[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]


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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.

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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.
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    \1\ 81 FR 24738 (Apr. 27, 2016).
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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.
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    \2\ 12 U.S.C. 1757(4).
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    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.
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    \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).
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    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.
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    \4\ 12 U.S.C. 1757(4).
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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\
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    \5\ FASB Exposure Draft, Consolidated Financial Statements: 
Purpose and Policy, Paragraph 6 (1999).
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    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\
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    \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.
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    \7\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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    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\
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    \8\ Public Law 105-277, 112 Stat. 2681 (1998).
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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