SENT BY CERTIFIED MAIL
Ms. Lucy Ito
President and CEO
National Association of State Chartered Credit Unions
1655 North Fort Myer Drive, Suite 650
Arlington, VA 22209
Dear Ms. Ito:
Re: Legal Analysis of Overhead Transfer Rate
This opinion letter discusses the legal analysis of NCUA's Office of General Counsel on whether notice and comment rulemaking processes under the Administrative Procedure Act ("AP A") are required for NCUA's Overhead Transfer Rate ("OTR") methodologies and determinations. In addition, to fully respond to recent claims that NCUA is not APA compliant with respect to the OTR, this opinion reviews the arguments in a document titled "Legal Analysis Of The Administrative Procedure Used By The National Credit Union Administration To Adopt The Overhead Transfer Rate," dated June 17, 2015 and produced by the law firm Schwartz & Ballen LLP as a "Report to the National Association of State Credit Union Supervisors" (the "Report"). The Report, enclosed as Exhibit A to this letter, contends that the OTR is a rule under the APA that requires notice and comment rulemaking procedures because no AP A exemption applies. The Report further alleges, among other things, that the OTR is a major rule for purposes of the APA.
Consistent with prior legal analyses, we conclude that the APA does not require either OTR calculations or processes to be developed under AP A notice and comment requirements. Further, nothing in the Report provides a sound legal basis for requiring NCUA to change its long-held position. Finally, contrary to the Report's conclusion, we do not believe the OTR process could be designated a major rule under the Congressional Review Act ("CRA"), even if AP A notice and comment procedures applied.
The conclusions and assertions in this opinion are based on public information that is available to NASCUS and any other interested parties. The cited statutes and cases, and the circumstances to which they apply, are a matter of public record. By providing this opinion to the public, NCUA does not waive the protections of 12 C.F.R. § 792.1 l(a)(5) or the general application of attorney/client privilege or attorney work product doctrines for any other legal analyses of the OTR or any other matter.
Further, application of privilege doctrines or other confidentiality protections do not make NCUA’s legal conclusions intentionally secretive or unjustified, even if they are the subject of disagreement among reasonable persons. The job of the Office of General Counsel is not only to advocate, but to determine the relative strength of a legal position, in part by objectively examining and reviewing counterarguments. With respect to the APA, which is not specific to NCUA in its application and which is an intensely scrutinized and evaluated statute, the range of reasonable arguments on disputed issues is relatively accessible.
It appears to us that the Report was commissioned for advocacy, rather than advisory purposes, and we believe it should be viewed in that context. The Report’s advocacy posture is demonstrated by, among other things, (i) repeated reference to events and circumstances that bear on policy, rather than legal, determinations; (ii) failure to discuss in any way the Federal Credit Union Act’s (“FCU Act”) discretionary language, which is the foundation for OTR processes; (iii) failure to accurately characterize the “major rule” concept; (iv) lack of transparency with respect to the citation of cases relying on tests and principles that have since been rejected; and (v) failure to acknowledge in any way the complications in applying APA standards and exemptions, which are chronicled by many of the courts and scholars engaged in such processes.1
Our conclusion that notice and comment processes are not required does not lead to the conclusion that they may not be used as a legal matter. The NCUA Board Chair’s recent commitment to formally solicit comments every three years demonstrates an alternative approach within the range of legally permissible methods by which NCUA can engage in OTR processes. Further, NCUA is able to receive and consider public input on its processes at any time, not only through formal solicitations or in the APA rulemaking context. These formal and informal interactions with parties affected by NCUA activities have occurred throughout the agency’s history.
NCUA charters and regulates federal credit unions and regulates and supervises state-chartered credit unions that have their shares insured through the National Credit Union Share Insurance Fund (“NCUSIF”) in coordination with State Supervisory Authorities (“SSAs”). To cover expenses related to its tasks, the NCUA Board adopts an operating budget in the fall of each year (the “Operating Budget”). The FCU Act provides two primary sources to fund the Operating Budget: (1) requisitions from the NCUSIF; and (2) operating fees charged against federal credit unions. The Board uses an allocation formula, the OTR, to determine the amount of the Operating Budget that it will procure from the NCUSIF.
NCUA has never used notice and comment rulemaking to establish either an individual determination of the OTR or the general methodology used to calculate the OTR. The OTR has, however, been explained, discussed, and reviewed in various public records, including in Board Action Memorandums related to budget matters and other documents available on NCUA’s Web site.2 Since the OTR’s inception, NCUA has taken the position that the OTR is not a legislative rule under the APA and is exempt from notice and comment rulemaking processes.
