[Federal Register Volume 69, Number 77 (Wednesday, April 21, 2004)]
[Proposed Rules]
[Pages 21439-21443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9002]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 742


Federal Credit Union Ownership of Fixed Assets

AGENCY: National Credit Union Administration.

ACTION: Proposed rule with request for comments.

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SUMMARY: The National Credit Union Administration (NCUA) Board is 
proposing amendments to its fixed asset rule. The fixed asset rule 
governs federal credit union (FCU) ownership of fixed assets and, among 
other things, limits investment in fixed assets to five percent of an 
FCU's shares and retained earnings. Most of the proposed amendments 
clarify and reorganize the requirements of the current rule to make it 
easier to understand. The only substantive proposed changes are to: (1) 
Eliminate the requirement that an FCU, when calculating its investment 
in fixed assets, include its investments in any entity that holds fixed 
assets used by the FCU; and (2) establish a time frame for submission 
of requests for waiver of the requirement for partial occupation of 
premises acquired for future expansion.

DATES: Comments must be received on or before June 21, 2004.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for 
submitting comments.
     E-mail: Address to [email protected]. Include 
``[Your name] Comments on Proposed Rule 701.36, Federal Credit Union

[[Page 21440]]

Ownership of Fixed Assets'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line 
described above for e-mail.
     Mail: Address to Becky Baker, Secretary of the 
Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Paul Peterson, Staff Attorney, 
Division of Operations, Office of General Counsel, at the above address 
or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

Background

    The Federal Credit Union Act authorizes an FCU to purchase, hold, 
and dispose of property necessary or incidental to its operations. 12 
U.S.C. 1757(4). Generally, an FCU may only invest in property it 
intends to use to transact credit union business, that is, to support 
its internal operations or serve its members. 12 CFR 721.3(d). NCUA's 
fixed asset rule limits an FCU's investment in fixed assets and imposes 
requirements on the planning for, use of, and disposal of real property 
acquired for future expansion. 12 CFR 701.36.
    The NCUA Board has a policy of continually reviewing NCUA 
regulations to ``update, clarify and simplify existing regulations and 
eliminate redundant and unnecessary provisions.'' NCUA Interpretive 
Ruling and Policy Statement (IRPS) 87-2, Developing and Reviewing 
Government Regulations. As a result of the NCUA's 2003 review, the 
Board determined that the fixed asset rule should be updated.

Summary of Proposed Changes

    The only substantive proposed changes are to (1) Eliminate the 
requirement that an FCU, when calculating its investment in fixed 
assets, include its investments in any entity that holds fixed assets 
used by the FCU, and (2) Establish a time frame for submission of 
requests for waiver of the requirement for partial occupation of 
premises acquired for future expansion. The Board believes that neither 
of these proposals impose any new burden on FCUs.
    The proposed rule reorganizes the paragraph structure. It retains 
the five percent limit on investment in fixed assets as a percentage of 
an FCU's shares and retained earnings, currently located in Sec.  
701.36(c), but makes it the lead paragraph, Sec.  701.36(a). The 
current Sec.  701.36(a), which states only that ``[a] Federal credit 
union's ownership in fixed assets shall be limited as described in this 
chapter,'' is unnecessary and the proposed rule deletes it. The 
proposed rule moves the definitions paragraph, currently in Sec.  
701.36(b), to the end of the section. Sections 701.36(c) and (d) are 
renumbered as Sec.  701.36(b) and (c), respectively.
    In addition to reorganization of the paragraph structure, the 
proposed rule contains amendments clarifying the provisions governing 
an FCU's plans for future expansion into fixed assets and simplifying 
the rule's language to make it easier to read and understand. The 
proposed rule also adds a cross reference to NCUA's Regulatory 
Flexibility Program (RegFlex) rule. 12 CFR part 742. Federal credit 
unions that qualify for RegFlex treatment are currently exempt from the 
five percent limit on investment in fixed assets. 12 CFR 742.4(a), 
701.36(c). In addition, the proposed rule contains a technical 
amendment to the RegFlex rule that reflects the proposed reorganization 
of the fixed asset rule.

