Federal Credit Union Ownership of Fixed Assets

AGENCY:

National Credit Union Administration.

ACTION:

Proposed rule with request for comments.

SUMMARY:

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

DATES:

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

ADDRESSES:

You may submit comments by any of the following methods (Please send comments by one method only):

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
• NCUA Web site: http://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.
• E-mail: Address to regcomments@ncua.gov. Include “[Your name] Comments on Proposed Rule 701.36, Federal Credit Union Ownership of Fixed Assets” in the e-mail subject line.
• Fax: (703) 518-6319. Use the subject line described above for e-mail.
• Mail: Address to Becky Baker, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
• Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

Background

The Federal Credit Union Act authorizes an FCU to purchase, hold, and dispose of property necessary or incidental to its operations. 12 U.S.C. 1757(4). Generally, an FCU may only invest in property it intends to use to transact credit union business, that is, to support its internal operations or serve its members. 12 CFR 721.3(d). NCUA's fixed asset rule limits an FCU's investment in fixed assets and imposes requirements on the planning for, use of, and disposal of real property acquired for future expansion. 12 CFR 701.36.

The NCUA Board has a policy of continually reviewing NCUA regulations to “update, clarify and simplify existing regulations and eliminate redundant and unnecessary provisions.” NCUA Interpretive Ruling and Policy Statement (IRPS) 87-2, Developing and Reviewing Government Regulations. As a result of the NCUA's 2003 review, the Board determined that the fixed asset rule should be updated.

Summary of Proposed Changes

The only substantive proposed changes are to (1) Eliminate the requirement that an FCU, when calculating its investment in fixed assets, include its investments in any entity that holds fixed assets used by the FCU, and (2) Establish a time frame for submission of requests for waiver of the requirement for partial occupation of premises acquired for future expansion. The Board believes that neither of these proposals impose any new burden on FCUs.

The proposed rule reorganizes the paragraph structure. It retains the five percent limit on investment in fixed assets as a percentage of an FCU's shares and retained earnings, currently located in § 701.36(c), but makes it the lead paragraph, § 701.36(a). The current § 701.36(a), which states only that “[a] Federal credit union's ownership in fixed assets shall be limited as described in this chapter,” is unnecessary and the proposed rule deletes it. The proposed rule moves the definitions paragraph, currently in § 701.36(b), to the end of the section. Sections 701.36(c) and (d) are renumbered as § 701.36(b) and (c), respectively.

In addition to reorganization of the paragraph structure, the proposed rule contains amendments clarifying the provisions governing an FCU's plans for future expansion into fixed assets and simplifying the rule's language to make it easier to read and understand. The proposed rule also adds a cross reference to NCUA's Regulatory Flexibility Program (RegFlex) rule. 12 CFR part 742. Federal credit unions that qualify for RegFlex treatment are currently exempt from the five percent limit on investment in fixed assets. 12 CFR 742.4(a), 701.36(c). In addition, the proposed rule contains a technical amendment to the RegFlex rule that reflects the proposed reorganization of the fixed asset rule.

Discussion of Particular Proposed Amendments

Proposed § 701.36(a)

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

Proposed § 701.36(b)

The current § 701.36(d), Premises, would become paragraph (b). This paragraph contains provisions on real property owned by an FCU that is not currently used to transact credit union business. 12 CFR 701.36(d). The Board has several proposed amendments to this paragraph.

The Board proposes to change the title of this paragraph to “Premises Not Currently Used to Transact Credit Union Business” to better indicate its scope.

The current subparagraph (d)(1) provides that an FCU must accomplish partial use of its real property within three years of acquisition unless the FCU obtains a waiver. 12 CFR 701.36(d)(1). The proposal clarifies that requests for waiver must be in writing and submitted to NCUA within 30 months of acquisition. The proposed amendments would also clarify that partial use occurs when FCU staff occupy some part of the space on a full-time basis.

The current rule states that “[a]fter real property acquired for future expansion has been held for one year, a board resolution with definitive plans for utilization must be available for inspection by an NCUA examiner.” Id. Those plans must address full use since FCUs do not have the authority to own and lease out space indefinitely for purposes unrelated to FCU operations or member service. The proposed amendments clarify the full use planning requirement and that full use occurs when the premises are completely occupied by the FCU, or by some combination of the FCU, credit union service corporations (CUSOs), and credit union vendors, on a full-time basis. CUSO and vendor activities must be primarily to support the operations of the FCU or serve its members.

The Board also intends to clarify and simplify the current provisions on abandoned premises. 12 CFR 701.36(b)(5), 701.36(d)(2). The Board proposes to revise the provision in paragraph (d)(2) that an FCU “shall endeavor to dispose of ‘abandoned premises’ at a price sufficient to reimburse the FCU for its investment and costs of acquisition” to state that an FCU must seek fair market value for the property. The Board recognizes that changing market conditions may affect an FCU's ability to recover its investment and costs of acquisition. The proposal retains the requirements that an FCU document its efforts to sell abandoned premises and complete the sale within five years.