II. The Administrative Procedure Act
Under the APA, a rule means
the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, costs, or accounting, or practices bearing on any of the foregoing . . . . 3
The APA’s definition of a rule is very broad and applies to “nearly every statement an agency may make.”4 However, determining whether the APA notice and comment requirements apply to a particular agency action or rule is a separate inquiry. Statutory exemptions from APA notice and comment requirements include matters “relating to agency management or personnel or to public property, loans, grants, benefits, or contracts” and “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice . . . .”5
The United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) “has generally referred to the category of rules to which the notice and comment requirements apply as ‘legislative rules’ or, sometimes, ‘substantive rules’”, as opposed to “interpretive rules.”6 “A rule is legislative if it supplements a statute, adopts a new position inconsistent with existing regulations, or otherwise effects a substantive change in existing law or policy.”7 Rules are interpretative, and exempt from notice and comment requirements, if they “clarify a statutory or regulatory term, remind parties of existing statutory or regulatory duties, or ‘merely track[ ]’ preexisting requirements and explain something the statute or regulation already required.”8 A substantial impact imposed by an interpretive rule “does not transform it into a legislative rule” requiring notice and comment.9
“An agency action that merely explains how the agency will enforce a statute or regulation—in other words, how it will exercise its broad enforcement discretion or permitting discretion under some extant statute or rule—is a general statement of policy” that is exempt from notice and comment rulemaking.10 “The most important factor [in making the legislative/interpretive/policy determination] concerns the actual legal effect (or lack thereof) of the agency action in question on regulated entities.”11 Courts also consider how an agency characterizes an action, including any statements about intent to legally bind regulated entities.12
III. NCUA’s Analysis
Under the above authority, no part of the OTR process requires notice and comment rulemaking. First, the OTR tracks and interprets discretionary statutory language that makes the NCUSIF available to pay expenses the Board determines to be proper under Title II of the FCU Act. As such, the OTR is an interpretive rule or general statement of policy. Second, the OTR is part of NCUA’s budget processes, inextricable from agency management, procedure, and practice.
i) The OTR is an Interpretive Rule
There is no express provision in the FCU Act that requires a rulemaking to establish when or how the Board will requisition the NCUSIF to pay administrative expenses. In fact, the FCU Act’s language on this point is highly deferential, qualified by phrases like “as [the Board] may determine to be proper”13 and “as [the Board] may deem necessary or appropriate”.14 Under this language, NCUA’s OTR methodology and calculation is a means of explaining a function committed to agency discretion by the FCU Act.
In New Jersey Department of Human Services v. U.S. Department of Health & Human Services,15 the United States District Court for the District of New Jersey addressed whether the Health Care Financing Administration’s (“HCFA”) changes to a manual governing federal reimbursement rates for expenses incurred by states in administering Medicaid were legislative or interpretive rules. The court applied a test articulated by the D.C. Circuit in Community Nutrition Institute v. Young,16 which “provided two criteria for assisting in the determination of whether a rule is legislative or interpretative: (1) whether the rule establishes a binding norm, and (2) whether the rule allows the agency and its decision makers leave to exercise their discretion.”17 “If the rule acts prospectively and without binding effect, . . . it is said to be interpretative.”18
The court found that HCFA’s changes to the manual described rates at which certain costs were reimbursable but did not bind the State of New Jersey and did not “oblige the State to assume any obligations or duties.”19 Further, the court determined the manual acted prospectively and permitted the HCFA to exercise its discretion.20 The court noted that the direct reduction in reimbursement rates to states did not transform the manual into a substantive rule.21
Similarly, the OTR has no direct binding legal effect on insured credit unions. It does not impose or require credit unions to take on new duties. There is no compliance component to the OTR and NCUA cannot use it as the basis for an enforcement action. In addition, documents describing OTR methodology permit NCUA employees and officers to exercise their discretion. The OTR process allows for elements of judgment in connection with what examination procedures to perform and in guidance on how examiners record their time.22 Allocation factors applied to the cost of NCUA resources and programs are reviewed annually, demonstrating NCUA’s view that OTR processes are not subject to notice and comment requirements.23
With respect to substantial impact or legal effect, the correlation between the OTR and NCUSIF assessments or distributions is tenuous and diluted. In addition to the OTR, whether a FICU experiences an assessment or distribution is affected by:
- (i) the amount of statutorily required insurance payments from the NCUSIF,24
- (ii) interest rates on NCUSIF investments,25
- (iii) special assistance payments from the NCUSIF,26
- (iv) adjustments to the NCUSIF’s normal operating level (which the Board sets anywhere from 1.2 percent to 1.5 percent),27
- (v) the NCUSIF’s available assets ratio,28
- (vi) the timing of assessments in the event of a restoration plan (which can extend out to eight years or more), 29 and
- (vii) NCUSIF borrowings from the United States Treasury (“Treasury”) or the Central Liquidity Facility (“CLF”).30
A required assessment or distribution to insured credit unions is triggered only if the NCUSIF’s equity ratio deviates outside of the statutorily prescribed range (further subject to variables (iv), (v), (vi), and (vii), above). The OTR has a less significant and more indirect effect on third parties or regulated entities than the HCFA’s guidelines had on Medicaid reimbursements.
