Compliance Blog

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 ksubramanian@nafcu.org or 703-842-2212.