On May 24th the Office of the Comptroller of the Currency issued its final regulation (“final regulation”) implementing the provisions of the newly created section 5A of the Home Owners’ Loan Act. This new section 5A allows federal savings associations with total consolidated assets equal to or less than $20 billion as of December 31, 2017, to elect to operate as a “covered savings association”. Upon election, a covered savings association will have the same rights and privileges as a national bank. Similarly, a covered savings association generally will be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to a national bank. Regardless of whether the federal savings association is in mutual or stock form, a covered savings association will retain its federal savings association charter and existing governance framework. Likewise, a covered savings association will continue to be treated as a federal savings association for purposes of merger, consolidation, conversion, dissolution and other purposes determined by OCC regulation. However, activities not authorized for a national bank, primarily service corporation investments related to real estate, must be discontinued and nonconforming investments divested within a two year period with the possibility of extensions pursuant to an application meeting certain criteria. The final regulation takes effect on July 1st.

While not an exhaustive summary of the regulation, the text of which can be found in the Federal Register, Vol. 84, No. 101, May 24, 2019, some of the more notable provisions of the final regulation are described below.

1. Under the final regulation, once the election is made, a covered savings association may continue to operate as a covered savings association even if its total consolidated assets exceed $20 billion.
2. The final regulation eliminates the proposed definition of “eligible association”. This eliminates the concern that once the election to covered savings association status was made and national bank like investments and operations evolved accordingly, a subsequent CAMEL or CRA downgrade or enforcement action taken by the OCC, would trigger the loss of covered savings association status. The threat of a supervisory reversal, no matter how remote, would call into question a covered savings association’s future reliability as a commercial lender or employer of specialized personnel with commercial lending or investment talents This chilling possibility has been eliminated. Once the election to covered savings association status is made, it is preserved, although the exercise of the expanded rights and powers are still subject to regulatory oversight.
3. The OCC has stated its view in the preamble to the final regulation that a covered savings association would no longer be required to satisfy the Qualified Thrift Lender (“QTL”) test. This is a highly desirable change for federal savings associations that are attempting to source more profitable investments and loans but are bumping up against the QTL limitation. However, the Federal Reserve Board (“FRB”) which also has QTL enforcement powers has not expressed its view publicly. Federal savings associations seeking to make the election should seek clarification from the FRB as to its position.
4. A federal savings association which converted from a state savings bank and has grandfathered powers preserved by Dodd-Frank, even if incompatible with national bank powers, may retain those powers as a covered savings association.
5. The final regulation preserves investment authority for covered savings associations to invest in public welfare and community development investments.
6. The final regulation requires the divestiture of service corporation powers not authorized for national banks but if a service corporation engages only in operations authorized for national banks it can preserve its corporate existence.
7. The final regulation generally requires a covered savings association to divest, conform, or discontinue nonconforming service corporations, assets and activities (those that would not be permissible for a national bank, subject to limited exceptions). Such divestiture, conformance or discontinuance must be achieved not later than two years after the effectiveness of the election of covered savings association status. Under certain circumstances, this two year period can be extended with the approval of the OCC for up to an additional eight years. However, the criteria that apply to an application for an extension are unclear. This particular provision may be the most problematic for federal savings associations with service corporations engaged in real estate activities as most such activities would be nonconforming. We recommend a careful legal analysis of the OCC rules and opinions on powers of national banks before concluding a particular activity is nonconforming. It is worth noting that, notwithstanding the above, there are alternative corporate structures which may permit a covered savings association to continue its existing nonconforming business lines.

The foregoing has not been a complete summary of the final regulation and, obviously, each institution has unique issues and possibilities. One size does not fit all. We would be pleased to discuss with you how the final regulation might be used to your advantage and what the pros and cons are as they relate to your situation and objectives.