ii) The OTR is a General Statement of Policy
While a distinction between interpretive rules and policy statements is often ignored, the OTR also meets the characteristics of a general statement of policy. General statements of policy are, according to the Attorney General’s APA Manual, “statements issued by an agency to advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power.”31 The D.C. Circuit has explained that an agency policy statement “merely represents an agency position with respect to how it will treat—typically enforce—the governing legal norm.”32 The statement “simply lets the public know its current enforcement or adjudicatory approach” and “[t]he agency retains the discretion and the authority to change its position—even abruptly—in any specific case because a change in its policy does not affect the legal norm.”33
In National Mining Association v. McCarthy, 34 the D.C. Circuit found that the Environmental Protection Agency’s (“EPA”) Final Guidance that instructed EPA staff to recommend limitations on mining projects amounted to a statement of policy. According to the plaintiffs, the Final Guidance gave “permit applicants (and state permitting authorities) [ ] no choice when faced with EPA ‘recommendations’ except to fold.”35 Despite this alleged effect, the D.C. Circuit reasoned as follows in support of its holding:
The Final Guidance does not tell regulated parties what they must do or may not do in order to avoid liability. The Final Guidance imposes no obligations or prohibitions on regulated entities. State permitting authorities “are free to ignore it.” The Final Guidance may not be the basis for an enforcement action against a regulated entity. Moreover, the Final Guidance may not be relied on by EPA as a defense in a proceeding challenging the denial of a permit. And the Final Guidance does not impose any requirements in order to obtain a permit or license. As a matter of law, state permitting authorities and permit applicants may ignore EPA's Final Guidance without facing any legal consequences.36
The court’s view of the Final Guidance in McCarthy aligns remarkably with the effect and implications of the OTR with respect to FICUs. In fact, one could substitute the term “OTR” for “Final Guidance” in the court’s language above and produce an apt description of the OTR.
As noted above, other than for statutorily required insurance payments, the FCU Act sets forth a discretionary standard for NCUSIF requisitions. The OTR bears out this discretion in its key components, such as the examiner time survey, filled out by principal examiners selected on a rotating basis. In connection with the time survey, NCUA has stated expressly that it created a rule matrix to assist examiners in properly classifying their time as related to regulatory or insurance matters.37 Further, NCUA has made adjustments to the matrix and reviews allocation factors annually, demonstrating its view that the OTR is a policy, subject to alteration outside of rulemaking procedures.38 This approach and language is consistent with the APA’s and the D.C. Circuit’s explanation of general policy statements.
iii) The OTR is a Matter of Agency Management and Agency Organization, Procedure, or Practice
The APA expressly exempts from notice and comment requirements matters “relating to agency management or personnel or to public property, loans, grants, benefits, or contracts” and rules of agency organization, procedure, or practice.39 The D.C. Circuit has construed the exemption for matters relating to agency management as cutting a “wide swath.”40 Within these exemptions, settled law provides NCUA with discretion to set its budget without a rulemaking.41 The OTR is a component of NCUA budget processes, allocating expenditures to a permissible source.
In Lincoln v. Vigil,42 the United States Supreme Court noted that “decisions to expend otherwise unrestricted funds are not, without more, subject to the notice-and-comment requirements of § 553.” Further, distinctions between the purpose and function of various regulations and how resources are allocated to their oversight involves “‘a complicated balancing of a number of factors which are peculiarly within [an agency’s] expertise’: whether its ‘resources are best spent’ on one program or another; whether it ‘is likely to succeed’ in fulfilling its statutory mandate; whether a particular program ‘best fits the agency’s overall policies’; and, ‘indeed, whether the agency has enough resources’ to fund a program ‘at all.’”43 Once again, these circumstances apply to the OTR.
As a practical matter, the FCU Act in 12 U.S.C. § 1783(a) makes no material distinction between how the Board should requisition the NCUSIF for special assistance under § 1788 and for administrative and budget expenses. The FCU Act uses discretionary language with respect to both.44 NCUA has no regulation governing requisitions for special assistance and would vigorously dispute that one is required. The OTR may be more amenable to APA regulatory processes, but this characteristic does not, in itself, impose APA notice and comment requirements.
IV. The Report
The following is a Section-by-Section analysis of the Report that NASCUS commissioned with respect to the OTR.