Discussion of Particular Proposed Amendments

Proposed Sec.  701.36(a)

    The current Sec.  701.36(c), Investment in Fixed Assets, would 
become paragraph (a). The proposed rule retains the current requirement 
that FCUs with $1,000,000 or more in assets cannot invest in fixed 
assets if the investment would cause the aggregate of all the FCU's 
fixed assets to exceed five percent of the FCU's shares and retained 
earnings. The current rule provides a waiver process so that FCUs may 
apply for a waiver of the five percent limitation, and the proposed 
rule retains these waiver provisions but reorganizes them to simplify 
and make them easier to follow.

Proposed Sec.  701.36(b)

    The current Sec.  701.36(d), Premises, would become paragraph (b). 
This paragraph contains provisions on real property owned by an FCU 
that is not currently used to transact credit union business. 12 CFR 
701.36(d). The Board has several proposed amendments to this paragraph.
    The Board proposes to change the title of this paragraph to 
``Premises Not Currently Used to Transact Credit Union Business'' to 
better indicate its scope.
    The current subparagraph (d)(1) provides that an FCU must 
accomplish partial use of its real property within three years of 
acquisition unless the FCU obtains a waiver. 12 CFR 701.36(d)(1). The 
proposal clarifies that requests for waiver must be in writing and 
submitted to NCUA within 30 months of acquisition. The proposed 
amendments would also clarify that partial use occurs when FCU staff 
occupy some part of the space on a full-time basis.
    The current rule states that ``[a]fter real property acquired for 
future expansion has been held for one year, a board resolution with 
definitive plans for utilization must be available for inspection by an 
NCUA examiner.'' Id. Those plans must address full use since FCUs do 
not have the authority to own and lease out space indefinitely for 
purposes unrelated to FCU operations or member service. The proposed 
amendments clarify the full use planning requirement and that full use 
occurs when the premises are completely occupied by the FCU, or by some 
combination of the FCU, credit union service corporations (CUSOs), and 
credit union vendors, on a full-time basis. CUSO and vendor activities 
must be primarily to support the operations of the FCU or serve its 
members.
    The Board also intends to clarify and simplify the current 
provisions on abandoned premises. 12 CFR 701.36(b)(5), 701.36(d)(2). 
The Board proposes to revise the provision in paragraph (d)(2) that an 
FCU ``shall endeavor to dispose of `abandoned premises' at a price 
sufficient to reimburse the FCU for its investment and costs of 
acquisition'' to state that an FCU must seek fair market value for the 
property. The Board recognizes that changing market conditions may 
affect an FCU's ability to recover its investment and costs of 
acquisition. The proposal retains the requirements that an FCU document 
its efforts to sell abandoned premises and complete the sale within 
five years.

Proposed Sec.  701.36(c)

    The current Sec.  701.36(d), Prohibited Transactions, would become 
paragraph (c). The proposal retains the current prohibition on an FCU 
acquiring or leasing property from the FCU's insiders, their family 
members, or corporations and partnerships in which the insider has a 
significant ownership interest. As a clarification, the proposal 
revises the rule to include limited liability companies and other 
entities. The proposed rule also simplifies the paragraph's 
introductory language.

Proposed Sec.  701.36(d)

    FCUs that qualify for the RegFlex Program are exempt from the five 
percent limitation on investment in fixed assets. 12 CFR 701.36(c), 
part 742. Accordingly, the proposed rule adds a

[[Page 21441]]

new paragraph to Sec.  701.36 with a cross-reference to the RegFlex 
Program. The proposed rule also states that FCUs that once qualified 
for the RegFlex Program and its associated exemptions but no longer 
qualify for RegFlex must comply with all the provisions of the fixed 
asset rule. For example, a RegFlex FCU that exceeds the five percent 
limitation on investment in fixed assets and subsequently loses its 
RegFlex qualification must either reduce its fixed asset holdings below 
five percent or obtain a waiver.

