[Federal Register Volume 80, Number 60 (Monday, March 30, 2015)]
[Proposed Rules]
[Pages 16595-16603]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-06816]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AE39


Federal Credit Union Ownership of Fixed Assets

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is issuing for public comment this 
proposed rule (2015 proposal) to amend its regulation governing federal 
credit union (FCU) ownership of fixed assets. To provide regulatory 
relief to FCUs, the 2015 proposal eliminates a provision in the current 
fixed assets rule that established a five percent aggregate limit on 
investments in fixed assets for FCUs with $1,000,000 or more in assets. 
It also eliminates the provisions in the current fixed assets rule 
relating to waivers from the aggregate limit. Further, instead of 
applying the prescriptive aggregate limit provided by regulation in the 
current fixed assets rule, the Board proposes to oversee FCU ownership 
of fixed assets through the

[[Page 16596]]

supervisory process and guidance. The 2015 proposal also makes 
conforming amendments to the scope and definitions sections of the 
current fixed assets rule to reflect this proposed approach, and it 
amends the title of Sec.  701.36 to more accurately reflect this 
amended scope and applicability.
    In addition, the 2015 proposal simplifies the fixed assets rule's 
partial occupancy requirements for FCU premises acquired for future 
expansion by establishing a single six-year time period for partial 
occupancy of such premises and by removing the 30-month requirement for 
partial occupancy waiver requests. The Board notes that, in July 2014, 
it issued a proposal regarding the fixed assets rule that addressed, 
among other things, the partial occupancy provisions of the fixed 
assets rule (July 2014 proposal), but NCUA did not finalize that 
proposal. For reasons discussed below, the 2015 proposal incorporates 
similar partial occupancy proposed amendments from the July 2014 
proposal, with one modification to the time period for partial 
occupancy.

DATES: Comments must be received on or before April 29, 2015.

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/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name] Comments on Notice of Proposed Rulemaking for Part 701, FCU 
Ownership of Fixed Assets'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: You may view all public comments on NCUA's Web 
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as 
submitted, except for those we cannot post for technical reasons. NCUA 
will not edit or remove any identifying or contact information from the 
public comments submitted. You may inspect paper copies of comments in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: Pamela Yu, Senior Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540, or Jacob McCall, Program Officer, Office of Examination and 
Insurance, at the above address or telephone (703) 518-6360.

SUPPLEMENTARY INFORMATION:

I. Background
    A. 2013 Rule
    B. July 2014 Proposal
    C. Public Comments on the July 2014 Proposal
II. Summary of the 2015 Proposal
III. Request for Public Comment
IV. Regulatory Procedures

I. Background

    The Federal Credit Union Act (FCU Act) authorizes an FCU to 
purchase, hold, and dispose of property necessary or incidental to its 
operations.\1\ NCUA's fixed assets rule interprets and implements this 
provision of the FCU Act.\2\ NCUA's current fixed assets rule: (1) 
Limits FCU investments in fixed assets; (2) establishes occupancy, 
planning, and disposal requirements for acquired and abandoned 
premises; and (3) prohibits certain transactions.\3\ Under the current 
rule, fixed assets are defined as premises, furniture, fixtures, and 
equipment, including any office, branch office, suboffice, service 
center, parking lot, facility, real estate where a credit union 
transacts or will transact business, office furnishings, office 
machines, computer hardware and software, automated terminals, and 
heating and cooling equipment.\4\
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    \1\ 12 U.S.C. 1757(4).
    \2\ 12 CFR 701.36.
    \3\ Id.
    \4\ 12 CFR 701.36(c).
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A. 2013 Rule

    The Board has a policy of continually reviewing NCUA's regulations 
to update, clarify and simplify existing regulations and eliminate 
redundant and unnecessary provisions. To carry out this policy, NCUA 
identifies one-third of its existing regulations for review each year 
and provides notice of this review so the public may comment. In 2012, 
NCUA reviewed its fixed assets rule as part of this process. As a 
result of that review, in March 2013, the Board issued proposed 
amendments to the fixed assets rule to make it easier for FCUs to 
understand it.\5\ The proposed amendments did not make any substantive 
changes to the regulatory requirements. Rather, they only clarified the 
rule and improved its overall organization, structure, and readability.
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    \5\ 78 FR 17136 (Mar. 20, 2013).
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    In response to the Board's request for public comment on the March 
2013 proposal, several commenters offered suggestions for substantive 
changes to the fixed assets rule, such as increasing or eliminating the 
aggregate limit on fixed assets, changing the current waiver process, 
and extending the time frames for occupying premises acquired for 
future expansion. These comments, however, were beyond the scope of the 
March 2013 proposal, which only reorganized and clarified the rule. 
Accordingly, in September 2013, the Board adopted the March 2013 
proposal as final without change except for one minor modification.\6\ 
In finalizing that rule, however, the Board indicated it would take the 
commenters' substantive suggestions into consideration if it were to 
make subsequent amendments to NCUA's fixed assets rule.
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    \6\ 78 FR 57250 (Sept. 18, 2013).
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B. July 2014 Proposal

    In July 2014, the Board issued a proposed rule to provide 
regulatory relief to FCUs and to allow FCUs greater autonomy in 
managing their fixed assets.\7\ These amendments reflected some of the 
public comments received on the March 2013 proposal. Specifically, in 
the July 2014 proposal, the Board proposed to allow an FCU to exceed 
the five percent aggregate limit,\8\ without the need for a waiver, 
provided that the FCU implemented a fixed asset management (FAM) 
program that demonstrated appropriate pre-acquisition analysis to 
ensure the FCU could afford any impact on earnings and net worth levels 
resulting from the purchase of fixed assets. Under the July 2014 
proposal, an FCU's FAM program would have been subject to supervisory 
scrutiny and would have had to provide for close ongoing oversight of 
fixed assets levels and their effect on the FCU's financial 
performance. It also would have had to include a written policy that 
set an FCU board-established limit on the aggregate amount of the FCU's 
fixed assets. In the July 2014 proposal, the Board also proposed to 
simplify the partial occupancy requirement for premises acquired for 
future expansion by establishing a single five-year time period for 
partial occupancy of any premises acquired for future expansion, 
including improved

