On January 4, 2021, the OCC issued a proposed rule codifying standards governing a national bank’s or federal savings association’s investment in real estate used, or to be used, as bank premises.  Specifically, the proposed rule would revise 12 C.F.R. § 7.1024 in order to create a more transparent and consistent set of principles for evaluating the acquisition and use of  national bank and federal savings association premises.

National bank real estate ownership is governed by 12 U.S.C. § 29.  Section 7.1024 is an interpretive rule that codifies specific OCC interpretations of 12 U.S.C. § 29.  Section 29 prohibits national banks from acquiring, holding, or conveying real estate unless one of four exceptions applies.  The first exception and the one discussed in the proposed revisions to section 7.1024, covers the authority of a national bank to hold real property “[s]uch as shall be necessary for its accommodation in the transaction of its business.”[1]  Federal savings association premises ownership is governed by the Home Owners Loan Act (the “HOLA”).  Although the HOLA does not specifically address federal savings association investments in real estate, the OCC has determined that, as a supervisory matter, it is appropriate to apply the rules governing national banks to federal savings associations as well.  The proposal solicits comment on the appropriateness of this approach.

 

The OCC proposes to revise § 7.1024 to provide national banks and federal savings associations (collectively, “banks”) with standards to determine whether the acquisition and holding of real estate falls within the scope of the bank premises exception.  These revisions include the implementation of an occupancy test and an excess capacity standard, allowing national banks and federal savings associations to better determine whether acquiring or holding real estate is permissible.  Under the proposed occupancy test, more than 50 percent of each building or severable piece of land that the bank acquires or holds must be used to facilitate bank business operations.  Such facilities would include not only the space devoted to the actual transaction of bank business but also space containing amenities or services used by bank employees or contractors such as a gym, cafeteria, daycare center, or printing facility.

 

The proposal would authorize banks to permit third parties to use excess space, or capacity, in bank premises, provided the excess space or capacity has a “nexus with the transaction of the bank’s business or bank operations such that . . . it is acquired or held to provide the bank with a business location rather than as an investment in real estate.” The proposal lists several examples of situations giving rise to “legitimate” excess capacity.  One such situation identified in the proposed rule can occur when the acquisition of space beyond a bank’s current needs is necessary to accommodate its plans for future expansion, provided the expansion occurs within five years.

 

The proposed rule would supersede outstanding OCC precedent in this area to the extent the precedent is inconsistent with the proposed rule.  A transition rule provides that banks may continue to hold real estate acquired in compliance with prior legal requirements, but may not modify, expand, or improve that real estate in the future without the OCC’s prior approval.  The OCC believes that the proposed rule will result in improved clarity and certainty about the scope of the bank premises exception to section 29’s prohibition on holding real estate.  Individual banks may wish to evaluate the proposal according to whether it provides sufficient flexibility for their own premises needs.  Comments on the proposed rule must be received 45 days from the date of publication in the Federal Register.

[1] 12 U.S.C. § 29.  The other three exemptions permit national banks to take and hold real property in satisfaction of, or as security for, debts outstanding. The proposed rule only concerns the first exemption; it would not affect the ability of national banks to rely on the other three exemptions found in section 29.