Proposed Sec.  701.36(e)

    The current Sec.  701.36(b), Definitions, would become paragraph 
(e). The current rule defines ``investment in fixed assets.'' 12 CFR 
701.36(b)(4). As provided in subparagraph (iv), the definition includes 
any investments in, and loans to, a partnership or corporation, 
including a CUSO, that holds any fixed assets used by the FCU. 12 CFR 
701.36(b)(4)(iv). The proposed rule deletes this subparagraph (iv) 
element of the definition as unnecessary and, in some cases, 
duplicative. Generally, FCUs may only invest in entities that are 
CUSOs, and FCUs are expected to pay the fair market value (FMV) for the 
use of CUSO assets. Lease payments are captured as part of the FCU's 
investment in fixed assets through the subparagraph (iii) provision on 
capital and operating lease payments. 12 CFR 701.36(b)(4)(iii). 
Accordingly, subparagraph (iv) could well cause an FCU to overstate its 
investment in fixed assets when it leases CUSO property. The Board also 
notes that the Federal Credit Union Act limits FCU investment in CUSOs 
to one percent of its paid in and unimpaired capital and surplus, and, 
even without subparagraph (iv), this restricts the use of CUSOs to 
invest in fixed assets. 12 U.S.C. 1757(7)(I).
    The current rule also defines ``retained earnings'' as ``regular 
reserve, reserve for contingencies, supplemental reserves, reserve for 
losses and undivided earnings.'' 12 CFR 701.36(b)(7). The proposed rule 
updates this definition to include ``and other appropriations of 
undivided earnings as designated by management or the Administration'' 
to recognize other reserve accounts that may be created out of 
undivided earnings consistent with generally accepted accounting 
principles. The proposed rule also separates the definitions of 
``shares'' and ``retained earnings.''
    Finally, the proposed rule alphabetizes all the definitions to make 
them easier to locate.

Proposed Sec.  742.4(a)

    The proposed rule includes a technical amendment to the RegFlex 
rule reflecting the proposed restructuring of the fixed asset rule.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small entities (those credit unions under ten 
million dollars in assets). NCUA believes that, under the current rule, 
the only burden imposed on small credit unions is the requirement to 
submit a waiver request if investment in fixed assets exceed 5% of 
retained shares and earnings. There are presently about 4,540 small 
federally-insured credit unions. Each year, only about ten of these 
credit unions submit a waiver request, and NCUA estimates that each 
waiver request takes about ten hours to prepare. Accordingly, NCUA does 
not believe the current rule imposes a significant economic impact on a 
substantial number of small entities. Since the proposed rule does not 
change the burdens associated with the current rule, the proposed rule 
also does not have a significant economic impact on a substantial 
number of small credit unions, and, therefore, a regulatory flexibility 
analysis is not required.

Paperwork Reduction Act

    Section 701.36 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 
the NCUA has submitted a copy of this section as part of an information 
collection package to the Office of Management and Budget (OMB) for its 
review and approval for reinstatement of Collection of Information, FCU 
Ownership of Fixed Assets, Control Number 3133-0040.
    Section 701.36 protects the safety and soundness of FCUs by 
ensuring that FCUs do not over invest in unproductive fixed assets. The 
regulation also ensures that FCUs do not purchase and hold fixed assets 
for purposes other than the internal operations of the FCU or serving 
the FCU's members.
    NCUA estimates the reporting and recordkeeping burden for this 
collection of information to be about 325 hours, calculated as follows:
    (1) Waiver of five percent limitation. NCUA estimates the annual 
burden for preparation of an application for waivers to the limitation 
on investments in fixed assets as follows:

     Respondents: 15
     Responses x 1
     Hours per respondent x 15
     Annual reporting burden: 225

    (2) Plan for full occupation of premises. NCUA estimates the annual 
burden associated with preparation of definitive plans for full 
occupation in connection with fixed asset acquired for future expansion 
but not fully occupied after one year as follows:

     Respondents: 5
     Responses x 1
     Hours per respondent x 15
     Annual reporting burden: 75

    (3) Waiver of requirement for partial occupation. NCUA estimates 
the annual burden associated the acquisition of premises for future 
expansion and seeking NCUA approval for plans not to partially occupy 
the property within 3 years as follows:

     Respondents: 5
     Responses x 1
     Hours per respondent x 5
     Annual reporting burden: 25

    Total annual burden hours = 325.