In this section, the Report discusses the history of the OTR and alleges that changes to NCUA’s OTR methodology have resulted in increasing charges to the NCUSIF and reduced operating fees charged to federal credit unions. We note, and the Report agrees, that NCUA has used an allocation process for the OTR since the early 1970s without employing notice and comment processes. This practice is consistent with NCUA’s long-held position and characterization of the OTR. An agency’s characterization is relevant to a determination of whether notice and comment processes apply.45
Section I of the Report also cites a 1973 United States General Accounting Office (“GAO”) report.46 In this report, the GAO initially recommended that NCUA use a cost allocation process for funding its operations from the NCUSIF. Notably absent from this report is any recommendation from the GAO that NCUA use notice and comment rulemaking procedures to establish its resource allocation.
In this Section, the Report discusses NCUA’s implementation procedure for the OTR. The Report observes that NCUA has never formally requested comment by publishing a proposed OTR, OTR methodology, or changes to the OTR methodology in the Federal Register. This fact is consistent with NCUA’s settled position that the APA does not require notice and comment processes for the OTR. An agency’s characterization “is entitled to a significant degree of credence.”47
The Report further alleges that NCUA has never provided a reasoned, comprehensive explanation of its OTR methodology. However, approximately 12 pages of the 31 page Report meticulously describe the history and evolution of NCUA’s OTR and its processes, gleaned from public documents, studies, and reports. In any event, these contentions, which we believe multiple offices at NCUA would strenuously dispute, do not bear on whether notice and comment requirements apply under the APA. Similarly, the fact that the OTR has increased in recent years does not support the conclusion that notice and comment requirements apply.
We did not scrutinize the Report’s assertions about the impact of the OTR on the competitive position of state-chartered credit unions. Unquestionably, the OTR has an impact on all insured credit unions, as do almost all actions NCUA undertakes. To the extent NASCUS relies on an impact to conclude that notice and comment processes are required, we disagree and the courts do as well. An impact, even substantial, “does not mean [an agency action] is subject to notice and comment if it is otherwise expressly exempt under the APA.”48
In addition, although the Office of General Counsel is only tangentially involved in OTR processes, we view with great skepticism the statements in the Report that imply that NCUA is manipulating the OTR to favor federal charters.49 We have never seen any evidence to support this assertion. In two evaluations, procured for objective, internal, advisory purposes with respect to policy, PricewaterhouseCoopers (“PwC”) made the following observations:
- “Based on PwC’s review, there was no reasonable basis to conclude that the OTR Methodology ex-ante and for reasons beyond the control of the credit unions, favours or disadvantages any one type of credit unions (i.e. federal versus state chartered) over another.”50
- “The NCUA rules and regulations matrix aligns consistently with the insurance and regulatory activities and provides a documented bases supporting the allocation of examiner time between insurance and regulatory activities.”51
Further, we do not believe NASCUS’ characterization of the immediacy or nature of the impact is accurate. As stated above, the OTR’s impact through the NCUSIF is affected and diluted by a variety of factors, including:
- (i) the amount of statutorily required insurance payments,
- (ii) interest rates on investments,
- (iii) special assistance payments,
- (iv) adjustments to the normal operating level,
- (v) the available assets ratio,
- (vi) the timing of assessments in the event of a restoration plan, and
- (vii) borrowings from the Treasury or the CLF.
Other external factors would likely have a significantly more immediate and substantial impact on a credit union’s competitive position.
The Report references the studies of the OTR completed by PwC in 2011 and 2013 (the “PwC Studies”). The PwC Studies are not legal analyses. Nor are they documents NCUA has relied upon as legal support for not subjecting the OTR to notice and comment processes. Further, although one of the PwC Studies (i) notes “dissatisfaction within the industry with respect to the NCUA’s efforts to communicate and explain the OTR methodology”; and (ii) recommends “providing more visibility on how [NCUA] characterizes its activities . . . and possibly solicit[ing] feedback with regards to the reasonableness and accuracy of the classification,” such an observation bears on policy determinations, not legal conclusions.
We appreciate that credit unions care about the OTR and its impact. That fact demonstrates the strength of the system and a healthy engagement in governmental processes. We do not, however, believe the OTR’s impact or industry criticisms lead to the conclusion that notice and comment processes are required.
In this Section, the Report generally asserts that the OTR methodology constitutes a “rule making” for purposes of the APA. As noted above, whether agency action is a rule and whether notice and comment procedures apply are separate questions. The Report goes on to allege that none of the exemptions NCUA analyzed above could apply. The Report notably fails to discuss the relevant language of the FCU Act or its discretionary prose.
The Report discusses three cases for their application of law to facts in support of its conclusions. First, the Report cites Minard Run Oil Company v. United States. 52 In Minard, the court found that a moratorium the United States Forest Service imposed on drilling represented “a ‘sea change’ in the Service’s policy regarding mineral rights that directly prohibits mineral rights owners from engaging in new drilling, under threat of criminal penalties.”53 The court further observed that “[t]he burden imposed by the moratorium goes far beyond ‘the expense and annoyance of litigation [that] is part of the social burden of living under government.’”54 In contrast, the OTR does not prohibit activities or impose criminal penalties. Further, as discussed above, the effect of the OTR on regulated entities, including their competitive positions, is diluted and tempered by a variety of other circumstances.