[[Page 16597]]

and unimproved property, and by removing the current fixed assets 
rule's 30-month time limit for submitting a partial occupancy waiver 
request.
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    \7\ 79 FR 46727 (Aug. 11, 2014).
    \8\ The five percent aggregate limit on fixed assets is measured 
in comparison to the FCU's shares and retained earnings.
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C. Public Comments on the July 2014 Proposal

    The public comment period for the July 2014 proposal ended on 
October 10, 2014. NCUA received thirty-six comments on the proposal: 
Two from credit union trade associations; one from a bank trade 
association; sixteen from state credit union leagues; thirteen from 
FCUs; three from federally insured, state-chartered credit unions; and 
one from an individual. While commenters generally supported the 
Board's efforts to provide regulatory relief from the requirements 
concerning FCU fixed assets, most commenters advocated more relief or 
suggested alternative approaches to achieving that objective.
    One commenter fully supported all aspects of the July 2014 
proposal. Two commenters opposed it, and another commenter stated that 
it represented only a marginal improvement over the current rule.
1. Removal of the Waiver Requirement To Exceed the Five Percent 
Aggregate Limit
    Under the current rule, if an FCU has $1,000,000 or more in assets, 
the aggregate of all its investments in fixed assets must not exceed 
five percent of its shares and retained earnings, unless it obtains a 
waiver from NCUA.\9\ In the July 2014 proposal, the Board proposed to 
amend this requirement to allow an FCU to exceed the five percent 
aggregate limit, without a waiver, provided the FCU implemented a FAM 
program to manage and monitor the FCU's fixed assets.
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    \9\ 12 CFR 701.36(c).
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    Fifteen commenters supported removing the waiver requirement and 
also supported the requirement to adopt a FAM program for those FCUs 
that exceed the five percent limit. Five commenters, however, supported 
removing the waiver requirement but disagreed with the FAM program 
requirement. One commenter did not support the removal of the waiver 
requirement.
a. Five Percent Aggregate Limit
    In the July 2014 proposal, the Board did not propose to change the 
current rule's five percent aggregate limit on an FCU's investment in 
fixed assets, but many commenters nonetheless advocated its repeal. At 
least ten commenters suggested that the July 2014 proposal did not 
provide sufficient regulatory relief and that the five percent 
aggregate limit should be eliminated. These commenters noted that the 
aggregate limit is not statutorily mandated by the FCU Act and, thus, 
FCUs should be allowed to independently manage their own fixed assets 
by setting their own credit union board-approved limits. Four 
commenters argued further that FCUs should be permitted to set their 
own fixed assets limits without the additional requirement of adopting 
a burdensome FAM program.
    One commenter, however, urged NCUA not to eliminate the aggregate 
limit because allowing unlimited amounts of investments in fixed assets 
could pose a significant safety and soundness risk. The same commenter 
observed that the material loss reviews of several failed FCUs noted 
the contributory role that excessive fixed assets played in those 
credit union failures.
    Other commenters were not opposed to an aggregate limit, but argued 
it should be increased. For example, one commenter advocated a fifteen 
percent aggregate limit. Another suggested that the aggregate limit 
should be raised to at least twenty percent.
b. Exclusions From the Fixed Assets Ratio
    A number of commenters recommended that certain investments should 
be excluded from the current rule's fixed assets ratio calculation. Two 
commenters stated generally that the fixed assets calculation should 
reflect the greater emphasis placed on technology in the current 
marketplace and better account for the need to replace obsolete 
technology and equipment. At least four commenters stated that 
investments in information technology, including computer hardware and 
software, should be excluded from the calculation. One commenter 
indicated that fixed assets should be comprised of land and buildings 
only. Another commenter stated generally that there should be some type 
of safe harbor or exclusion to allow for the purchase of necessary 
equipment.
2. Fixed Assets Management Program
    Fifteen commenters supported the proposed requirement for an FCU to 
adopt a FAM program before choosing to exceed the five percent 
aggregate limit. However, most commenters that generally supported this 
aspect of the proposal also expressed concerns about certain aspects of 
the requirement.
    Approximately one quarter of the commenters opposed the FAM program 
requirement altogether. Of those, several commenters argued that it is 
unnecessary or overly burdensome, and it would impose additional 
burdens that FCUs are not already subject to under the current rule. 
For example, four commenters noted that the requirement for annual FCU 
board review is an additional step that is not present under the 
current waiver process. One commenter argued that the FAM program 
requirement would create unnecessary complications to the acquisition 
of fixed assets over the five percent limit, and the requirement could 
serve as a deterrent to the acquisition of fixed assets. One commenter 
argued that the proposal simply shuffles regulatory burden, rather than 
providing meaningful regulatory relief. Another commenter also argued 
that the level of analysis that must be included in an FCU's FAM 
program is beyond what is required under the current waiver process 
and, thus, the proposal would not reduce regulatory burden. Three 
commenters proffered a similar argument that the additional 
requirements imposed after assets are acquired would increase FCUs' 
compliance responsibilities and costs, negating any flexibility gained 
under the proposal.
a. Minor Acquisitions
    Four commenters requested changes to proposed Sec.  701.36(c)(2), 
which would require an FCU to seek FCU board approval to make 
investments in fixed assets exceeding the aggregate limit ``except for 
the minor acquisitions of equipment in the normal course of business.'' 
A number of commenters suggested this language should be expanded to 
include minor acquisitions of furniture and fixtures, in addition to 
equipment. One commenter suggested ``minor acquisitions'' should 
specifically include purchases of desktop technologies, such as 
computer monitors, printers, faxes, scanners, copiers, and telephones, 
upgrades or renewals to existing desktop software, and ATMs. Another 
commenter suggested that ``minor acquisitions'' should be defined as 
anything under .005 percent of shares and retained earnings.
b. Future Marketability
    At least seven commenters expressed concern with the ``future 
marketability'' element of the FAM program. Specifically, proposed 
Sec.  701.36(2)(iii) provided that FCU board oversight of an investment 
in real property that would cause the FCU to exceed the five percent 
aggregate limit must reflect the board's consideration of the ``future

