[Federal Register Volume 81, Number 245 (Wednesday, December 21, 2016)]
[Rules and Regulations]
[Pages 93577-93580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30657]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701 and 721
RIN 3133-AE54
Federal Credit Union Occupancy, Planning, and Disposal of
Acquired and Abandoned Premises; Incidental Powers
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: As part of NCUA's Regulatory Modernization Initiative, the
NCUA Board (Board) is finalizing amendments to its regulation governing
federal credit union (FCU) occupancy, planning, and disposal of
acquired and abandoned premises, and its regulation regarding
incidental powers. To provide regulatory relief to FCUs, this final
rule eliminates a requirement in the current occupancy rule (formerly
known as the fixed assets rule) that an FCU must plan for, and
eventually achieve, full occupancy of acquired premises.
The final rule generally retains the current regulatory timeframes
for partial occupancy. However, it modifies the definition of
``partially occupy'' to mean occupation and use, on a full-time basis,
of at least fifty percent of the premises by the FCU, or by a
combination of the FCU and a credit union service organization (CUSO)
in which the FCU has a controlling interest in accordance with
Generally Accepted Accounting Principles (GAAP).
The final rule also amends the excess capacity provision in NCUA's
incidental powers rule to clarify that an FCU may lease or sell excess
capacity in its facilities, but it need not anticipate that such excess
capacity will be fully occupied by the FCU in the future. However, the
sale or lease of excess capacity in equipment or services, including
employee-sharing and data processing for third parties, continues to be
limited to circumstances where an FCU reasonably anticipates that such
excess capacity will be taken up by the future expansion of services to
members.
DATES: This rule is effective January 20, 2017.
FOR FURTHER INFORMATION CONTACT: Justin M. Anderson, Senior Staff
Attorney, Office of General Counsel, at (703) 518-6540, or Jacob
McCall, Program Officer, Office of Examination and Insurance, at (703)
518-6360.
SUPPLEMENTARY INFORMATION:
I. Background
II. Summary of Comments
III. Regulatory Procedures
I. Background
In April 2016, the Board issued a proposed rule \1\ to amend its
regulation governing FCU occupancy, planning, and disposal of acquired
and abandoned premises, and its regulation regarding incidental powers.
The regulatory changes in the 2016 proposed rule are identical to the
regulatory changes adopted in this final rule as summarized above. The
Board received 27 comment letters in response to the proposed rule.
Twenty-six of the commenters generally supported the proposal and one
commenter opposed the rule. Of the 26 supportive comments,
approximately half recommended additional changes or more regulatory
relief.
---------------------------------------------------------------------------
\1\ 81 FR 24738 (Apr. 27, 2016).
---------------------------------------------------------------------------
II. Summary of Comments.
As noted above, one commenter opposed the proposed rule in its
entirety. This commenter asserted that the proposed rule was a
significant departure from the Board's previous interpretation of the
Federal Credit Union Act (the Act) and could lead to FCUs exceeding
their authority.
As stated in the proposed rule, the Board believes the language in
Section 107(4) of the Act supports an interpretation that provides FCUs
with more flexibility than permitted by the current rule to acquire and
hold real property.\2\ Accordingly, the Board has reconsidered its
current approach of requiring FCUs to fully occupy premises. The Board
notes that section 107(4) of the Act neither explicitly mentions nor
requires full occupancy of FCU property.
---------------------------------------------------------------------------
\2\ 12 U.S.C. 1757(4).
---------------------------------------------------------------------------
While this final rule represents a departure from the Board's
previous interpretation of section 107(4) of the Act, the Board
believes the rule is both reasonable and consistent with the
requirements of the Act and is within the Board's authority. The Board
notes that the United States Supreme Court has emphasized that an
``initial agency interpretation is not instantly carved in stone,'' and
``to engage in informed rulemaking, [an agency] must consider varying
interpretations and the wisdom of its policy on a continuing basis,''
indicating that an agency may change its interpretive position on the
statutes it administers.\3\ The final rule is reasonable and eliminates
the imposition of unnecessary hardship on FCUs whose growth potential
and member service strategies may be hampered by the current rule.
---------------------------------------------------------------------------
\3\ Chevron v. Natural Res. Def. Council, 467 U.S. 837, 863-864
(1984). The Supreme Court has also found that an agency is entitled
to Chevron deference if it reverses an earlier interpretation. See,
e.g., Rust v. Sullivan, 500 U.S. 173 (1991); National Cable &
Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967 (2005).
