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OCC Bulletin 2019-31 | July 1, 2019
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Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, All Examining Personnel, and Other Interested Parties
On May 24, 2019, the Office of the Comptroller of the Currency (OCC) issued a final rule to allow federal savings associations with total consolidated assets of $20 billion or less, as reported by the association to the Comptroller on its call report as of December 31, 2017, to elect to operate as covered savings associations. A covered savings association is able to engage in national bank powers.1 The final rule provides these federal savings associations with additional flexibility to adapt their business model without changing their charters and establishes a streamlined election process for them to operate as covered savings associations. This bulletin describes the process for federal savings associations to make an election by submitting its notice to the supervisory office. The final rule is at 12 CFR 101 and is effective on July 1, 2019.
This bulletin applies to community banks that are federal savings associations.
Section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act created a new section 5A in the Home Owners’ Loan Act (HOLA) that required the OCC to issue regulations to allow federal savings associations with total consolidated assets of $20 billion or less, as reported by the association to the Comptroller as of December 31, 2017, to elect to operate as covered savings associations.
A covered savings association generally has 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, with some exceptions. It also is subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to a national bank, with some exceptions. A covered savings association must comply with certain rules and regulations applicable to the powers and investments of a national bank. A covered savings association is not required to comply with the lending and investment limits in HOLA. Further, a covered savings association is not required to be a qualified thrift lender under HOLA. Finally, a covered savings association is not permitted to retain or engage in any subsidiaries, assets, or activities that are not permissible for a national bank.
A covered savings association retains its federal savings association charter and continues to be treated as a federal savings association for purposes of governance, including incorporation, bylaws, board of directors, shareholders, mutual members, and distribution of dividends. A covered savings association also is treated as a federal savings association for purposes of consolidation, merger, dissolution, conversion (including conversion to a stock bank or another charter), conservatorship, and receivership, and for other purposes described in the final rule.
All federal savings associations are required to maintain federal deposit insurance. Trust-only covered savings associations continue to be required to maintain deposit insurance.
The rule does not require a federal mutual savings association to change its corporate form to make an election to operate as a covered savings association. Mutual member or depositor rights do not change as a result of federal mutual savings association management making an election to operate or operating as a covered savings association.
The OCC encourages federal savings association management to consult with the supervisory office before submitting the notice. An eligible federal savings association making an election to operate as a covered savings association must follow the streamlined process established in 12 CFR 101.3. A federal savings association can make the election by submitting a notice to its supervisory office, and a duly authorized officer of the federal savings association must sign it. The notice must identify and describe each nonconforming subsidiary, asset, or activity the federal savings association operates, holds, or controls at the time it submits the notice. A nonconforming subsidiary, asset, or activity is generally one that is not permissible for a national bank. A covered savings association must divest, conform, or discontinue nonconforming subsidiaries, assets, and activities as described in 12 CFR 101.5. The final rule establishes time frames for the divestiture, conformance, or discontinuation of the subsidiary, asset, or activity. The rule provides that the OCC may require that a covered savings association submit a plan for such divestiture, conformance, or discontinuation.
The rule provides that the election takes effect 60 days after the date the OCC receives the notice, unless the OCC notifies the association that it is not eligible to make an election. The supervisory office may notify the federal savings association in writing that the election is effective before the expiration of the 60-day period.
The supervisory office and federal savings association management should discuss any changes to the strategic plan that might result from making the election, if applicable. While the supervisory office is familiar with the operations and strategic plan of the federal savings association, it may request changes to the strategic plan and may change its examination scope as the business of the covered savings association evolves.
After an appropriate period, as determined by the OCC, a covered savings association may terminate an election to operate as a covered savings association by submitting a notice to the supervisory office. If a covered savings association choses to terminate the election, it must divest, conform, or discontinue any subsidiary, assets, or activities that are not permissible for a federal savings association. A federal savings association that has terminated its election may submit a notice to reelect to operate as a covered savings association, if at least five years have elapsed since the effective date of the termination, unless good cause exists to permit the reelection earlier.
The final rule and its preamble contain information about which national bank rules apply to the operations of a covered savings association. Generally a covered savings association may engage in any lending or investments permitted for a national bank and is not limited by the specific lending or investment restrictions in HOLA. 12 CFR 101.4(a) provides that a covered savings association may engage in any activity that is permissible for a similarly located national bank to engage in, subject to the same authorization, terms, and conditions that would apply to a similarly located national bank. When making loans and investments, covered savings associations are subject to the same authorization, terms, and conditions that would apply to similarly located national banks.
Covered savings associations generally are not permitted to retain nonconforming subsidiaries, assets, or activities. A nonconforming subsidiary, asset, or activity includes an investment in a subsidiary or other entity that is not permissible for a covered savings association. For example, federal savings associations have authority to invest in service corporations under section 5 of HOLA; national banks, however, do not have express statutory authority to invest in service corporations. Consequently, a covered savings association may not retain an existing service corporation or establish and invest in a new service corporation. This restriction applies even if the service corporation is solely engaged in activities permitted for national banks.
