of Financial Institutions Commissioner Robert J. Entringer wrote the first step to correcting weaknesses in the methodology is to clearly separate NCUA regulations that pertain to insurance and chartering functions.

"Until it is clear to all parties (credit union officials, consumers, state and federal examiners) which rules are insurance related and which are only related to federal charters, it is not practical to expect accuracy in examiner time surveys," he wrote.

He said the next step would be for the NCUA to recognize the congressional intent for the agency was for safety and soundness to be shared equally between chartering and insuring functions.

Ito offered the NCUA the following four alternative approaches to more equitably recognizing the costs of examination:

• The NCUSIF should treat federal credit unions and federal credit union examinations in the exact same manner that it treats federally insured, state chartered credit unions and federally insured, state chartered credit union examinations.

• Rather than reduce the overhead transfer by the amount of the imputed value of state examination work, the NCUA should refund that money to federally insured, state chartered credit unions.

• Rather than reduce the overhead transfer by the amount of the imputed value of state examination work, the NCUA should pay out those funds for the benefit of state agencies.

• The NCUA should eschew a formal overhead transfer calculation and establish the overhead transfer rate at 50% of its budget.

"We sincerely believe our recommendations could improve the process in an equitable and statutorily sound manner," she wrote. "We remain deeply concerned that the current allocation of (the) NCUA's operating expenses is inequitable to the state credit union system and incompatible with the wording, and spirit, of the FCUA."

Another state regulator, Harrold E. Feeney, commissioner at the Credit Union Department at the State of Texas, said the OTR methodology is incompatible with the spirit and intent of the FCUA. He added this results in the inequitable treatment of federally insured, state chartered credit unions.