Proposed § 701.36(c)

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

Proposed § 701.36(d)

FCUs that qualify for the RegFlex Program are exempt from the five percent limitation on investment in fixed assets. 12 CFR 701.36(c), part 742. Accordingly, the proposed rule adds a new paragraph to § 701.36 with a cross-reference to the RegFlex Program. The proposed rule also states that FCUs that once qualified for the RegFlex Program and its associated exemptions but no longer qualify for RegFlex must comply with all the provisions of the fixed asset rule. For example, a RegFlex FCU that exceeds the five percent limitation on investment in fixed assets and subsequently loses its RegFlex qualification must either reduce its fixed asset holdings below five percent or obtain a waiver.

Proposed § 701.36(e)

The current § 701.36(b), Definitions, would become paragraph (e). The current rule defines “investment in fixed assets.” 12 CFR 701.36(b)(4). As provided in subparagraph (iv), the definition includes any investments in, and loans to, a partnership or corporation, including a CUSO, that holds any fixed assets used by the FCU. 12 CFR 701.36(b)(4)(iv). The proposed rule deletes this subparagraph (iv) element of the definition as unnecessary and, in some cases, duplicative. Generally, FCUs may only invest in entities that are CUSOs, and FCUs are expected to pay the fair market value (FMV) for the use of CUSO assets. Lease payments are captured as part of the FCU's investment in fixed assets through the subparagraph (iii) provision on capital and operating lease payments. 12 CFR 701.36(b)(4)(iii). Accordingly, subparagraph (iv) could well cause an FCU to overstate its investment in fixed assets when it leases CUSO property. The Board also notes that the Federal Credit Union Act limits FCU investment in CUSOs to one percent of its paid in and unimpaired capital and surplus, and, even without subparagraph (iv), this restricts the use of CUSOs to invest in fixed assets. 12 U.S.C. 1757(7)(I).

The current rule also defines “retained earnings” as “regular reserve, reserve for contingencies, supplemental reserves, reserve for losses and undivided earnings.” 12 CFR 701.36(b)(7). The proposed rule updates this definition to include “and other appropriations of undivided earnings as designated by management or the Administration” to recognize other reserve accounts that may be created out of undivided earnings consistent with generally accepted accounting principles. The proposed rule also separates the definitions of “shares” and “retained earnings.”

Finally, the proposed rule alphabetizes all the definitions to make them easier to locate.

Proposed § 742.4(a)

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

Regulatory Procedures

Regulatory Flexibility Act

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

Paperwork Reduction Act

Section 701.36 contains information collection requirements. As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the NCUA has submitted a copy of this section as part of an information collection package to the Office of Management and Budget (OMB) for its review and approval for reinstatement of Collection of Information, FCU Ownership of Fixed Assets, Control Number 3133-0040.

Section 701.36 protects the safety and soundness of FCUs by ensuring that FCUs do not over invest in unproductive fixed assets. The regulation also ensures that FCUs do not purchase and hold fixed assets for purposes other than the internal operations of the FCU or serving the FCU's members.

NCUA estimates the reporting and recordkeeping burden for this collection of information to be about 325 hours, calculated as follows:

(1) Waiver of five percent limitation. NCUA estimates the annual burden for preparation of an application for waivers to the limitation on investments in fixed assets as follows:

 Respondents: 15

 Responses × 1

 Hours per respondent × 15

 Annual reporting burden: 225

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

 Respondents: 5

 Responses × 1

 Hours per respondent × 15

 Annual reporting burden: 75

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

 Respondents: 5

 Responses × 1

 Hours per respondent × 5

 Annual reporting burden: 25

Total annual burden hours = 325.

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

The NCUA considers comments by the public on this proposed collection of information in—

—Evaluating whether the proposed collection of information is necessary for the proper performance of the functions of the NCUA, including whether the information will have a practical use;

—Evaluating the accuracy of the NCUA's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;

—Enhancing the quality, usefulness, and clarity of the information to be collected; and

—Minimizing the burden of collection of information on those who are to respond, including through the use of appropriate automated electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses.

The Paperwork Reduction Act requires OMB to make a decision concerning the collection of information contained in these proposed regulations between 30 and 60 days after publication of this document in the Federal Register. Therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. This does not affect the deadline for the public to comment to the NCUA on the proposed regulations.

Executive Order 13132

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

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

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

Agency Regulatory Goal

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

List of Subjects

12 CFR Part 701

• Credit unions

12 CFR Part 742

• Credit unions
• Reporting and recordkeeping requirements

Accordingly, the NCUA proposes to amend 12 CFR parts 701 and 742:

PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

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

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

2. Revise § 701.36 to read as follows:

PART 742—REGULATORY FLEXIBILITY PROGAM

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

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

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