[[Page 16598]]

marketability'' of the premises. Commenters noted that this requirement 
could, in some circumstances, be contrary to the best interest of 
members, particularly low-income members and members in rural or 
underserved areas. They argued that the decision to purchase a branch 
or office location should be based on member service needs, not future 
marketability. At least four commenters requested that the future 
marketability provision be eliminated because strategic considerations 
beyond marketability factor into a decision to acquire fixed assets.
c. Internal Controls
    Proposed Sec.  701.36(c)(3) would have required an FCU's FAM 
program to establish ongoing internal controls to monitor and measure 
the FCU's investments in fixed assets. Two commenters disagreed with 
the proposed internal controls requirement, noting that the current 
fixed assets rule does not have a specific internal controls 
requirement. These commenters argued that internal controls to monitor 
fixed assets investments should not be prescribed by specific 
regulatory requirements, but rather such internal controls should be 
determined by credit union management and subject to examiner review 
during the routine examination process.
d. Appeals
    Eight commenters suggested that any final rule should include an 
appeals process to allow, for example, an FCU to appeal if an examiner 
contests an FCU's fixed asset investment or disapproves an FCU's FAM 
program.
e. Conclusion Regarding Aggregate Limit and FAM Program
    After careful consideration of the public comments relating to the 
fixed assets aggregate limit, the Board has determined that additional 
regulatory relief beyond what was provided in the July 2014 proposal is 
warranted. Therefore, the Board is not adopting the July 2014 proposed 
amendments relating to the five percent aggregate limit on fixed 
assets, including any FAM program requirements. In particular, upon 
further review, the Board has concluded that oversight of the purchase 
of FCU investments in fixed assets can be effectively achieved through 
supervisory guidance and the examination process, rather than through 
prescriptive regulatory limitations. Accordingly, the Board is issuing 
this 2015 proposal to remove altogether the five percent aggregate 
limit on fixed assets, as discussed in further detail below.

D. Partial Occupancy

    The July 2014 proposal also would have simplified the partial 
occupancy requirement for premises acquired for future expansion. 
Virtually all commenters that provided feedback on the proposed 
amendments to the partial occupancy requirement supported the overall 
concept of streamlining or improving this aspect of the fixed assets 
rule. However, as discussed more fully below, most commenters requested 
additional relief beyond that proposed.
1. Time Period for Partial Occupancy
    Under the current rule, if an FCU acquires premises for future 
expansion and does not fully occupy them within one year, it must have 
an FCU board resolution in place by the end of that year with 
definitive plans for full occupation. In addition, the rule requires an 
FCU to partially occupy the premises within a reasonable period, but no 
later than three years after the date of acquisition, or six years if 
the premises are unimproved land or unimproved real property. In the 
July 2014 proposal, the Board proposed to simplify this aspect of the 
fixed assets rule by establishing a single time period of five years 
from the date of acquisition for partial occupancy of any premises 
acquired for future expansion, regardless of whether the premises are 
improved or unimproved.
    Three commenters agreed with the proposal to establish a single, 
uniform five-year time period for partial occupancy of any premises 
acquired for future expansion. Of those, one commenter stated that an 
increase of two years for partial occupancy of improved property is a 
beneficial trade-off for the one year reduction in the timeframe for 
partial occupancy of unimproved property. The same commenter noted that 
a single timeframe is easier for compliance purposes.
    Two commenters supported a uniform time period, but suggested that 
five years is insufficient. They recommended that, at a minimum, it 
should be a uniform six years, as previously provided for unimproved 
property. Seven commenters suggested that the time period for partial 
occupancy should be extended to ten years.
    Eight commenters agreed with extending the partial occupancy 
requirement for improved premises from three to five years, but 
disagreed with reducing the partial occupancy requirement for 
unimproved property from six to five years. Of those, two commenters 
posited that reducing the timeframe would increase an FCU's regulatory 
burden.
    One commenter suggested that the current partial occupancy 
requirements should be retained, but the rule should require an FCU (or 
a combination of an FCU, credit union service organization, and/or 
credit union vendor) to occupy at least 51 percent of the premises to 
meet the partial occupancy requirement. This commenter argued that 
relaxing the partial occupancy requirement would encourage FCUs to 
maximize non-mission related income by leasing out their property. The 
same commenter further stated that because FCUs are not subject to 
unrelated business income taxes, they have an incentive to maximize 
leasing income by delaying occupancy, and this would be an abuse of the 
credit union tax exempt status. Another commenter also supported 
retaining separate timeframes for improved and unimproved property, but 
suggested that both time periods should be lengthened to five years and 
eight years, respectively.
    Approximately thirteen commenters suggested that regulatory 
timeframes for occupancy should be eliminated entirely. These 
commenters generally argued that an FCU should have the ability to make 
its own determination, in its FAM program or by board policy, about how 
much time it needs to reach full or partial occupancy of its property.
    The Board has carefully weighed these comments, but disagrees with 
commenters who suggested that regulatory timeframes for occupancy 
should be eliminated.
    Unlike the five percent aggregate limit, which is a safety and 
soundness safeguard but is not statutorily required, the occupancy 
requirements in the fixed assets rule have statutory underpinnings. As 
discussed in the preamble to the July 2014 proposal, an FCU may not 
hold (or lease to unrelated third parties) real property indefinitely 
without fully occupying the premises. Section 107(4) of the FCU Act 
authorizes an FCU to purchase, hold, and dispose of property necessary 
or incidental to its operations.\10\ NCUA has long held that this 
provision means an FCU may only invest in property it intends to use to 
transact credit union business or in property that supports its 
internal operations or member services.\11\ There is no authority in 
the

