Compliance Blog

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!