---------------------------------------------------------------------------
The Board reiterates, however, its current view that there is no
authority in the Act for an FCU to invest in real estate for
speculative purposes or to otherwise engage in real estate activities
that do not generally support its purpose of providing financial
services to its members. The Act is clear that any property acquired or
held by an FCU must be ``necessary or incidental to its operations.''
\4\ NCUA has stated consistently that an FCU may only invest in
property it intends to use to
[[Page 93578]]
transact credit union business or in property that supports its
internal operations or member services.
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1757(4).
---------------------------------------------------------------------------
A. Elimination of Requirement That an FCU Must Plan for, and Eventually
Achieve, Full Occupancy of Acquired Premises
The large majority of commenters strongly supported removing the
full occupancy requirement. However, two commenters opposed this
particular aspect of the proposed rule. Commenters that disagreed with
the elimination of the full occupancy requirement expressed concern
that FCUs will be more likely to venture into real estate activities
that are beyond the scope of credit union operations envisioned by
Congress.
In the proposed rule, the Board emphasized that maintaining the
requirement that an FCU must partially occupy real property it obtains
will reduce the likelihood and opportunity for speculative investments.
The Board reaffirms this position and also notes that NCUA will
diligently oversee FCUs' activities in this area to ensure that FCUs
are not engaging in speculative investments or other real estate
activities that are not permitted under the Act. Any FCU in violation
of these requirements could be subject to all administrative remedies
available to the agency. Therefore, the Board does not believe this
final rule will result in FCUs operating beyond the scope of their
authority as Congress provided for in the Act.
B. Partial Occupancy
1. Definition
Under the current rule, an FCU must partially occupy premises
acquired for future expansion, within a reasonable period, but no later
than six years after the date of acquisition. The proposed rule did not
change this requirement, but did modify the definition of ``partially
occupy'' to mean occupation and use, on a full-time basis, of at least
fifty percent of the premises by the FCU, or by a combination of the
FCU and a CUSO in which the FCU has a controlling interest in
accordance with GAAP.
Nearly half of the commenters supported the proposed definition of
``partially occupy.'' Several of these commenters, however, asked how
they are to measure different areas of a building (e.g., common,
service and mechanical areas) for determining the FCU's percentage of
occupancy. The Board notes that NCUA will consider all shared
facilities owned by the FCU as occupied by the FCU, unless the area is
specifically leased to an outside entity for their exclusive use. This
will include common, service, and mechanical areas, and other shared
spaces.
In addition, a few commenters supported the proposed definition,
but suggested the rule should allow for exceptions to the fifty percent
requirement or permit waivers from the partial occupancy requirement.
Some of these commenters noted that an FCU meeting the fifty percent
occupancy requirement may, at a later time, occupy less than fifty
percent for economic or strategic reasons. One commenter stated that
waivers should be allowed in such circumstances. Another commenter
suggested that satisfaction of the fifty percent occupancy requirement
should be ``grandfathered'' once initially achieved by the FCU.
Finally, one commenter said mixed-use developments in urban areas
sometimes require shared space and that common areas and other shared
fixtures and utilities should count toward the fifty percent partial
occupancy requirement.
The final rule retains the waiver provisions for the partial
occupancy requirement. FCUs can request a waiver of either the fifty
percent requirement or the six-year requirement. The waiver process is
designed to allow NCUA to evaluate unique circumstances. For example,
certain zoning laws affecting a particular property may support NCUA
accepting less than fifty percent occupancy or extending the time
period for compliance. The Board believes the waiver process balances
providing flexibility to FCUs while maintaining safety and soundness.
A few commenters disagreed with the proposed definition in its
entirety. One commenter argued against the fifty percent threshold and
stated the rule should allow FCUs broader flexibility to occupy a
lesser percentage of their premises. As discussed in more detail above,
the Board purposefully included the proposed partial occupancy
requirement, among other reasons, as a protection against FCUs
potentially engaging in impermissible and speculative real estate
investment transactions. Further, the ability to request a waiver from
the partial occupancy requirement is, in part, an acknowledgement that
there may be circumstances where an FCU could prudently occupy a lesser
percentage of the premises and still comply with the Act.
One commenter argued that there is no need for a prescriptive fifty
percent occupancy requirement. Another commenter urged that the fifty
percent occupancy threshold be removed or, alternatively, that the
threshold be reduced to no more than twenty-five percent. A different
commenter suggested ``partially occupy'' should be defined as ``less-
than-full occupancy that is material and visible actual usage.'' The
same commenter also suggested that the addition of an absolute
prohibition on real estate speculation, analogous to NCUA's regulatory
ban on credit union speculation on derivatives, could be adopted as an
added safeguard against speculative real estate investing. One
commenter noted the fifty percent threshold is somewhat ambiguous with
respect to mixed-use properties and larger tracts of land. The same
commenter recommended that the final rule revert to an earlier
iteration of the regulatory definition, which at one point required
only full occupancy of FCU property on a part-time basis.
