The Treasury Department has recently released proposed legislative language to implement the Obama Administration’s proposal to consolidate the Office of Thrift Supervision (“OTS”) and the Office of the Comptroller of the Currency (“OCC”) and eliminate the federal thrift charter. That legislative language provides further detail on this important element of the Administration’s regulatory reform agenda.
Creation of the National Bank Supervisor
The legislation would establish a “National Bank Supervisor” (“NBS”) as a bureau of the Treasury Department. That agency would be headed by a Director, who would be appointed for a five-year term by the President with the advice and consent of the Senate. The NBS Director would also be a member of the five person board of the Federal Deposit Insurance Corporation (“FDIC”). The seat on the FDIC board formerly occupied by the Director of OTS would go to the Chairman of the Federal Reserve Board (“FRB”) or another FRB governor designated by the Chairman.
All existing functions of the Comptroller of the Currency and the Director of OTS would be transferred to the NBS Director except that the regulatory functions of OTS as to state chartered savings associations would be transferred to the FDIC. Those transfers would take place one-year after the legislation is enacted (the “transfer date”), subject to a possible extension of six months by Treasury. The OCC and OTS would be abolished 90 days after the transfer date. The legislation makes clear that the transfers to NBS in no way affect the proposed transfer of functions related to consumer compliance and fair lending to the new Consumer Finance Protection Agency that the Administration has proposed.
The NBS would be funded by assessments on and fees charged to its regulated institutions. All employees of the OCC would be transferred to the NBS and all employees of OTS would be allocated to either the NBS or FDIC, as determined by the agencies. The NBS would assume all property and funds of the OCC and property and funds of the OTS would be split between the NBS and the FDIC.
The reorganization of the OCC and the OTS into the NBS thus far appears noncontroversial on Capitol Hill. One issue that had not been previously addressed is the status of state-chartered savings associations for whom OTS was primary federal regulator. Under the proposed legislation, those institutions will become regulated by the FDIC.
The proposed legislation also addresses the general topic of regulatory assessments. The FRB, FDIC and NBS would be directed to jointly develop rules to coordinate the assessment of fees for examinations. This coordination of fees is intended to end arbitrage between regulators based on bank examination fees. All national banks with assets of $10 billion or more would be assessed in amounts as necessary to fully defray examination costs and agency expenses taking into account each institution’s size, complexity and financial condition and other funds collected. The FRB and FDIC must assess regulated state banks of $10 billion or more at the same rate that the NBS assesses national banks of such size. National banks with assets of less than $10 billion would be assessed at a rate no greater than the average fees assessed by the states on their state banks. The FRB would be directed to assess fees on bank holding companies sufficient to defray costs of examination.
The language dealing with regulatory fees and assessments directs the FDIC and FRB to charge fees on certain state banks and bank holding companies that they do not now charge. Moreover, the direction to NBS that regulatory fees assessed on national banks of under $10 billion may not exceed the average charged by the states for state banks may reduce fees on smaller national banks from what is now charged.
Elimination of the Federal Thrift Charter
The proposed legislation would eliminate the federal savings association charter. Each federal savings association would have six months from the date of enactment to submit notice as to whether it elects to become a national bank, mutual national bank, state bank or state savings association. Once the notice has been provided, the institution must then, as applicable, submit such additional information as the OCC (prior to the transfer date) requests or follow the requirements in applicable state law for converting to a state charter. If a federal savings association has not made the required election, or its charter conversion to state charter has not been approved, it will become a national bank by operation of law on the one-year anniversary of the legislation. Neither OTS nor NBS may grant a federal savings association charter after the date of enactment.
The proposed legislation provides for a three-year grandfather (subject to two one-year extensions at the discretion of the appropriate federal regulator) of activities and assets of all federal savings associations that become national or state banks and all state savings associations that become regulated by the FDIC. Loans that would exceed the loan-to-one borrower limits applicable to national banks would also be grandfathered for three years. To prevent inordinate growth, the legislation provides for a five-year phase in period for a converted federal or state savings association to engage in lending and activities that are permitted under its new bank charter that were subject to a percentage of assets limitation under its savings association charter. Other activities that were limited in amount by statute as a savings association would be subject to such phase-in as imposed by the applicable federal regulator. The legislation would grandfather existing branches of savings associations under their bank charters.
A little noticed provision of the legislation would impose on all state chartered savings associations the national bank loan-to-one borrower limits. That would preempt state law in states that currently allow a higher limit.
The proposed legislation would repeal the Savings and Loan Holding Company Act as of the date of enactment. Savings and loan holding companies would become bank holding companies subject to regulation by the FRB. The legislation does not provide a specific grandfather or transition period for existing nonconforming activities, but gives the FRB authority to grant temporary exceptions to facilitate the compliance of such companies with the Bank Holding Company Act.
Of course, the proposal for the elimination of the federal thrift charter is one that industry groups have been strongly opposing. House Financial Services Committee Chairman Barney Frank has indicated that he opposes the Obama Administration’s effort to eliminate the federal thrift charter but has also suggested that he wants to revise the charter to eliminate abuses he believes have occurred. It is uncertain whether Mr. Frank’s vision of the thrift charter would be desirable in an era where many thrifts have diversified beyond a focus on residential mortgage lending. Despite the uncertainty surrounding this part of the legislation, it is a useful exercise for federal savings associations to begin to evaluate the chartering options available in their state compared to the desirability of a national bank charter.
Impact on Mutual Institutions and Mutual Holding Companies
The legislation contains some specific provisions dealing with mutual savings associations. As noted, federal mutual savings associations would have the option of becoming mutual national banks. Going forward, the NBS would be authorized to charter mutual national banks either de novo or through charter conversions from stock or mutual national or state banks or credit unions. The OTS regulations governing the corporate organization, governance and mutual to stock conversion of federal savings associations would apply to mutual national banks for three years after enactment, at which time any regulations on those topics issued by NBS would take effect.
Of interest to mutual institutions is the provision of the proposed legislation that prohibits the granting of new federal savings association charters as of the date of enactment. Inasmuch as a mutual to stock conversion or mutual holding company reorganization involves the issuance of a new stock charter to the association involved, the legislation could be interpreted to prevent such transactions during the transition period from the date of enactment to the transfer date. This provision may also prevent credit unions from converting to mutual savings banks during the transition period.
The proposed legislation does not address mutual holding companies and, by repealing the Savings and Loan Holding Company Act, eliminates the statutory basis for federal mutual holding companies. At the same time, the proposed legislation transfers regulations of OTS to the NBS, thereby suggesting that the OTS’ mutual holding company regulation may continue in effect. The lack of clarity regarding the status of federal mutual holding companies suggests that Treasury did not focus on that segment of the depository institutions industry and it is something that needs correction if the federal thrift charter is eliminated.