NAFCU Compliance Blog

NCUA Issues Final Occupancy Rule Addressing Partial Occupancy and Excess Capacity

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On December 15, 2016, the NCUA Board approved amendments to the Fixed Assets Rule (now called the “Occupancy Rule”) eliminating the requirement that federal credit unions must plan for and achieve full occupancy of premises acquired for future expansion. The final rule also clarifies that credit unions may lease or sell excess capacity in facilities without an expectation that the leased excess facilities will be fully occupied by the federal credit union in the future. The lease or sale of excess equipment or services, however, remains limited to situations where the federal credit union reasonably expects that the excess capacity will eventually be used by the credit union as part of a future expansion of services to members.

Partial Occupancy.  Under the current Fixed Assets Rule, federal credit unions that acquire premises for future expansion and do not achieve full occupancy within one year are required to have a board resolution in place showing definitive plans for full occupation and make these plans available to NCUA upon request. Premises are considered “fully occupied” when “the federal credit union (or the federal credit union and a credit union service organization or a vendor) uses the entire space on a full-time basis.” Merely leasing the space to a CUSO or vendor, however, is not sufficient to demonstrate full occupancy. Rather, CUSOs and vendors “must use the space primarily to support the federal credit union or to serve the federal credit union’s members” in order for the premises to be considered fully occupied. 12 C.F.R. § 701.35(c)(1).

Federal credit unions that do not achieve full occupancy within one year must, at least, partially occupy the premises within a reasonable period but no later than six years after the date of acquisition. See 12 C.F.R. § 701.35(c)(2). Premises are “partially occupied” when the credit union, on a full-time basis, occupies a portion of the premises that is consistent with the federal credit union’s usage plan for the premises, sufficient enough that the federal credit union is deriving practical utility from the occupied portion, and sufficient to show that the federal credit union will fully occupy the premises within a reasonable time. See 12 C.F.R. § 701.35(b). Federal credit unions may request a waiver of the partial occupancy requirements from the appropriate Regional Director.

Under the amended rule, NCUA eliminates the requirement that federal credit unions must plan for, and eventually achieve, full occupancy of acquired premises. Instead, federal credit unions must partially occupy premises acquired for future expansion within a reasonable period, not to exceed six years after the date of acquisition. As amended, “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).” While some credit unions may cheer this regulatory change as much needed regulatory relief, others may be wondering exactly what it means to have a controlling interest under U.S. GAAP.

According to FASB ASC 810-10-15-8, which addresses when parent companies should consolidate assets and liabilities of subsidiaries onto the parent company’s balance sheet, “the usual condition for a controlling financial interest is ownership of a majority voting interest, and therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing towards consolidation.” The accounting standard appears to recognize, however, that the “power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.” U.S. GAAP also appears to have specific principles addressing general and limited partnerships, and variable interest entities. Therefore, it is not entirely clear without an in-depth review of the corporate structure of CUSOs, exactly which CUSOs would count towards the fifty percent partial occupancy requirement. As a result, credit unions are going to need to speak with their accountants regarding whether a CUSO would count towards the fifty percent occupancy requirement. This is significantly more complicated than using terms such as “affiliate” or “subsidiary” which have generally accepted meanings under federal banking laws. See 12 U.S.C. § 1841(d), (k).

Excess Capacity.  Under the current Incidental Powers Rule, federal credit unions that invest in or establish excess capacity in good faith and with the intention of using that excess capacity to serve future needs of credit union members  may  “sell or lease the excess capacity in facilities, equipment or services such as office space, employees and data processing.” 12 C.F.R. § 721.3(e). The credit union, however, must reasonably anticipate that the excess capacity will be eventually be used by the credit union as part of the future expansion of services to members. The final rule relaxes this requirement for facilities, since federal credit unions will now only be required to partially occupy premises within six years rather than plan for, and eventually achieve, full occupancy of acquired premises.

The text of the final rule is available here. It is effective 30 days after publication in the Federal Register (whenever that will be!). As far as rules go, this one appears to be pretty straightforward. That being said, if you have any questions and happen to be a member of NAFCU, the Regulatory Compliance Team is always available to answer your questions. I would note, however, that despite our many skills, we are not accountants and do not pretend to know the intricacies of U.S. GAAP so for more technical FASB-related questions, the credit union may want to consult with its chief financial officer or accountant. I hope you all have happy holidays and a great new year!