To the extent Minard relied on what it described as “a ‘sea change’ in [ ] policy” to require notice and comment rulemaking, the Supreme Court’s recent ruling in Perez v. Mortgage Bankers Association55 puts its validity in doubt. In Perez, the Court held unequivocally that, without more, an agency need not “use the APA’s notice-and-comment procedures when it wishes to issue a new interpretation of a regulation that deviates significantly from [an interpretation] the agency has previously adopted.”56 Further, other circuits have rejected the “substantive adverse impact” test, which the Minard court also proffered as one of the principal bases for its finding.57
Second, the Report cites Anderson v. Butz,58 which addressed the United States Department of Agriculture’s practices for food stamps. Noted as relevant to the district court’s decision in Anderson that APA notice and comment processes applied, the Department of Agriculture had previously waived a potentially applicable exemption to APA notice and comment rulemaking.59 Further, the court found it “noteworthy that in the past the Secretary of Agriculture ha[d] followed the [APA’s] notice and comment procedure in connection with changes or clarification in agency practice regarding food stamp allotments.”60
With respect to the OTR, NCUA has not waived any exemptions, nor has it used notice and comment processes in the past. In contrast, NCUA has consistently taken the position that notice and comment processes are not required for the OTR. The judge in Anderson also opined that the Department of Agriculture’s adjustment to how housing subsidies factored into food stamp determinations “substantially and directly affected” the rights of individuals outside the agency.61 In NCUA’s case, the OTR does not result in an immediate assessment or distribution to insured credit unions. Depending on a multitude of factors, OTR determinations might not affect an assessment or distribution for many years. Further, eight years after the district court’s decision in Anderson, the United States Court of Appeals for the Ninth Circuit expressly rejected the “substantial impact test” on which the Anderson court principally relied.62 The D.C. Circuit has also rejected this test as a basis for concluding that notice and comment processes are required.63
The principal case cited in the Report is Credit Union National Association v. National Credit Union Administration.64 In this case, the United States District Court for the District of Columbia invalidated an NCUA interpretive ruling and policy statement that eliminated “unsecured creditor priority over [credit union] members and [the] NCUSIF” in involuntary liquidations.65 The court concluded that the Board’s intent to give operational meaning to the FCU Act where it was silent on payout priorities was an effort to make new law.66 However, unlike its relative silence on the payout priorities in involuntary liquidation,67 the FCU Act specifically makes the NCUSIF available “upon requisition by the Board, without fiscal year limitation, for making payments of insurance . . . , for providing assistance and making expenditures under section 1788 . . . , and for such administrative expenses incurred in carrying out the purposes of [Title II of the Act] as it may determine to be proper.”68 The FCU Act expressly permits requisitions for NCUA operations and commits such requisitions, particularly for administrative expenses, to the Board’s discretion. The Report provides no discussion of this FCU Act language.
In addition, Credit Union National Association does not address a matter related to NCUA’s budget. With respect to the OTR, in addition to the exemption for interpretive rules and policy statements, APA exemptions related to agency organization, procedure, or practice and agency management apply. The court in Credit Union National Association did not address these exemptions. Finally, the court in Credit Union National Association again placed reliance on the “substantial impact test,” the proper application of which the D.C. Circuit has now put in grave doubt.69 To wit: “But we rejected such a test for determining whether an agency pronouncement was a legislative rule or an interpretive rule. Because both types of rules may ‘vitally affect private interests,’ the ‘substantial impact test has no utility in distinguishing between the two.’”70
b. The Good Cause Exemption
The Report also discusses the “good cause” notice and comment exemption in Section II.B. To invoke it, an agency must incorporate into an issued rule a finding that the exemption applies, along with a brief statement supporting the reasons for asserting the exemption.71 NCUA has not included a statement justifying the good cause exemption in documents related to the OTR. Such a statement would be inconsistent with the basis for NCUA’s position that notice and comment processes do not apply and NCUA would not invoke this exemption.
