On May 24, 2019, the Office of the Comptroller of the Currency (OCC) issued a long-awaited final rule implementing the “covered savings association” provision of last year’s Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), which permits eligible federal savings associations to elect to operate with national bank powers and thereby to gain expanded operating flexibility.

Under the final rule, which takes effect July 1, 2019, an eligible federal savings association that elects to be a covered savings association may engage in any activity that is permissible for a similarly located national bank, and it becomes subject to the same authorization, terms, and conditions applicable to a similarly located national bank. (The eligibility requirements for this change are detailed below.) The most important result of the covered savings association status would be to free an electing institution from the various lending and asset concentration limits that apply to federal savings associations under the Home Owners’ Loan Act (HOLA). In particular, a covered savings association would not be subject to:

• The “Qualified Thrift Lender” (QTL) test, which requires that at least 65 percent of the federal association’s assets consist of qualified thrift investments, which are generally residential mortgage loans and mortgage-related securities

• HOLA’s limits on aggregate amounts of loans secured by nonresidential real property and on commercial and consumer lending

The final rule also confirms that a covered savings association will not be subject to the additional restrictions on loans to a single borrower and to certain affiliate transaction requirements to which federal savings associations are subject.

The covered savings association election should be of great interest to many eligible federal thrifts in light of the fact that such institutions have previously been unable to expand their commercial banking business without converting to a bank charter and incurring the significant expense of a charter conversion. The election may be especially attractive to mutual savings associations, as it would greatly increase their operating flexibility without the need to undergo a conversion to stock form, which would be required before a commercial bank charter conversion.

It must be stressed, however, that federal thrifts making the covered savings association election will also be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations as national banks, and as a result, certain institutions would be required to terminate or divest existing activities and investments. In practice, this means that a federal thrift electing to be a covered savings association would be required to discontinue any direct or indirect activities or investments—for example, non-premises real estate investments by service corporations—that are not permissible for a national bank. However, the final rule clarifies that the small group of federal savings institutions that have grandfathered powers under section 5(i)(4) of HOLA would not be required to discontinue nonconforming activities or investments upon a covered savings association election.

In addition, a federal thrift electing to be a covered savings association will become subject to the same branching restrictions as a national bank, but will be able to continue to operate all branches in operation on the effective date of its election. As a result of the Dodd-Frank Act’s provisions generally allowing interstate de novo branching for all banks, the imposition of national bank branching restrictions on covered savings associations would be unlikely to have an adverse effect on most institutions.

In view of the above national bank restrictions to which a covered savings association will be subject, a federal thrift considering the covered savings association election should initially determine (i) whether any of its assets or activities would be subject to divestiture or discontinuation, and (ii) whether its future branching plans would be affected by applicable law. It should then weigh the expected benefits of the election against such possible negative effects.

The rule establishes a transition process for bringing an electing institution’s nonconforming subsidiaries, assets, and activities into conformance with applicable requirements for national banks. A federal thrift electing to be a covered savings association would be required to divest, conform, or discontinue nonconforming subsidiaries, assets, and activities “at the earliest time that prudent judgment dictates” but not later than two years after the effective date of the election, subject to extension in specified circumstances.

Upon making the covered savings association election, a federal thrift would continue to be treated as a federal savings association for purposes of corporate governance, and would retain its federal savings association charter and corporate forms. It would also continue to be subject to the provisions of the HOLA governing federal savings association mergers, dissolutions, charter conversions, and mutual-to-stock conversions, as well as to certain other specified provisions of federal law applicable to federal savings associations.

Eligibility Requirements

Under the Act and the final rule, in order to make the covered savings association election, a federal thrift must have been a federal savings association on December 31, 2017, and had assets of $20 billion or less as of that date. The final regulation confirms that both parts of this eligibility requirement—the federal charter requirement and the asset limit—must have been satisfied as of December 31, 2017. As a result, an institution that was operating on that date as a state savings institution or a credit union would not be eligible, following a subsequent conversion to a federal savings association charter, to make the election.

In the final rule, the OCC chose not to impose the additional “eligible savings association” test included in its proposed regulation, which would have required a federal thrift making the covered savings association election to satisfy the OCC’s requirements for expedited treatment of applications.

Under the Act and the final rule, a federal thrift would not be required to amend its charter or bylaws or to obtain the approval of shareholders or members before submitting a notice to the OCC. The preamble to the final rule recommends, however, that a federal thrift considering the covered savings association election should review its corporate documents and applicable law to confirm that such election would not require any charter or bylaw amendments or a shareholder or member vote.

Procedural Requirements

An eligible federal savings association may make an election to operate as a covered savings association by submitting a notice to the OCC. The sole requirements for the notice are that it be signed by a duly authorized officer of the electing association and that it identify and describe each nonconforming subsidiary, asset, or activity that the association operates, holds, or conducts at the time it submits the notice.

A covered savings association election will automatically take effect on the date that is 60 days after the date on which the OCC receives the notice, unless the OCC notifies the federal thrift that it is not eligible to make the election. The OCC may notify an electing federal thrift in writing prior to the expiration of the 60-day period that it is eligible to make the election, and in such a case the election will take effect on the date of the OCC notification.