The Board believes that removing the full occupancy requirement
provides FCUs with greater flexibility in managing their real estate,
and that it is important to maintain the partial occupancy requirement
to ensure safety and soundness. The fifty percent standard provides
FCUs with a clear guideline for achieving compliance, and the waiver
provisions ensure further flexibility when warranted.
2. CUSOs
Several commenters asked what is meant by ``a controlling interest
in a CUSO.'' As stated in the proposed rule, NCUA defines controlling
interest in a CUSO under GAAP using FASB Accounting Standards Update
(ASU) 805. This standard defines controlling interest as ``the ability
of an entity to direct the policies and management that guide the
ongoing activities of another entity so as to increase its benefits and
limit its losses from that other entity's activities.'' \5\
---------------------------------------------------------------------------
\5\ FASB Exposure Draft, Consolidated Financial Statements:
Purpose and Policy, Paragraph 6 (1999).
---------------------------------------------------------------------------
In addition, two commenters disagreed with the controlling interest
requirement for CUSOs entirely. These commenters suggested that an FCU
and its CUSO should be able to meet the partial occupancy threshold
regardless of the amount of ownership interest the FCU has in the CUSO.
One of the commenters further suggested that the types of entities with
which an FCU may meet the fifty percent occupancy requirement should be
expanded to include credit union industry ``partners'' or other credit
union service providers.
The Board stated in the proposed rule that:
[[Page 93579]]
Occupancy of FCU premises with third-party vendors or CUSOs in
which the FCU does not maintain a controlling interest will not
count towards the fifty percent partial occupancy requirement
because these entities operate at the direction of other owners and
may not be obligated to primarily support the FCU that acquired the
premises or to primarily serve that FCU's members.\6\
---------------------------------------------------------------------------
\6\ 81 FR 24738 (Apr. 27, 2016).
Further, the Board notes that this definition will ensure that any
property acquired or held by an FCU is primarily utilized for a purpose
that is necessary or incidental to its operations, as required by the
Act.
3. Timeframe for Partial Occupancy
Nearly half of the commenters offered input on the current rule's
six-year regulatory timeframe for partial occupancy of improved and
unimproved property. Of these, several urged that the regulatory
timeframe for partial occupancy be eliminated entirely or,
alternatively, be extended to ten years.
Three commenters recommended the rule be modified to allow ten
years for partial occupancy of unimproved property or raw land. One
commenter suggested that the occupancy requirement for unimproved
property should be removed entirely. In addition, two commenters
suggested that the occupancy waiver provision should be amended to
require NCUA to grant waivers upon request unless there are specific
safety and soundness concerns.
The Board notes that the final rule will retain the waiver
provisions for the partial occupancy requirement, which allows an FCU
to request a waiver of the six-year requirement. The Board believes the
waiver process, as currently written, provides sufficient flexibility
while protecting safety and soundness.
C. Incidental Powers
As discussed above, the proposed rule amends the excess capacity
provision in NCUA's incidental powers rule to clarify that an FCU may
lease or sell excess capacity in its facilities, but it need not
anticipate that such excess capacity will be fully occupied by the FCU
in the future. However, the sale or lease of excess capacity in
equipment or services, including employee-sharing and data processing
for third parties, would continue to be limited to circumstances where
an FCU reasonably anticipates that such excess capacity will be taken
up by the future expansion of services to members.
Four commenters expressed support for this aspect of the proposed
rule and one commenter disagreed with it, stating that it would allow
credit unions to exceed their authority under the Act. The Board does
not believe that anything in this final rule will allow FCUs to exceed
their authority under the Act.
D. Additional Comments
Two commenters advocated the creation of an independent appeals
process for adjudicating disagreements between NCUA and an FCU
concerning the acquisition and use of FCU premises. The creation of
such a process was not part of the proposed rule and is, therefore,
outside the scope of this final rulemaking. The Board will, however,
consider amending NCUA's appeals process in the coming year.
Finally, one commenter suggested that there should be a de minimis
exception for fixed assets that are financially immaterial to the FCU's
operations. This commenter asserted that such de minimis fixed assets
should not be subject to any regulatory occupancy requirements,
including the fifty percent rule and the six-year occupancy timeframe.