NCUA Issues Fixed Assets Supervisory Guidance

by Kavitha Subramanian, Regulatory Affairs Counsel

Happy Wednesday, everyone! My name is Kavitha Subramanian and I am an attorney in NAFCU’s Regulatory Affairs division.  I have had the pleasure of meeting many of you at NAFCU’s Compliance School and Congressional Caucus, but for those I haven’t, it’s nice to meet you, electronically at least! The NAFCU compliance team was nice enough to let me take over the blog today, as long as my last name could fit on the byline, and I promised not to break it.  For my inaugural post, I wanted to give you an update on NCUA’s recently released guidance on its amended fixed assets regulation that went into effect on October 2, 2015.

As you may recall from NAFCU’s Final Regulation, after first issuing a proposal in 2014, then a second proposal in 2015, the NCUA Board finally approved amendments in July 2015 to remove the five percent aggregate cap on a federal credit union’s (FCU) ownership of fixed assets. Under the new rule, NCUA will now address an FCU’s ownership of fixed assets under a safety and soundness approach during the supervisory exam process. Additionally, the new rule simplifies the previous partial occupancy requirements for FCU premises acquired for future expansion by establishing a single six-year time period for partial occupancy of all premises. The new rule will also eliminate the 30-month requirement for partial occupancy waiver requests and allow FCUs to apply for a waiver at any time.

While credit unions achieved much-needed regulatory relief with NCUA’s removal of the stringent five percent cap, the industry has been eagerly awaiting the agency’s release of its supervisory guidance, as NCUA has shifted its focus from prescriptive regulation to supervisory assessment through these amendments.  Last Friday, NCUA issued Supervisory Letter No. 15-03 to its examiners outlining its supervisory expectations for the new fixed asset rule. This guidance delineates what FCUs must demonstrate in their fixed asset ownership, including appropriate due diligence, ongoing board and management oversight, 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.”

While the 11-page supervisory letter offers many helpful parameters for NCUA’s supervisory oversight on credit union ownership of fixed assets, I wanted to highlight the agency’s general approach. First, NCUA field staff will “generally only complete the exam procedures” if one of the following four situations exists in for a credit union:

(1) there are unresolved Document of Resolution (DOR) items or enforcement actions against the credit union;

(2) the credit union is experiencing weak earnings or has other structural earnings weaknesses;

(3) fixed assets are greater than 5 percent of assets; or

(4) credit union made, or has board approved plans to make a major acquisition of premises since the last exam.

If the field staff determines that it should take a closer look at an FCU’s ownership of fixed assets, NCUA advises examiners to look for (1) whether credit unions have a board-approved fixed assets policy, and (2) whether credit unions (including their board of directors) did appropriate pre-acquisition due diligence.  The “due diligence” guidance would also apply to fixed-asset acquisitions of a material amount and impact. Examiners would be expected to consider instances in which credit unions rely on rental income as the primary way to afford an acquisition of property as unsafe and unsound.

As you may remember, in NCUA’s first fixed assets proposal, the agency sought to require by regulation that a credit union have a Fixed Assets Management policy and that the board approve any fixed asset investment that would push a credit unions fixed assets investment concentration above five percent of its outstanding shares.  In its second proposal, NCUA removed those two requirements. Under Friday’s Supervisory Letter, however, NCUA seems to have addressed these requirements through its examination procedures. Specifically, the new guidance directs examiners to determine if fixed-asset acquisitions were made in compliance with the credit union’s board-approved policy and that the board approved any fixed-asset investment that would materially affect credit union earnings. 

For more information on NCUA’s new Fixed Assets rule, be sure to check out NAFCU’s Final Regulation, or feel free to reach out to me at [email protected] or 703-842-2212.

NCUA Board Approves Final Rule on Fixed Assets

Written by Victoria Daka, Regulatory Compliance Counsel

In NCUA’s most recent Board meeting, the NCUA Board approved a final rule providing regulatory relief to thousands of federal credit unions by eliminating certain provisions in the agency’s fixed-assets rule. The final rule amending the fixed-asset rule makes three changes.