    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to Joseph F. 
Lackey, the Office of Information and Regulatory Affairs, OMB, Attn: 
Joseph F. Lackey, Room 10226, New Executive Office Building, 
Washington, DC 20503.
    The NCUA considers comments by the public on this proposed 
collection of information in--

--Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
--Evaluating the accuracy of the NCUA's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used;
--Enhancing the quality, usefulness, and clarity of the information to 
be collected; and
--Minimizing the burden of collection of information on those who are 
to respond, including through the use of appropriate automated 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology; e.g., permitting electronic 
submission of responses.

    The Paperwork Reduction Act requires OMB to make a decision 
concerning the collection of information contained in these proposed 
regulations between 30 and 60 days after publication of this document 
in the

[[Page 21442]]

Federal Register. Therefore, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days of publication. This 
does not affect the deadline for the public to comment to the NCUA on 
the proposed regulations.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. This proposed rule would not have substantial 
direct effects on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this proposed rule does not constitute a policy that 
has federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive.

List of Subjects

12 CFR Part 701

    Credit unions.

12 CFR Part 742

    Credit unions, Reporting and recordkeeping requirements

    By the National Credit Union Administration Board on April 15, 
2004.
Becky Baker,
Secretary of the Board.
    Accordingly, the NCUA proposes to amend 12 CFR parts 701 and 742:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also 
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

    2. Revise Sec.  701.36 to read as follows:


Sec.  701.36  FCU Ownership of Fixed Assets.

    (a) Investment in Fixed Assets. (1) No federal credit union with 
$1,000,000 or more in assets may invest in any fixed assets if the 
investment would cause the aggregate of all such investments to exceed 
five percent of the credit union's shares and retained earnings.
    (2) The Administration may waive the prohibition in paragraph 
(a)(1) of this section.
    (i) A federal credit union desiring a waiver must submit a written 
request to the NCUA regional office having jurisdiction over the 
geographical area in which the credit union's main office is located. 
The request must describe in detail the contemplated investment and the 
need for the investment. The request must also indicate the approximate 
aggregate amount of fixed assets, as a percentage of shares and 
retained earnings, that the credit union would hold after the 
investment.
    (ii) The regional director will inform the requesting credit union, 
in writing, of the date the request was received and of any additional 
documentation that the regional director might require in support of 
the waiver request.
    (iii) The regional director will approve or disapprove the waiver 
request in writing within 45 days after receipt of the request and all 
necessary supporting documentation. If the regional director approves 
the waiver, the regional director will establish an alternative limit 
on aggregate investments in fixed assets, either as a dollar limit or 
as a percentage of the credit union's shares and retained earnings. 
Unless otherwise specified by the regional director, the credit union 
may make future acquisition of fixed assets only if the aggregate all 
of such future investments in fixed assets does not exceed an 
additional one percent of the shares and retained earnings of the 
credit union over the amount approved by the regional director.
    (iv) If the regional director does not notify the credit union of 
the action taken on its request within 45 calendar days of the receipt 
of the waiver request or the receipt of additional requested supporting 
information, whichever occurs later, the credit union may proceed with 
its proposed investment in fixed assets. The investment, and any future 
investments in fixed assets, must not cause the credit union to exceed 
the aggregate investment limit described in its waiver request.
    (b) Premises Not Currently Used to Transact Credit Union Business. 
(1) When a federal credit union acquires premises for future expansion 
and does not fully occupy the space within one year the credit union 
must have a board resolution in place by the end of that year with 
definitive plans for full occupation. Premises are fully occupied when 
the credit union, or a combination of the credit union, CUSOs, or 
vendors, use the entire space on a full-time basis. CUSOs and vendors 
must be using the space primarily to support the credit union or to 
serve the credit union's members. The credit union must make any plans 
for full occupation available to an NCUA examiner upon request.
    (2) When a federal credit union acquires premises for future 
expansion, the credit union must partially occupy the premises within a 
reasonable period, not to exceed three years. Premises are partially 
occupied when the credit union is using some part of the space on a 
full-time basis. The Administration may waive this partial occupation 
requirement in writing upon written request. The request must be made 
within 30 months after the property is acquired.
    (3) A federal credit union must make diligent efforts to dispose of 
abandoned premises and any other real property not intended for use in 
the conduct of credit union business. The credit union must seek fair 
market value for the property, and record its efforts to dispose of 
abandoned premises. After premises have been abandoned for four years, 
the credit union must publicly advertise the property for sale. Unless 
otherwise approved in writing by the Administration, the credit union 
must complete the sale within five years of abandonment.
    (c) Prohibited Transactions. (1) Without the prior written approval 
of the Administration, no federal credit union may invest in premises 
through an acquisition or a lease of one year or longer from any of the 
following:
    (i) A director, member of the credit committee or supervisory 
committee, or senior management employee of the federal credit union, 
or immediate family member of any such individual.
    (ii) A corporation in which any director, member of the credit 
committee or supervisory committee, official, or senior management 
employee, or immediate family members of any such individual, is an 
officer or director, or has a stock interest of 10 percent or more.

