January 4, 2021, the OCC issued a proposed rule which amends its regulations on ownership of real property by national banks and federal savings associations. The proposed rule, which will be codified as 12 C.F.R. 7.1024, replaces a prior rule on permissible national bank premises which was codified at 12 C.F.R. 7.1000. Davenport Evans lawyer Charles D. Gullickson explains.
Questions concerning real estate investments permissible for banks often arise in two situations: (1) a bank desires to acquire a particular building or parcel of real estate which it intends to only partly occupy, with the remainder occupied by others, and (2) a bank desires to acquire property that it does not currently intend to use but wants to secure for future use. For these two situations, the proposed rule provides clearer, more specific standards than the guidance that existed in the old rule on permissible national bank premises found at 12 C.F.R. 7.1000. Arguably, however, the proposed rule’s clearer, more specific standards are more rigid than case-by-case guidance provided in the old real estate rule, and depending upon the facts and circumstances in some cases the proposed rule might be more restrictive than interpretive guidance previously provided by the OCC.
The proposed rule provides this bright line test for acquiring or holding real estate that a bank only intends to partially occupy: the bank may acquire or hold property in which more than 50% of each “building or severable piece of land” will be used as bank premises, and the bank would be free to lease out excess space which it will not occupy to third parties. However, the acquisition of such real estate with the intent that the excess capacity will be leased to others must have a “nexus with the transaction of the bank’s business…such that it is acquired or held to provide the bank with a business location rather than an investment in real estate.” In other words, the proposed rule seems to suggest that if a bank desires to hold real estate for which there will be excess capacity to be used by others, the bank must have some business-related justification for the investment.
The OCC’s proposal also provides a bright line test for acquiring property for future use: the bank must use the property within five years. Although not explicit in the proposal, presumably a bank would need to dispose of property it acquired for future use if it does not devote the property to bank use within that five-year period.
The proposed rule also contains other details and requirements for national bank real estate investments. For example, it has requirements that address when a national bank may share a space with third parties (in this regard, the proposal would replace the OCC’s existing shared space rule found at 12 C.F.R. 7.3001). Finally, in the proposal the OCC sets forth ten questions for which it seeks public comment.
On its face the proposed rule applies only to national banks and federal savings associations but, as this author has previously noted in an article on permissible real estate investments for banks and bank holding companies, federal law limits activities and investments permissible for state banks to only those that are permissible for national banks, and thus to the extent the proposed rule makes a real estate investment impermissible for a national bank it may well also be impermissible (under federal law) for a state bank.
Note that the pending proposal is not a comprehensive treatment of the topic of bank-owned real property. For example, bank ownership of property acquired through foreclosure or as OREO is addressed elsewhere in federal law.
The next step in the regulatory process for the proposed rule to become effective is for the OCC to publish the proposal for public comment in the Federal Register which has not yet happened. The delay may be due to an overall pause in federal rulemaking in light of the transition from the Trump administration to the Biden administration. Because the rule in question, however, seems non-political and non-partisan it is likely that this rulemaking process will continue.
UPDATE: February 4, 2021
The OCC’s proposed new rule on national bank premises has now been published in the Federal Register and is available for public comment, with the comment period closing on March 22, 2021. Persons interested in submitting comments may do so online by going to www.regulations.gov. While on that site go to the Search Box, enter Docket ID OCC-2020-0045, and click on “Comment Now” to submit comments. Comments submitted to the OCC on the proposed rule are available to the public.
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