On September 10, 2018, the Office of the Comptroller of the Currency (“OCC”) released a proposed rule to implement section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, codified in section 5A of the Home Owners’ Loan Act (“HOLA”).  Section 5A permits a federal savings association with total consolidated assets of $20 billion or less as of December 31, 2017, to elect to operate as a “covered savings association.”  A covered savings association would have the same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, and would be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that would apply to such a national bank.  Under the terms of the statute, however, a covered savings association would still be treated as a federal savings association for certain purposes, including governance, dividends, and mergers.

Notable aspects of the OCC’s proposal include the following:

• The proposal confirms that a covered savings association would not be required to satisfy the Qualified Thrift Lender (“QTL”) test, limits on aggregate amounts of loans secured by nonresidential real property, additional restrictions on loans to a single borrower, and certain affiliate transaction requirements that otherwise apply to a federal savings association but not a national bank.

• The OCC generally would not permit a federal savings association that is not an “eligible savings association” under Part 5 of its rules to make a section 5A election.  Therefore, a savings association that has a composite rating of 3 or lower, a consumer compliance rating of 3 or lower, a Community Reinvestment Act rating of “Needs to Improve” or worse, or is subject to an enforcement action, generally would not be authorized to make the election.  However, there is no indication in the proposal that a federal savings association that has already made an effective section 5A election but subsequently loses its status as an “eligible savings association” would forfeit its status as a covered savings association.

• The proposal does not address whether the Riegle-Neal Act’s limitations on interstate mergers would apply to a covered savings association as they would to a national bank, or whether section 5A’s carveout for mergers means that a covered savings association would remain exempt from such limitations.  In contrast, the preamble to the proposal does state that a covered savings association seeking to establish a de novo branch or close an existing branch would be subject to the statutes and regulations that govern the establishment or closing of a national bank branch.  Presumably these statutes and regulations would include the Riegle-Neal Act’s limitations on interstate branching, which otherwise do not apply to a federal savings association.

• The OCC would interpret section 5A to forbid a covered savings association from retaining an investment in a service corporation.  A service corporation is a type of subsidiary that is permissible for a federal savings association, but not a national bank, to control.

• The OCC would interpret section 5A to supersede the grandfather provision of section 5(i)(4) of HOLA, which permits a federal savings association chartered prior to October 15, 1982, to continue to make any investment or engage in any activity not otherwise authorized under section 5 of the HOLA to the degree it was permitted to do so as a federal savings association prior to October 15, 1982.  As a result, a covered savings association would be required to divest any investments or cease any activities conducted solely under the authority of section 5(i)(4), to the extent such investment or activity is impermissible for a national bank.

• The proposal would provide a two year conformance period for a covered savings association to divest or cease any non-conforming investments or activities, and give the OCC authority to grant four extensions of two years each.

• Under the proposal, a federal savings association would be permitted to make a subsequent section 5A election after terminating a previous election.  However, a federal savings association that previously made and terminated a section 5A election would be required to wait five years after the termination before making a subsequent election.

A section 5A election is most likely to be attractive to a federal savings association that seeks to operate more extensive commercial banking businesses but would fail to satisfy the QTL test or other limits that constrain federal savings associations’ assets and investments.  The proposal does not, however, address whether the Federal Reserve will treat the holding company of a covered savings association as a savings and loan holding company or as a bank holding company. This is likely to be a critical issue for many federal savings associations that have interest in making a section 5A election.

Comments will be due 60 days after the proposal is published in the Federal Register.