[[Page 16599]]

FCU Act for an FCU to invest in real estate for speculative purposes or 
to otherwise engage in real estate activities that do not support its 
purpose of providing financial services to its members. While there is 
no required timeframe in the fixed assets rule within which an FCU must 
achieve full occupation, the rule requires an FCU to partially occupy 
the premises within a time period set by the rule and sufficient to 
show, among other things, that the FCU will fully occupy the premises 
within a reasonable time.\12\
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    \10\ 12 U.S.C. 1757(4) (emphasis added).
    \11\ See 43 FR 58176, 58178 (Dec. 13, 1978) (``Part 107(4) of 
the Federal Credit Union Act provides that a credit union may 
purchase, hold, and dispose of property necessary or incidental to 
its operations. Retaining a piece of property whose only purpose is 
to provide office space to other entities is clearly not necessary 
or incidental to the Federal credit union's operations. Further, 
investing in, or holding, property with the intent of realizing a 
profit from appreciation at a future sale is also outside the powers 
of a Federal credit union.''); 69 FR 58039, 58041 (Sept. 29, 2004) 
(``Federal credit unions are chartered for the purpose of providing 
financial services to their members and it is not permissible for 
them to engage in real estate activities that do not support that 
purpose.'')
    \12\ 12 CFR 701.36(b).
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    The Board emphasizes that FCUs already have significant leeway and 
flexibility in managing real property acquired for future use, given 
that there is no required time period for full occupation. Moreover, 
the proposed elimination of the 30-month requirement for partial 
occupancy waiver requests, which is discussed below, would allow FCUs 
additional leeway to apply for a waiver later if it deemed appropriate.
    The Board continues to believe that, as discussed in the preamble 
to the July 2014 proposal, a single time period for partial occupancy 
would simplify and improve the rule.\13\ However, in light of 
commenters' concerns that shortening the time period for unimproved 
property from six to five years would increase regulatory burden, the 
Board has decided to maintain the current time allowed for partial 
occupancy of unimproved property. Accordingly, the Board is proposing a 
single six-year time period for partial occupancy in this 2015 
proposal. The proposed amendment therefore retains the current time 
period for unimproved land or unimproved real property, and extends the 
current time period for improved premises by three years, which the 
Board believes is a significant measure of relief for FCUs.
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    \13\ The Board notes that a single time period would be 
consistent with the Office of the Comptroller of the Currency's 
(OCC) uniform five-year requirement for real estate acquired by 
banks for future expansion.
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2. Waivers
    Under the current rule, an FCU must submit its request for a waiver 
from the partial occupancy requirement within 30 months after the 
property is acquired. In the July 2014 proposal, the Board proposed to 
eliminate the 30-month requirement and allow FCUs to apply for a waiver 
beyond that time frame as appropriate. Seven commenters provided 
feedback on this aspect of the proposal, and all supported it. In light 
of the unanimous support from commenters on this aspect of the July 
2014 proposal, the Board is restating in this 2015 proposal, without 
change, the proposed waiver provision originally proposed in the July 
2014 proposal. Although the Board is incorporating the same proposed 
amendments to the partial occupancy waiver requirements, the Board 
still invites comments on this subject to help inform its decision for 
the final rule. The Board notes that it is unnecessary for commenters 
to the July 2014 proposal to resubmit their same comments again. NCUA 
has considered those previously submitted comments and will consider 
them again before finalizing this rule. However, commenters with new, 
different, or updated comments should feel free to submit them as 
provided for above.
3. Definition
    Although the Board did not propose amending any current definitions 
in the fixed assets rule, five commenters expressed concern about the 
definition of ``partial occupancy,'' as clarified by the March 2013 
proposal. Of those, four commenters suggested that the clarification 
reduced an FCU's ability to meet partial occupancy requirements, 
particularly with respect to ATMs deployed on vacant land purchased for 
future expansion. The commenters asked that any subsequent final rule 
correct this. One commenter stated generally that any subsequent final 
rule should reinstate the previous definition.
    The Board reiterates that, as indicated in the preambles to the 
March 2013 proposal and the corresponding final rule,\14\ the 
clarification of the partial occupancy definition did not impose any 
new regulatory requirements on FCUs or amend the meaning of that term. 
Rather, it only clarified the partial occupancy provisions by 
reflecting NCUA's interpretation of them. Accordingly, the Board is not 
proposing any amendments in this 2015 proposal as a result of those 
comments.
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    \14\ 78 FR 17136 (Mar. 20, 2013); 78 FR 57250 (Sept. 18, 2013).
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E. Full Occupancy

    The current rule does not set a specific time period within which 
an FCU must achieve full occupation of premises acquired for future 
expansion. However, partial occupancy of the premises is required 
within a set timeframe and must be sufficient to show, among other 
things, that the FCU will fully occupy the premises within a reasonable 
time and consistent with its plan for the premises.\15\ The Board did 
not propose to amend the full occupancy requirement in the July 2014 
proposal, but it requested public comment on this topic.
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    \15\ Under the current rule, if an FCU acquires premises for 
future expansion and does not fully occupy them within one year, it 
must have an FCU board resolution in place by the end of that year 
with definitive plans for full occupation. 12 CFR 701.36(d)(1). The 
reasonableness of an FCU's plan for full occupation is evaluated 
through the examination process and based upon such factors as the 
defensibility of projection assumptions, the operational and 
financial feasibility of the plan, and the overall suitability of 
the plan relative to the FCU's field of membership.
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    At least four commenters said the current rule should be retained, 
and NCUA should not set a specific time period for full occupancy. Of 
those, three commenters said FCUs should have flexibility under the 
rule. Three commenters noted that FCU boards and management should 
determine the best timeframe in which to fully develop property. One 
commenter said there is no need to modify the full occupancy 
requirement, but NCUA should consider improving the definition of full 
occupancy.
    One commenter stated generally that the full occupancy requirement 
should be modified and determined on a case-by-case basis. Another 
commenter suggested that if the requirement is modified, at a minimum, 
the timeframe for full occupancy should be six years for all property, 
along with a simple extension process. Two commenters suggested that 
the full occupancy requirement should be eliminated entirely. Three 
commenters suggested that NCUA should replace the ``full'' occupancy 
requirement with a ``significant'' or ``substantial'' occupancy 
requirement. Of these, one commenter said ``substantial occupancy'' 
should be defined as fifty-one percent occupancy. Another commenter 
suggested ``substantial occupancy'' should be defined as ``within a 
reasonable period of time consistent with FCU's usage plan.''
    One commenter, however, argued that the full occupancy requirement 
should be stricter. This commenter suggested that NCUA should require 
full occupancy within three years of reaching partial occupancy, to 
ensure that FCUs are not participating in impermissible real estate 
activities. Citing OCC guidance, the commenter indicated that, 
historically, three years