The Board notes that the occupancy rule implements provisions of the
Act. The Act does not distinguish certain fixed assets from other fixed
assets based on financial materiality. The Board believes this final
rule provides significant flexibility and regulatory relief to FCUs and
does not include a de minimis exception.
III. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires NCUA to prepare and
make available for public comment an initial regulatory flexibility
analysis that describes the impact of a 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 $100 million) and
publishes its certification and a short, explanatory statement in the
Federal Register together with the rule. The final rule would provide
regulatory relief by eliminating the need to develop a plan for full
occupancy. Also, FCUs currently have limited flexibility to purchase
real estate with excess capacity. NCUA certifies that this final rule
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.\7\ 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 final rule provides regulatory relief to FCUs by eliminating the
requirement that, if an FCU does not fully occupy premises acquired for
future expansion within one year, it must have a board resolution in
place by the end of that year with definitive plans for full
occupation. The final rule does not impose new paperwork burdens.
Rather, the final rule would relieve FCUs from the current requirement
to have a board-approved plan for full occupation of its premises.
---------------------------------------------------------------------------
\7\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------
According to NCUA estimates, approximately 15 FCUs are required to
develop a plan for full occupation of premises each year. Accordingly,
the reduction to existing paperwork burdens that would result from the
final is analyzed below:
Estimate of the reduced burden by eliminating the full occupancy
planning requirement.
Estimated FCUs: 15.
Frequency of waiver request: Annual.
Reduced hour burden: 15 hours.
15 FCUs x 15 hours = 225 hours reduced burden.
In accordance with the requirements of the PRA, NCUA intends to
obtain a modification of its OMB Control Number to reflect these
changes. NCUA is submitting a copy of this rule 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 did not receive any comments on the PRA aspects of the rule.
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 occupancy and
[[Page 93580]]
incidental powers regulations apply only to FCUs, the final rule does
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.\8\
---------------------------------------------------------------------------
\8\ Public Law 105-277, 112 Stat. 2681 (1998).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 701
Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 721
Credit unions, Functions, Implied powers.
By the National Credit Union Administration Board, on December
15, 2016.
Gerard Poliquin,
Secretary of the Board.
For the reasons stated above, NCUA amends 12 CFR parts 701 and 721
as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 is revised to read as follows:
Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,
1787, 1789; Title V, Pub. L. 109-351, 120 Stat. 1966.
0
2. Amend Sec. 701.36 as follows:
0
a. Revise the section heading.
0
b. Revise paragraph (a).
0
c. Amend paragraph (b) by revising the definitions of Abandoned
premises and Partially occupy.
0
d. Remove paragraph (c)(1).
0
e. Redesignate paragraphs (c)(2) and (3) as (c)(1) and (2),
respectively.
0
f. Revise newly redesignated paragraph (c)(1).
The revisions read as follows:
Sec. 701.36 Federal credit union occupancy 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 and disposal requirements for acquired and abandoned
premises, and by prohibiting certain transactions. This section applies
only to federal credit unions.
(b) * * *
Abandoned premises means premises previously used to transact
credit union business but no longer used for that purpose. It also
means premises originally acquired to transact future credit union
business but no longer intended for that purpose.
* * * * *
Partially occupy means occupation and use, on a full-time basis, of
at least fifty percent of each of the premises by the federal credit
union, or the federal credit union and a credit union service
organization in which the federal credit union has a controlling
interest in accordance with Generally Accepted Accounting Principles
(GAAP).
* * * * *
(c) Premises not currently used to transact credit union business.
(1) If a federal credit union acquires premises, including unimproved
land or unimproved real property, it must partially occupy each of 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.
* * * * *
PART 721--INCIDENTAL POWERS
0
3. The authority citation for part 721 continues to read as follows:
Authority: 12 U.S.C. 1757(17), 1766 and 1789.
0
4. Amend Sec. 721.3 by revising paragraph (e) to read as follows:
Sec. 721.3 What categories of activities are preapproved as
incidental powers necessary or requisite to carry on a credit union's
business?
* * * * *
(e) Excess capacity. Excess capacity is the excess use or capacity
remaining in facilities, equipment, or services that you properly
invested in or established, in good faith, with the intent of serving
your members or supporting your business operations. You may sell or
lease the excess capacity in facilities, such as office space and other
premises. You may sell or lease the excess capacity in equipment or
services, such as employees and data processing, if you reasonably
anticipate that the excess capacity will be taken up by the future
expansion of services to your members.
* * * * *
[FR Doc. 2016-30657 Filed 12-20-16; 8:45 am]
BILLING CODE 7535-01-P