Long restricted in their ability to pursue certain lines of business under the Home Owners' Loan Act (HOLA), and with the Dodd-Frank Act eliminating many of the benefits HOLA provided, federal savings associations (FSAs) have been hampered in their ability to manage their balance sheet and meet the needs of their communities. Congress, through section 206, the Economic Growth, Regulatory Relief, and Consumer Protection Act (known as the Federal Savings Association Flexibility Act (Flexibility Act)), has provided FSAs a tool to diversify their portfolios, maintain their federal charter, and better serve their communities. The Flexibility Act allows certain FSAs to elect to operate as a covered savings association (Covered SA) with "the same rights and privileges as a national bank that has the main office of the national bank situated in the same location as the [Covered SA's] home office."
In May 2019, the OCC finalized the rule implementing the Flexibility Act (Rule) setting forth the process for making the Covered SA election and, as Covered SAs retain their federal savings association charter, clarifying which HOLA provisions continue to apply to Covered SAs. The Rule becomes effective July 1, 2019.
Eligibility. In order to make the election, a FSA must, as of December 31, 2017, have held a FSA charter and had total consolidated assets of $20 billion or less. Exceeding the $20 billion threshold thereafter does not cause the FSA to lose its eligibility or a Covered SA to lose its covered status.
Election Process. To make the election, an eligible FSA must file a notice with the OCC containing a description of each nonconforming subsidiary, asset, or activity. The election is effective 60 days after the OCC receives the notice unless the OCC notifies the FSA earlier that the election is effective. Importantly, shareholder or member approval is not required to make the election, and mutual FSAs are not required to convert to stock in order to make the election. The Rule also provides a process for termination and reelection.
Key Provisions. In general, a Covered SA has the same rights and privileges as a national bank and is subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations. Meanwhile, a Covered SA is still an FSA for matters relating to its charter, governance, bylaws, board, and shareholders, as well as for purposes of consolidation, merger, dissolution, conversion, conservatorship, and receivership. Below are key provisions relevant for any eligible FSA considering making such an election, followed by an excerpt from a summary table provided by the OCC.
- The qualified thrift lender (QTL) requirements no longer apply.
- HOLA investment and loan limits, including commercial loan limits, no longer apply. Covered SAs must follow national bank investment limits and any loan limits.
- HOLA unlimited branching no longer applies, and Covered SAs must branch subject to national bank limits. All existing branches may be retained.
- Subsidiaries, assets, and activities must conform to the requirements for national banks. Nonconforming subsidiaries (including service corporations), assets, and activities must be divested within 2 years of making the election.
- Grandfathered FSAs may continue to engage in any grandfathered activities and retain any grandfathered investments.
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| Selected Statutory Provisions Applicable to National Banks | |
| 12 U.S.C. § 24 (Eleventh) and 12 C.F.R. part 24—These sections permit national banks to make public welfare investments, subject to certain limitations. | 12 U.S.C §§ 22, 30—These sections require national banks to have the work "National" in their names. |
| 12 U.S.C. § 71—This section sets out standards for the election of directors of national banks. | |
| 12 U.S.C. § 72—This section sets out citizenship and residency requirements for directors of national banks. | |
| 12 U.S.C. § 76—This section requires the president of a national bank to be a member of the board of directors of the national bank. | |
| Selected Statutory Provisions Applicable to Federal Savings Associations | |
| 12 U.S.C. § 1462(2)—This paragraph defines a "savings association." The OCC interprets this definition to require deposit insurance. | 12 U.S.C. § 1464(c)—This subsection establishes limitations on the lending and investment authority of FSAs, including the authority to make community development investments. |
| 12 U.S.C. §§ 1464(d), 1821(c)—These statutes set forth authority to appoint a conservator or receiver for FSAs. | 12 U.S.C. § 1467a(m)—This subsection sets out the qualified thrift lender test. |
| 12 U.S.C. § 1464(i)(4)—This statute is the grandfathering provision for federal savings banks chartered prior to October 15, 1982. | |
| Selected Capital Distributions and Subordinated Debt Regulations | |
| 12 C.F.R. § 5.45—This section establishes requirements for increases in permanent capital for federal stock savings associations. | 12 C.F.R. § 5.46—This section establishes requirements for changes in permanent capital of national banks. |
| 12 C.F.R. § 5.55—This section sets out requirements for capital distributions by FSAs, including distributions of dividends. The entire section would apply to a covered savings association. | 12 C.F.R. § 5.47—This section establishes requirements for subordinated debt issued by national banks. |
| 12 C.F.R. § 5.56—This section establishes requirements for inclusion of subordinated debt securities and mandatorily redeemable preferred stock of FSAs as supplementary capital. | |
| 12 C.F.R. § 163.76—This section addresses offers and sales of securities at an office of an FSA. | |
Outstanding Issues. The OCC has left Federal Reserve membership as well as any impact on savings and loan holding companies, including grandfathered unitary thrift holding companies, to the Board of Governors of the Federal Reserve System to address. Similarly, the OCC has left treatment of Covered SAs within the Federal Home Loan Bank (FHLB) System to the FHLBs.
While Covered SA election might not be necessary for FSAs operating comfortably within the existing HOLA framework or those that have significant nonconforming subsidiaries, assets or activities, for other FSAs the election will provide them the flexibility to diversify their portfolios and better serve their communities without the time and expense of a conversion to a national bank charter.