[[Page 16600]]

has been a reasonable time for national banks to reach full occupancy.
    The Board appreciates these comments and, after careful 
consideration of the points raised, it has determined to retain the 
current full occupancy provision. Accordingly, the Board is not 
proposing to amend the full occupancy requirement in this 2015 
proposal. As discussed above, the limited authority in Section 107(4) 
the FCU Act means that an FCU may not hold real property indefinitely 
without fully occupying the premises. There is no authority for an FCU 
to invest speculatively in real estate or to otherwise engage in real 
estate activities that do not support its purpose of providing members 
with financial services. The Board reiterates there is no required time 
period within which an FCU must achieve full occupation. However, the 
limited authority for FCUs to invest in property granted by the FCU Act 
mandates that full occupancy must be achieved. The Board believes the 
current rule gives FCUs substantial flexibility in managing fixed 
assets acquired for future use within the authority granted in the FCU 
Act, and thus, no changes are proposed.

F. Leasing

    At least five commenters recommended that the fixed assets rule be 
amended to allow an FCU to generate income from premises. Of those, 
three commenters urged NCUA to consider a ``de minimis ownership 
exception'' under which land that is not valued at more than three 
percent of shares and retained earnings would not be subject to the 
occupancy requirements. One commenter suggested that more flexibility 
is needed for an FCU to retain undeveloped property on a long-term 
basis and encouraged NCUA to allow 2.5 percent to 5 percent of an FCU's 
net worth to be invested in undeveloped or vacant properties. Another 
commenter argued that excess space should not sit idle if it could be 
used to generate value for the membership, even if such space is not 
specifically used for member business.
    At least seven commenters argued that the requirement for full 
occupancy should allow for an FCU to lease or sublease a portion of its 
premises as needed. Two of these commenters argued that restrictive 
occupancy requirements reduce access to commercial space and limit an 
FCU's ability to acquire space in the most cost-effective manner. Four 
commenters cited a number of reasons why an FCU might want to lease its 
property, including zoning or retail requirements, city entitlement, or 
other use requirements.
    Four commenters discussed credit union mergers. They suggested 
that, in a merger, space may be available in an existing building if 
operations are combined. The ability to lease or sublease this excess 
space could permit an FCU to realize short-term income from the lease 
while retaining property that fits into the FCU's long-term plans for 
member service. Four commenters suggested that an FCU should be allowed 
to maximize long-term assets, instead of avoiding reasonable 
acquisitions or underutilizing space to ensure compliance with 
occupancy requirements.
    As discussed above, NCUA's long-standing interpretation is that the 
limited statutory authority for FCUs to invest in property mandates 
that full occupancy must be achieved, and there is no authority for an 
FCU to engage in real estate activities that do not support its purpose 
of providing financial services to its members. The Board has also long 
recognized, however, that in planning for future expansion, FCUs should 
be able to sell or lease their excess capacity as a matter of good 
business practice.\16\ Indeed, the incidental powers rule permits the 
sale or lease of excess capacity in FCU fixed assets.\17\ Excess 
capacity is the excess use or capacity remaining in facilities, 
equipment, or services that an FCU properly invested in with the good 
faith intent to serve its members, and where the FCU reasonably 
anticipates that the excess capacity will be taken up by the future 
expansion of services to its members.\18\ An FCU's sale or lease of 
excess capacity may, for example, involve leasing excess office space, 
sharing employees, or using data processing systems to process 
information for third parties.\19\ However, in adopting the excess 
capacity provision in the incidental powers rule, the Board noted in 
2001 that:
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    \16\ 66 FR 40845, 40851 (Aug. 6, 2001).
    \17\ The incidental powers rule defines an incidental powers 
activity as one that is necessary or requisite to enable an FCU to 
carry on effectively the business for which it is incorporated. An 
activity meets the definition of an incidental powers activity if 
it: (1) Is convenient or useful in carrying out the mission or 
business of credit unions consistent with the FCU Act; (2) is the 
functional equivalent or logical outgrowth of activities that are 
part of the mission or business of credit unions; and (3) involves 
risks similar in nature to those already assumed as part of the 
business of credit unions. 12 CFR 721.2.
    \18\ 12 CFR 721.3(e).
    \19\ Id.

    NCUA has consistently held the position that an FCU has limited 
authority in the leasing of fixed assets and the sale of excess data 
processing capacity. FCUs are not in the business of providing 
others with data processing capacity or any other service that is 
not within their express or incidental powers; rather, they are 
cooperative financial institutions organized to provide financial 
services to their members.\20\
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    \20\ 66 FR 40845, 40851 (Aug. 6, 2001).