First, and most notably, the final rule eliminates the five-percent cap on investments in fixed assets. In other words, credit unions are now relieved from the requirement of obtaining a waiver to exceed the current five-percent aggregate limit on investments in fixed assets. The rule defines fixed assets as “premises, furniture, fixtures, and equipment, including any office, branch office, sub office, 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.” However, the preamble to final rule reiterates that examiners would reserve the right to supervise federal credit unions investment levels in fixed assets. Thus, the final rule shifts the agency's focus on this area from regulation to the supervisory process.

Second, the final rule establishes a single six year time period for partial occupancy of any premises acquired for future expansion, starting from the date of acquisition.  Under the current rule, a federal credit union must show that it will fully occupy the premises within a reasonable time by requiring the federal credit union’s partial occupancy of the premises within a time period set by the rule.  The rule sets a distinction in the requirements between improved and unimproved property. Specifically, for improved premises acquired for future expansion, a federal credit union is currently permitted up to three years from the date it obtains the property to meet the partial occupancy requirement, unless NCUA grants a waiver.  And for unimproved land or unimproved real property, a federal credit union has six years from the date of acquisition. The final rule, however, permits federal credit unions up to six years from the date of acquisition to meet the partial occupancy requirement, regardless of whether the premises are improved or unimproved property.

Third, the final rule eliminates the requirement that a federal credit union apply for a waiver from the partial occupancy rules within thirty months of acquisition. Instead, the final rule allows federal credit unions to apply for a waiver at any time, as appropriate.

The final rule, available online here, will become effective 60 days after publication in the Federal Register. Additionally, the NCUA has indicated that it is working on supervisory guidance to be issued to NCUA examiners before this final rule is implemented.

NCUA July Board Meeting – Proposed Fixed Assets Rule; NAFCU Compliance Monitor; Regulatory Compliance Seminar; He's Back...

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Yesterday, the NCUA Board held its July meeting, approving the following three items:

• A proposed rule to provide federal credit unions with regulatory relief and greater flexibility managing fixed assets by removing the waiver requirement for credit unions to exceed the 5-percent aggregate limit on fixed-asset investments.
• Reprogramming NCUA’s 2014 operating budget with a net reduction in overall expenditures of $1.1 million for the remainder of the year.
• Expanding the community charter of Call Federal Credit Union to serve the entire Richmond, Virginia, Metropolitan Statistical Area.

The Board also indicated that no future assessments for the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) are currently expected. Check out NCUA’s Board Action Bulletin for more details on the full meeting results.

Proposed Fixed Assets Rule. The proposed rule approved by the Board during yesterday’s meeting is intended to provide federal credit unions greater flexibility in their management of fixed assets. The proposal would remove the current requirement that federal credit unions seek NCUA approval before exceeding the 5 percent aggregate limit on investments in fixed assets.  Instead, FCUs that wish to exceed the five percent aggregate limit would be able to do so, without prior NCUA approval, if they implement a fixed assets management (FAM) program. The FAM program would have to include a written board policy, board oversight and ongoing internal controls. The proposal would also simplify the occupancy requirement applied to premises acquired for future expansion. The proposal has a 60-day comment period and NAFCU’s Regulatory Affairs team will be preparing a Regulatory Alert for NAFCU members.

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NAFCU Compliance Monitor. The August 2014 NAFCU Compliance Monitor is now available for download by NAFCU members. This month's feature article is on Delving into the Closing Disclosure: Requirements, Timing, Delivery and More. The “Did You Know?” section also provides a quick glance at the topics on tap for NAFCU’s upcoming Regulatory Compliance Seminar.

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Regulatory Compliance Seminar. Speaking of Seminar, don’t miss your chance to meet other compliance professionals from around the country and get the most up-to-date information on regulatory compliance, plus learn what’s coming up next.  $100 savings end soon! Enroll by August 22 to secure your spot for our 2014 Regulatory Compliance Seminar this October in Baltimore’s beautiful Inner Harbor.

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He’s back...The former compliance guy (Anthony Demangone) has teamed with NAFCU President and CEO Dan Berger to write “Managing and Leading Well.”  The book provides a blueprint for today’s credit union leaders to hone their leadership and management skills.  Anthony and Dan will also be on-hand at our Compliance Seminar in Baltimore this fall.

Have a great weekend everyone!