c. The Congressional Review Act: Major Rules
Also in Section II.B., the Report contends that adoption of “the OTR should be deemed a major rule for purposes of the APA.” As an initial matter, “major rule” designations apply under the CRA, not the APA. The CRA provides procedures by which Congress can take steps to prevent a rule from taking effect and, if designated as major, prevents a rule from going into effect until at least 60 days from specified dates. 72 “No determination, finding, action, or omission under [the CRA is] subject to judicial review.” 73
The CRA, in relevant part, defines a major rule as follows:
any rule that the Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget [(“OMB”)] finds has resulted in or is likely to result in--
- (A) an annual effect on the economy of $100,000,000 or more;
- (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or
- (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets.74
Expressly excluded from the definition of “rule” is “any rule relating to agency management or personnel; or [ ] any rule of agency organization, procedure, or practice that does not substantially affect the rights or obligations of non-agency parties.” 75 Since the OTR is a matter relating to agency management, we necessarily conclude that OMB would not designate it as a major rule under the CRA. In addition, the OTR is a rule of agency organization, procedure, or practice. As discussed above, the OTR has an indirect effect on credit unions, tempered by a variety of other contingent circumstances. Further, the OTR does not impose regulatory obligations on credit unions. NCUA can take no enforcement action based on the OTR.
The CRA also excludes from the definition of the term rule “any rule of particular applicability, including a rule that approves or prescribes for the future rates, wages, prices, services, or allowances therefor, corporate or financial structures, reorganizations, mergers, or acquisitions thereof, or accounting practices or disclosures bearing on any of the foregoing . . . .”76 The Report’s assertion, at page 17, that this language applies for purposes of the APA’s definition of a rule is inconsistent with and undermines its later assertion that the OTR could be a major rule under the CRA.
This Section of the Report states that “the [Office of the Comptroller of the Currency (“OCC”) follows an APA notice and comment process both for the methodology it uses for determining [ ] assessments and fees, as well as for its actual assessments and fees.” The Report also points out that “the [Federal Deposit Insurance Corporation (“FDIC”)] utilizes an APA notice and comment process for its assessment methodology.” The Report acknowledges that, “[w]hile the Federal Reserve Board [(“FRB”)]does not solicit public comment on the fees for Federal Reserve Bank priced services, it does provide APA-compliant notice and comment on the methodology it uses to develop these fees.” Finally, it points out that “the [FRB] followed an APA-compliant notice and comment process for imposing” new assessments under the Dodd Frank Act.
To the extent they bear at all on the legal analysis, we find the Report’s analogies unpersuasive. The FDIC, FRB, and OCC each have complex assessment authorities that differ substantially from NCUA’s.77 The FRB and OCC do not administer insurance funds from which to requisition money for operations. To our knowledge, the FDIC funds its operating expenses entirely from the Deposit Insurance Fund (“DIF”). Further, the FDIC has complex risk-based assessment authority for the DIF, for which the Federal Deposit Insurance Act expressly requires implementing regulations. In contrast, the FCU Act severely restricts how NCUA can charge assessments and does not expressly require implementing regulations.
Under the FCU Act, each insured credit union must maintain a one percent deposit (adjusted annually or semi-annually depending on asset size) and pay assessments based on its insured shares.78 The Board’s discretion to charge insurance premiums is limited to circumstances when the NCUSIF’s equity ratio is at least 1.2 percent and less than 1.3 percent.79 No insurance premium may cause the equity ratio to exceed 1.3 percent.80 Premiums are required if the ratio is below 1.2 percent.81 Despite these statutory restrictions, NCUA has adopted regulations governing the methodology for insurance premiums and NCUSIF deposits that, among other things, establish:
- (i) various definitions,
- (ii) an invoicing process,
- (iii) rules for conversion or termination of insurance, and
- (iv) administrative fees for late payment.82
Because of (i) material differences between funding and assessment authorities; and (ii) the casespecific analysis required under the APA, the practices of other regulators provide anecdotal authority, relevant, if at all, to policy rather than legal determinations. Comparing assessment regulations that apply direct assessments on regulated entities to NCUA’s OTR is misleading. We found no evidence that the FDIC uses notice and comment processes for amounts that it transfers from the DIF for its operating expenses. Further, as recently as 2001, when the FDIC allocated budget expenses for specific work between the Savings Association Insurance Fund and the Bank Insurance Fund (the closest analogy we can discover to what NCUA does now with the OTR allocation), the FDIC did not treat its allocation as a rulemaking subject to notice and comment requirements.
In any event, NCUA is not privy to the APA legal analyses of other regulators. Nor do we need to be. Under a case-specific analysis of requirements that apply to OTR circumstances, formal notice and comment processes are not required.
In Section II.D., the Report cites portions of a 2003 GAO report that “raised questions about NCUA’s process for determining the transfer rate.”83 Once again, this GAO report does not assert that any aspect of the OTR is subject to notice and comment procedures under the APA. Nor does it recommend that NCUA use notice and comment processes to establish the OTR. Further, although this report notes that certain state officials “expressed concern over NCUA’s process for developing its overhead transfer rate, which they claimed was not transparent,” the GAO did not make an independent finding that the OTR process is not transparent. Although the report recommends that NCUA “continuously improve the process for and documentation of the overhead transfer rate,” it does so in the context of NCUA’s current processes.84 This GAO report provides anecdotal evidence, relevant, if at all, to policy rather than legal determinations.