    Accordingly, the Board emphasizes that an FCU already has the 
authority under the incidental powers rule to obtain short-term income 
by leasing excess capacity in its fixed assets to third parties. 
However, there are limits to that authority. The fixed assets must have 
been acquired by an FCU, in good faith, for the purpose of providing 
financial services to its members, and the FCU must reasonably 
anticipate, and plan,\21\ that the excess capacity will be fully 
occupied by the FCU in the future.
---------------------------------------------------------------------------

    \21\ See 12 CFR 701.36(d)(1).
---------------------------------------------------------------------------

II. Summary of the 2015 Proposal

    As discussed above, because of the public comments received in 
response to the July 2014 proposal, the Board is issuing this 2015 
proposal to address commenters' requests for additional regulatory 
relief from the aggregate limit on fixed assets. The Board is also 
incorporating similar partial occupancy requirements from the July 2014 
proposal, with one modification to the proposed single time period for 
partial occupancy, to provide additional relief to FCUs.

A. Aggregate Limit On Investments in Fixed Assets

    Section 701.36(c) of the current fixed assets rule establishes an 
aggregate limit on investments in fixed assets for FCUs with $1,000,000 
or more in assets.\22\ For an FCU meeting this asset threshold, the 
aggregate of all its investments in fixed assets is limited to five 
percent of its shares and retained earnings, unless NCUA grants a 
waiver establishing a higher limit.\23\ The aggregate limit is not 
statutorily required by the FCU Act. Rather, it was established by 
regulation in 1978 as a safety and soundness measure to prevent losses 
or impaired operations of FCUs from overinvestment in non-income 
producing fixed assets.\24\
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    \22\ As of September 30, 2014, 226 of the total 3,707 FCUs with 
assets over $1,000,000 are currently above the five percent 
aggregate limit.
    \23\ 12 CFR 701.36(c).
    \24\ 43 FR 58176 (Dec. 13, 1978).
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    In the past few years, and most recently in response to the July 
2014 proposal, FCUs have asked the Board to consider increasing or 
eliminating the aggregate limit.\25\ In addition to the

[[Page 16601]]

comments discussed above, FCUs have repeatedly mentioned that the five 
percent limit is too low for FCUs to effectively manage their 
investments in fixed assets and to achieve growth. They have argued 
that the current limit does not allow FCUs adequate flexibility in 
acquiring fixed assets to serve their members' needs.
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    \25\ See, e.g., 75 FR 66295, 66297 (Oct. 28, 2010); 78 FR 57250, 
57250 (Sept. 18, 2013); 79 FR 46727 (Aug. 11, 2014).
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    As discussed in the preamble to the July 2014 proposal, the 
objective of the fixed assets rule is to place reasonable limits on the 
risk associated with excessive or speculative acquisition of fixed 
assets.\26\ Upon further review and consideration, the Board believes 
this objective can be effectively achieved through the supervisory 
process as opposed to a regulatory limit. Accordingly, the Board 
proposes to eliminate the five percent aggregate limit on FCU 
investments in fixed assets. It also proposes to eliminate the related 
provisions governing waivers of the aggregate limit because those 
provisions will no longer be necessary in the absence of a prescriptive 
regulatory limit.
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    \26\ See 43 FR 26317 (June 19, 1978) (``This regulation is 
intended to ensure that the officials of FCUs have considered all 
relevant factors prior to committing large sums of members' funds to 
the acquisition of fixed assets.''); 49 FR 50365, 50366 (Dec. 28, 
1984) (``The intent of the regulation is to prevent, or at least 
curb, excessive investments in fixed assets and the related costs 
and expenses that may be beyond the financial capability of the 
credit union.''); 54 FR 18466, 18467 (May 1, 1989) (``[T]he purpose 
of the regulation is to provide some control on the potential risk 
of excess investment and/or commitment to invest substantial sums in 
fixed assets.'').
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    An FCU's ability to afford a given level of fixed assets depends on 
a variety of factors, including its level of net worth and earnings, 
its operational efficiency, and risks to its future earnings and growth 
inherent in the FCU's balance sheet and strategic plans. Excessive 
levels of fixed assets can create earnings and capital accumulation 
problems for an FCU, and lead to greater losses to the National Credit 
Union Share Insurance Fund (NCUSIF), if the FCU fails and its fixed 
assets cannot be sold at or above their recorded value. Fixed assets 
not only hold member funds in non-income producing assets, but they 
also typically involve a material increase in FCU operating expenses, 
such as depreciation, maintenance, and other related expenses. 
According to NCUA data, excessive levels of fixed assets have 
contributed to the failure of some credit unions. Of the 63 FCU 
failures \27\ that resulted in a loss to the NCUSIF since 2009, 
excessive levels of fixed assets contributed in part to the failures in 
10 of those cases (16 percent), and were a primary contributor in 3 
cases (5 percent). However, overall, excessive fixed asset levels have 
not been a disproportionate contributor to FCU failures. In many cases, 
FCUs have effectively managed elevated levels of fixed assets to safely 
achieve member service and growth objectives. For the 264 FCUs with 
fixed assets ratios exceeding five percent as of December 2004, 197 
(74.62 percent) were still active as of December 2013. In comparison, 
the total number of credit unions from December 2004 to 2013 went from 
9,128 to 6,554, representing a 71.8 percent survival rate. Thus, the 
level of consolidation in FCUs with elevated fixed assets levels has 
been no higher than for FCUs with lower levels. Also, CAMEL rating and 
net worth ratio distributions were not significantly different for FCUs 
with elevated fixed assets levels than for those without. Further, over 
the last 10 years, NCUA has granted approximately 500 waivers to FCUs 
to operate at levels of fixed assets above the five percent aggregate 
limit, including some above 20 percent of total assets.\28\
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    \27\ This figure includes all FCUs over $1,000,000 in assets. 
FCUs under that asset threshold and federally insured, state-
chartered credit unions are not subject to the aggregate limit and 
therefore excluded from this figure.
    \28\ Since 2004, approximately 94 percent of waivers were for 
levels of fixed assets less than 10 percent of total assets.
---------------------------------------------------------------------------