A federal savings association that elects to operate as a covered savings association is required to comply with 12 CFR 101.5 by divesting or conforming any investment in a service corporation within the time frame set out in section 101.5. The covered savings association could do so by divesting any investment in a service corporation. Alternatively, the covered savings association could conform the investment by designating the service corporation as an operating subsidiary because national banks are permitted to have operating subsidiaries. A covered savings association that chooses to designate a service corporation as an operating subsidiary must ensure that the operating subsidiary is only engaged in activities permissible for the covered savings association to engage in directly (generally, those permissible for a national bank.) Operating subsidiary designations are subject to applicable OCC licensing requirements at 12 CFR 5.34.
12 CFR 101.5 establishes a transition process for bringing nonconforming subsidiaries, assets, and activities into conformance with the requirements for national banks. 12 CFR 101.5(a) requires a covered savings association 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. The supervisory office may require a covered savings association to submit a plan to divest, conform, or discontinue a nonconforming subsidiary, asset, or activity, to assist the OCC in assessing the federal savings association’s compliance with the regulation.
12 CFR 101.5(b) allows the OCC to grant a covered savings association extensions. The supervisory office may grant a covered savings association extensions of not more than two years each up to a maximum extension period of eight years if the supervisory office determines that (1) the covered savings association has made a good faith effort to divest, conform, or discontinue the nonconforming subsidiaries, assets, or activities; (2) divestiture, conformance, or discontinuance would have a material adverse financial effect on the covered savings association; and (3) retention or continuation of the nonconforming subsidiaries, assets, or activities is consistent with the safe and sound operation of the covered savings association. The OCC will not grant extensions if it receives the request for an extension less than 30 days in advance of the expiration of the initial two-year period or any extension that has been previously granted.
12 CFR 101.4(b) provides that a covered savings association may continue to operate any branch or agency that the federal savings association operated on the date on which the election was effective. A covered savings association seeking to establish a de novo branch or to relocate or close an existing branch, however, is subject to the authorization, terms, and conditions that govern the establishment or closing of a national bank branch. Furthermore, if a branch of a covered savings association engages in activities that are permitted under the national bank branching regulation, 12 CFR 5.30, that branch may continue to operate subject to the same authorization, terms, and conditions as a similarly located branch of a similarly located national bank.
National banks are not permitted to operate agency or administrative (“non-branch”) offices in the same way as federal savings associations. National banks may have non-branch offices that engage in some activities that are permissible for agency offices of federal savings associations. For example a national bank may have a loan production office and a federal savings association may have an agency office that is a loan production office. In contrast, a federal savings association may be permitted to engage in certain activities in an agency office that a national bank would not be permitted to conduct in a non-branch location. For example, federal savings associations typically are permitted to disburse loan proceeds in an agency office. A national bank office that disburses loan proceeds could be considered a location at which there is “money lent,” and thus within the definition of “branch” in 12 CFR 5.30. If, after making an election, an agency office of a covered savings association engages in activities that would qualify the agency office as a branch under the national bank branching regulation, 12 CFR 5.30, those activities will be considered nonconforming activities, and the covered savings association will be required to discontinue the activities or conform them by submitting an application under 12 CFR 5.30 to establish the agency office as a branch.
The final rule provides that a covered savings association be treated as a federal savings association for purposes of merger, consolidation, dissolution, conversion, conservatorship, and receivership.
A covered savings association’s acquisition or establishment of new branches must comply with the requirements applicable to national banks. Under the final rule, a covered savings association will be permitted to establish or retain new branches, or to close branches, subject to the authorization, terms, and conditions that apply to a similarly located national bank. This is true whether the branch is retained or closed as part of a merger.
For purposes of the final rule, the provisions of law relating to retention of branches in mergers and those that establish interstate branching restrictions in the merger context should be considered branching requirements rather than merger requirements. For a covered savings association, this means that while the authority to engage in a proposed merger or consolidation transaction will be governed under the laws applicable to federal savings associations, the ability to establish or retain branches will be subject to the same authorization, terms, and conditions that would apply to a similarly located national bank (including conditions on the establishment of interstate branches).
12 CFR 101.8 provides that the OCC may disapprove any notice submitted pursuant to the final rule if the OCC determines that the notice is submitted for purposes of evading 12 CFR 101.5, “Nonconforming Subsidiaries, Assets, and Activities.”
Documents describing the powers of national banks and federal savings associations are available on the OCC website. For example, two summaries that indicate the applicability of the requirements described to covered savings association are available. They are “Key Differences Among National Banks, Federal Savings Associations, and Covered Savings Association Requirements” and “Comparison of the Powers of National Banks and Federal Savings Associations.”
Please contact Charlotte Bahin, Senior Advisor for Thrift Supervision, at (202) 649-6281 or your supervisory office.
Toney M. Bland Senior Deputy Comptroller for Midsize and Community Bank Supervision