The Report concludes that “adoption of the OTR [is] subject to notice and comment requirements.” Therefore, the Report alleges, NCUA’s established process for implementing the OTR violates the APA. Based on our review of the law and cases, set forth above, the Report does not provide a sound legal basis for requiring NCUA to change its long-held position that neither the OTR nor its methodology is subject to notice and comment requirements.
Consistent with our prior legal analysis of the issue, we conclude that the APA does not require either OTR calculations or processes to be developed under APA notice and comment procedures. Further, nothing in the Report provides a sound legal basis for requiring NCUA to change its position. The cases discussed in Section III of this opinion, including Lincoln v. Vigil;85 National Mining Association v. McCarthy;86 and New Jersey Department of Human Services v. U.S. Department of Health & Human Services, 87 among others, staunchly rebut the cases cited in the Report.
I hope this opinion letter clarifies NCUA's position on the permissible administrative procedure surrounding the OTR.
Michael J. McKenna
1 See, e.g., Cmty. Nutrition Inst. v. Young, 818 F.2d 943, 946 (D.C. Cir. 1987) (“The distinction between legislative rules and interpretative rules or policy statements has been described at various times as ‘tenuous,’ Chisholm v. FCC, 538 F.2d 349, 393 (D.C. Cir.), cert. denied, 429 U.S. 890, 97 S. Ct. 247, 50 L. Ed. 2d 173 (1976), ‘fuzzy,’ Pacific Gas & Electric Co. v. FPC, 506 F.2d 33, 38 (D.C. Cir. 1974), ‘blurred,’ Saunders, Interpretative Rules With Legislative Effect: An Analysis and a Proposal For Public Participation, 1986 Duke L.J. 346, 352, and, perhaps most picturesquely, ‘enshrouded in considerable smog.’ Noel v. Chapman, 508 F.2d 1023, 1030 (2d Cir.), cert. denied, 423 U.S. 824, 96 S. Ct. 37, 46 L. Ed. 2d 40 (1975), quoted in American Bus Association v. United States, 627 F.2d 525, 529 (D.C. Cir. 1980).”).
2 Materials related to the OTR that appear on NCUA’s Web site can be found at the following Web address: http://www.ncua.gov/about/Pages/budget.aspx
3 § 551(4).
4 Batterton v. Marshall, 648 F.2d 694, 700 (D.C. Cir. 1980).
5 5 U.S.C. § 553(a)(2) & (b)(3)(A).
6 Mendoza v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014) (citation omitted).
7 Id. But see Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1203, 191 L. Ed. 2d 186 (2015) (Holding that, without more, an agency is not required to “use the APA's notice-and-comment procedures when it wishes to issue a new interpretation of a regulation that deviates significantly from [an interpretation] the agency has previously adopted.”).
8 Mendoza, 754 F.3d at 1021.
9 Cent. Texas Tel. Co-op., Inc. v. F.C.C., 402 F.3d 205, 214 (D.C. Cir. 2005) (citing Am. Hosp. Ass’n v. Bowen, 834 F.2d 1037, 1046 (D.C. Cir. 1987) (quoting Am. Postal Workers Union v. United States Postal Serv., 707 F.2d 548, 560 (D.C. Cir. 1983)))
10 Nat’l Min. Ass’n v. McCarthy, 758 F.3d 243, 252 (D.C. Cir. 2014).
13 12 U.S.C. §1783(a).
14 § 1766(i).
15 748 F. Supp. 1120 (D.N.J. 1990).
16 818 F.2d 943 (D.C. Cir. 1987).
17 N.J. Dep’t of Human Servs., 748 F. Supp. at 1127.
18 Id. (citing Cmty. Nutrition Inst., 818 F.2d at 946 n.4).
19 Id. at 1127-28.
20 Id. at 1128.
21 Id. at 1127
22 See, e.g., NCUA Office of Examination and Insurance, Introduction to the Overhead Transfer Rate, http://www.ncua.gov/about/Documents/Budget/Misc%20Documents/IntrotoOTRPresentation_10_2014%20Final.pdf (opens new window) (last visited Apr. 22, 2015 and on file with author) & Board Action Memorandum on Overhead Transfer Rate 2015, p. 2 (Nov. 20, 2014), http://www.ncua.gov/about/Documents/Agenda%20Items/AG20141120Item4.pdf (opens new window).
23 See, e.g., Board Action Memorandum, supra note 22, at 1.
24 12 U.S.C. § 1787(d).
25 § 1783(c).
26 § 1788.
27 § 1782(h)(4).
28 § 1782(h)(1).
29 § 1782(c)(2)(D).
30 § 1783(d) & (f).