    In addition, the experience with FCUs operating with higher fixed 
assets ratios under NCUA's former Regulatory Flexibility Program 
(RegFlex) \29\ indicates that the risks associated with investment in 
fixed assets are manageable through supervision. Out of the 149 former 
RegFlex FCUs with fixed assets over the five percent aggregate limit, 
120 FCUs (80 percent) were still operating nearly a decade later.\30\ 
By comparison, as noted above, the overall survival rate for all credit 
unions during the same time period was 71.8 percent. Further, 25 of 
those 120 FCUs (20 percent) have continued to operate effectively above 
the five percent aggregate limit, indicating that some FCUs can safely 
maintain elevated levels of fixed assets over time.
---------------------------------------------------------------------------

    \29\ The RegFlex Program was established in 2002, 66 FR 58656 
(Nov. 23, 2001), and eliminated in 2012, 77 FR 31981 (May 31, 2012). 
RegFlex relieved FCUs from certain regulatory restrictions and 
granted them additional powers if they demonstrated sustained 
superior performance as measured by CAMEL ratings and net worth 
classification. One of the flexibilities enjoyed by RegFlex FCUs at 
one time was relief from the aggregate limit on fixed assets.
    \30\ As of December 31, 2013, in 95 of those 120 FCU (80 
percent), fixed assets levels had declined to under 5 percent.
---------------------------------------------------------------------------

    Therefore, upon further analysis, the Board has determined that 
oversight of FCU investments in fixed assets would be effectively 
achieved through the supervisory process, and evaluated on a case-by-
case basis. The Board emphasizes, however, that NCUA's supervisory 
expectations remain high. The Board cautions that the proposed 
elimination of the aggregate limit should not be interpreted as an 
invitation for FCUs to make excessive, speculative, or otherwise 
irresponsible investments in fixed assets. Rather, the 2015 proposal 
reflects the Board's recognition that relief from the prescriptive 
limit on fixed assets is appropriate, but FCU investments in fixed 
assets are, and will continue to be, subject to supervisory review. If 
an FCU has an elevated level of fixed assets, NCUA will maintain close 
oversight to ensure it conducts prudent planning and analysis with 
respect to fixed assets acquisitions, can afford any such acquisitions, 
and properly manages any ongoing risk to its earnings and capital.
    If the Board finalizes this 2015 proposal, NCUA will issue updated 
supervisory guidance to examiners that will be shared with FCUs. The 
guidance will reflect current supervisory expectations \31\ that 
require an FCU to demonstrate appropriate due diligence, ongoing board 
and management oversight,\32\ and prudent financial analysis to ensure 
the FCU can afford any impact on earnings and net worth levels caused 
by its purchase of fixed assets. The guidance will ensure examiners 
effectively identify any risks to safety and soundness due to an FCU's 
excessive investment in fixed assets. It will focus on evaluating the 
quality of an FCU's fixed assets management relative to its planning 
for fixed assets acquisitions and controlling the related financial 
risks. The guidance will also focus on evaluating an FCU's quality of 
earnings and capital relative to its projected performance under both 
baseline (expected) and stressed scenarios.
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    \31\ See NCUA Examiner's Guide, Chapter 8.
    \32\ The credit union's board needs to approve plans for any 
investment in fixed assets that will materially affect the credit 
union's earnings. Credit union management should only purchase fixed 
assets in compliance with policy approved by the credit union's 
board.
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B. Partial Occupancy

    For the reasons discussed above, the Board is incorporating, with 
one change, the proposed amendments in the July 2014 proposal relating 
to the partial occupancy requirements for FCU premises acquired for 
future expansion. Specifically, the Board is proposing to require an 
FCU to partially occupy any premises acquired for future expansion,

[[Page 16602]]

regardless of whether the premises are improved or unimproved property, 
within six years from the date of the FCU's acquisition of those 
premises. In the July 2014 proposal, the Board had proposed to require 
partial occupancy within a uniform five years. However, as discussed 
above, in response to public comments, this 2015 proposal provides six 
years rather than five years for partial occupancy, which retains the 
current time period for unimproved land or unimproved real property and 
extends the current time period for improved premises by three years. 
In addition, the Board is reissuing in this 2015 proposal, without 
change, the amendment in the July 2014 proposal to eliminate the 
requirement that an FCU that wishes to apply for a waiver of the 
partial occupancy requirement must do so within 30 months of 
acquisition of the property acquired for future expansion.

C. Conforming Amendments

    The Board is also proposing to make conforming amendments to the 
fixed assets rule's scope and definitions sections. Specifically, the 
Board proposes to amend Sec.  701.36(a) of the current fixed assets 
rule to remove reference to the aggregate limit on FCU investments in 
fixed assets. This language is unnecessary with the proposed removal of 
the aggregate limit. This 2015 proposal also amends Sec.  701.36(b) of 
the current fixed assets rule to remove the regulatory definitions of 
the following terms: ``fixed assets,'' ``furniture, fixtures, and 
equipment,'' ``investments in fixed assets,'' ``retained earnings,'' 
and ``shares.'' These definitions are included in the current rule to 
provide meaning to certain terms used in the regulatory provision 
establishing the aggregate limit on fixed assets. With the proposed 
removal of the aggregate limit, however, inclusion of these regulatory 
definitions is no longer necessary.

D. Amended Title

    Finally, the Board proposes to amend the title of the regulation to 
more accurately reflect its amended scope and applicability. Currently, 
the rule is titled ``Federal credit union ownership of fixed assets.'' 
If the 2015 proposal is finalized, the rule will be retitled ``Federal 
credit union occupancy, planning, and disposal of acquired and 
abandoned premises.''

E. Effect on Existing Waivers

    Should the 2015 proposal become finalized as proposed, any existing 
waiver of the five percent aggregate limit on fixed assets will be 
rendered moot as of the effective date of the final rule.

III. Request for Public Comment

    Because the proposed amendments are intended to grant regulatory 
relief to FCUs, and the Board perceives no reason to delay their 
implementation, the Board is issuing the 2015 proposal for a 30-day 
public comment period instead of NCUA's customary 60 days. 
Additionally, the Board already solicited comments on this subject in 
the July 2014 proposal. The Board invites comment on all issues 
discussed in this 2015 proposal; however, as noted earlier, it is not 
necessary for commenters to resubmit any comments they previously 
submitted in response to the July 2014 proposal. NCUA has already 
reviewed those comments and will consider them again before finalizing 
this rule.

IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a notice of proposed rulemaking, an agency prepare and 
make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small 
entities. A regulatory flexibility analysis is not required, however, 
if the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities (defined for 
purposes of the RFA to include credit unions with assets less than $50 
million) and publishes its certification and a short, explanatory 
statement in the Federal Register together with the rule. The 2015 
proposal would provide regulatory relief to help FCUs better manage 
their investments in fixed assets. NCUA certifies that the 2015 
proposal will not have a significant economic impact on a substantial 
number of small credit unions.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden.\33\ For purposes of the PRA, a 
paperwork burden may take the form of either a reporting or a 
recordkeeping requirement, both referred to as information collections. 
The 2015 proposal provides regulatory relief to FCUs by eliminating the 
requirement that, for an FCU with $1,000,000 or more in assets, the 
aggregate of all its investments in fixed assets must not exceed five 
percent of its shares and retained earnings, unless it obtains a waiver 
from NCUA. The 2015 proposal does not impose new paperwork burdens. 
However, the 2015 proposal would relieve FCUs from the current 
requirement to obtain a waiver to exceed the five percent aggregate 
limit on investments in fixed assets.
---------------------------------------------------------------------------

    \33\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

    According to NCUA records, as of September 30, 2014, there were 
3,707 FCUs with assets over $1,000,000 and subject to the five percent 
aggregate limit on fixed assets. Of those, approximately 150 FCUs would 
prepare and file a new waiver request to exceed the five percent 
aggregate limit. This effort, which is estimated to create 15 hours 
burden per waiver, would no longer be required under the 2015 proposal. 
Accordingly, the reduction to existing paperwork burdens that would 
result from the 2015 proposal is analyzed below:
Estimate of the Reduced Burden by Eliminating the Waiver Requirement
    Estimated FCUs which will no longer be required to prepare a waiver 
request and file a waiver request: 150.
    Frequency of waiver request: Annual.
    Reduced hour burden: 15.

150 FCUs x 15 hours = 2250 hours annual reduced burden

    In accordance with the requirements of the PRA, NCUA intends to 
obtain a modification of its OMB Control Number, 3133-0040, to support 
these changes. NCUA is submitting a copy of the 2015 proposal to OMB, 
along with an application for a modification of the OMB Control Number.
    The PRA and OMB regulations require that the public be provided an 
opportunity to comment on the paperwork requirements, including an 
agency's estimate of the burden of the paperwork requirements. The 
Board invites comment on: (1) Whether the paperwork requirements are 
necessary; (2) the accuracy of NCUA's estimates on the burden of the 
paperwork requirements; (3) ways to enhance the quality, utility, and 
clarity of the paperwork requirements; and (4) ways to minimize the 
burden of the paperwork requirements.
    Comments should be sent to the NCUA Contact and the OMB Reviewer 
listed below:
    NCUA Contact: Amanda Wallace, National Credit Union Administration, 
1775 Duke Street, Alexandria, Virginia 22314-3428, Fax No. 703-837-
2861, Email: [email protected].
    OMB Contact: Office of Management and Budget, ATTN: Desk Officer 
for the

[[Page 16603]]

National Credit Union Administration, Office of Information and 
Regulatory Affairs, Washington, DC 20503.

C. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency, as defined in 44 U.S.C. 
3502(5), voluntarily complies with the executive order to adhere to 
fundamental federalism principles. Because the fixed assets regulation 
applies only to FCUs, the 2015 proposal would not have a substantial 
direct effect 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. As such, NCUA 
has determined that this rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

D. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this rule will not affect family well-
being within the meaning of Section 654 of the Treasury and General 
Government Appropriations Act of 1999.\34\
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    \34\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects in 12 CFR Part 701

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board, on March 19, 
2015.
Gerard Poliquin,
Secretary of the Board.

    For the reasons stated above, NCUA proposes to amend 12 CFR 701.36 
as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT

0
1. The authority for part 701 continues to read as follows:

    Authority:  12 U.S.C. 1752(5), 1757, 1765, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section 
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also 
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

0
2. In Sec.  701.36 revise the section heading and paragraph (a) to read 
as follows:


Sec.  701.36  Federal credit union occupancy, planning, and disposal of 
acquired and abandoned premises.

    (a) Scope. Section 107(4) of the Federal Credit Union Act (12 
U.S.C. 1757(4)) authorizes a federal credit union to purchase, hold, 
and dispose of property necessary or incidental to its operations. This 
section interprets and implements that provision by establishing 
occupancy, planning, and disposal requirements for acquired and 
abandoned premises, and by prohibiting certain transactions.
    This section applies only to federal credit unions.
* * * * *
0
3. Revise Sec.  701.36 paragraph (b) by removing the following 
definitions: ``fixed assets'', ``furniture, fixtures, and equipment'', 
``investments in fixed assets'', ``retained earnings'', and ``shares''.
0
4. Remove Sec.  701.36 paragraph (c).
0
5. Revise Sec.  701.36 paragraph (d)(2) to read as follows:
    (d) * * *
    (2) If a federal credit union acquires premises for future 
expansion, including unimproved land or unimproved real property, it 
must partially occupy them within a reasonable period, but no later 
than six years after the date of acquisition. NCUA may waive the 
partial occupation requirements. To seek a waiver, a federal credit 
union must submit a written request to its Regional Office and fully 
explain why it needs the waiver. The Regional Director will provide the 
federal credit union a written response, either approving or 
disapproving the request. The Regional Director's decision will be 
based on safety and soundness considerations.
* * * * *
0
6. In Sec.  701.36 redesignate paragraph (d) as paragraph (c) and 
paragraph (e) as paragraph (d).

[FR Doc. 2015-06816 Filed 3-27-15; 8:45 am]
 BILLING CODE 7535-01-P