[[Page 21443]]

    (iii) A partnership, limited liability company, or other entity in 
which any director, member of the credit committee or supervisory 
committee, or senior management employee, or immediate family members 
of any such individual, is a general partner, or a limited partner or 
entity member with an interest of 10 percent or more.
    (2) The prohibition contained in paragraph (c)(1) of this section 
also applies to a lease from any other employee if the employee is 
directly involved in investments in fixed assets unless the board of 
directors determines that the employee's involvement does not present a 
conflict of interest.
    (3) All transactions with business associates or family members not 
specifically prohibited by this paragraph (c) must be conducted at 
arm's length and in the interest of the credit union.
    (d) Regulatory Flexibility Program. Federal credit unions that 
qualify for the Regulatory Flexibility Program provided for in part 742 
of this chapter are exempt from the five percent limitation described 
in paragraph (a) of this section. Federal credit unions that lose their 
eligibility for the Regulatory Flexibility Program must comply with 
paragraph (a).
    (e) Definitions--As used in this section:
    (1) Abandoned premises means real property previously used to 
transact credit union business but no longer used for that purpose and 
real property originally acquired for future expansion for which the 
credit union no longer contemplates such use.
    (2) Fixed assets means premises, furniture, fixtures and equipment.
    (3) Furniture, fixtures, and equipment means all office 
furnishings, office machines, computer hardware and software, automated 
terminals, and heating and cooling equipment.
    (4) Investments in fixed assets means:
    (i) Any investment in improved or unimproved real property which is 
being used or is intended to be used as premises;
    (ii) Any leasehold improvement on premises;
    (iii) The aggregate of all capital and operating lease payments on 
fixed assets, without discounting commitments for future payments to 
present value; and
    (iv) Any investment in furniture, fixtures and equipment.
    (5) Immediate family member means a spouse or other family members 
living in the same household.
    (6) Premises means any office, branch office, suboffice, service 
center, parking lot, other facility, or real estate where the credit 
union transacts or will transact business.
    (7) Senior management employee means the credit union's chief 
executive officer (typically this individual holds the title of 
President or Treasurer/Manager), any assistant chief executive officers 
(e.g., Assistant President, Vice President or Assistant Treasurer/
Manager) and the chief financial officer (Comptroller).
    (8) Shares means regular shares, share drafts, share certificates, 
other savings.
    (9) Retained earnings means undivided earnings, regular reserve, 
reserve for contingencies, supplemental reserves, reserve for losses, 
and other appropriations from undivided earnings as designated by 
management or the Administration.

PART 742--REGULATORY FLEXIBILITY PROGAM

    3. The authority citation for part 742 continues to read as 
follows:

    Authority: 12 U.S.C 1756 and 1766.

    4. Revise Sec.  742.4(a) to read as follows:


Sec.  742.4  From what NCUA regulations will I be exempt?

    (a) RegFlex credit unions are exempt from the provisions of the 
following NCUA regulations without restrictions or limitations: Sec.  
701.25, Sec.  701.32(b) and (c), Sec.  701.36(a), Sec.  703.5(b)(1)(ii) 
and (2), Sec.  703.12(c), Sec.  703.16(b), and Sec.  723.7(b) of this 
chapter.
* * * * *
[FR Doc. 04-9002 Filed 4-20-04; 8:45 am]
BILLING CODE 7535-01-P