31 Attorney General’s Manual on the Administrative Procedure Act 30 n.3 (1947).
32 Syncor Int’l Corp. v. Shalala, 127 F.3d 90, 94 (D.C. Cir. 1997).
34 758 F.3d 243, 252 (D.C. Cir. 2014)
35 Id. at 253.
36 Id. (citations omitted).
37 An example of this matrix is available on NCUA’s Web site at the following address: http://www.ncua.gov/about/Documents/Budget/2013/2013ETSAnalysis.pdf (opens new window).
38 See Introduction to the Overhead Transfer Rate, supra note 22, at 7 & Board Action Memorandum, supra note 22, at 2.
39 5 U.S.C. § 553(a)(2) & (b).
40 Humana of S. Carolina, Inc. v. Califano, 590 F.2d 1070, 1082 (D.C. Cir. 1978).
41 Lincoln v. Vigil, 508 U.S. 182, 198 (1993) (“[D]ecisions to expend otherwise unrestricted funds are not, without more, subject to the notice-and-comment requirements of § 553.”).
42 508 U.S. at 198.
43 Id. at 193.
44 With respect to administrative expenses, § 1783(a) uses the phrase “as [the Board] may determine to be proper.” With respect to special assistance expenses, § 1788 uses “which the Board has determined,” “in [the Board’s] discretion,” “in the opinion of the Board,” “in the judgment of the Board,” and “upon such terms and conditions as [the Board] may determine.”
45 Nat’l Min. Ass’n, 758 F.3d at 252.
46 This GAO report can be viewed at the following Web address: http://gao.gov/assets/210/203181.pdf (opens new window).
47 Cabais v. Egger, 690 F.2d 234, 238 n.7 (D.C. Cir. 1982) (citing British Caledonian Airways, Ltd. v. CAB, 584 F.2d 982, 992 (D.C. Cir. 1978)).
48 Id. at 237.
49 See, e.g., p. 10 of the Report (“By increasing the OTR, the NCUA Board was able to shift a substantial portion of NCUA expenses to the NCUSIF, thereby enabling it to reduce FCU Operating Fees for 2014.”).
50 PricewaterhouseCoopers, Overhead Transfer Rate Review 39 (Jan. 20, 2011), http://www.ncua.gov/about/Documents/Budget/Misc%20Documents/2011PwCOTRReview.pdf (opens new window) (emphases in original) (on file with author).
51 PricewaterhouseCoopers, Analysis of Examination Time Survey (ETS) Modifications 2 (Oct. 2, 2013), http://www.ncua.gov/about/Documents/Budget/2013/2013ETSAnalysis.pdf (opens new window) (on file with author).
52 670 F.3d 236 (3d Cir. 2011), as amended (Mar. 7, 2012).
53 Id. at 248 (citation omitted) (emphasis added).
55 135 S. Ct. 1199, 191 L. Ed. 2d 186 (2015).
56 135 S. Ct. at 1203.
57 See Rivera v. Becerra, 714 F.2d 887, 891 (9th Cir. 1983) & Cent. Texas Tel. Co-op., Inc., 402 F.3d at 214 (citing Cabais, 690 F.2d at 237–38).
58 428 F. Supp. 245 (E.D. Cal. 1975)
59 Id. at 249.
60 Id. at 251.
61 428 F. Supp. at 250.
62 Rivera, 714 F.2d at 891.
63 Cent. Texas Tel. Co-op., Inc., 402 F.3d at 214 (citing Cabais, 690 F.2d at 237–38).
64 573 F. Supp. 586 (D.D.C. 1983)
65 Id. at 589.
66 Id. at 591-92.
67 See 12 U.S.C. § 1787(b)(10), (11).
68 § 1783(a) (emphasis added).
69 See Cent. Texas Tel. Co-op., Inc., 402 F.3d at 214 (citing Cabais, 690 F.2d at 237–38).
70 Id. (emphases added).
71 5 U.S.C. § 553(B)(3)(B).
72 5 U.S.C. § 801.
73 § 805.
74 § 804(2).
75 § 804(3)(B), (C).
76 § 804(3)(A)
77 For FDIC provisions, see 12 U.S.C. § 1817(b) and 12 C.F.R. Part 327. For OCC provisions, see 12 U.S.C. §§ 16; 196; 481; 482 and 12 C.F.R. Part 8. For FRB provisions, see 12 U.S.C. §§ 243; 244; 248; 326; 338; 467; 483 and 12 C.F.R. Part 246
78 12 U.S.C. §1782(c).
82 12 C.F.R. § 741.4
83 This GAO report can be viewed at the following Web address: http://www.gao.gov/new.items/d0491.pdf (opens new window).
84 Id. at 83.
85 508 U.S. 182 (1993).
86 758 F.3d 243 (D.C. Cir. 2014).
87 748 F. Supp. 1120 (D.N.J. 1990).