Thrift Institutions After Dodd-Frank: The New Regulatory Framework

On July 21, 2011, thrift institutions entered a new regulatory structure, with the transfer of regulatory responsibility for these institutions from the Office of Thrift Supervision ("OTS") to the other federal banking agencies and with other changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank" or the "Act").1 Dodd-Frank and related reforms, including new international capital standards, will, over time, shape the operations of savings and loan holding companies ("SLHCs") and their subsidiary thrifts. For the most part, the changes will bring the thrift and bank charters closer together, and SLHCs will be treated nearly the same as bank holding companies ("BHCs"). Reinforcing the similarity in treatment are various amendments Dodd-Frank has made to the same provisions in the thrift statute and the banking statutes. Some important distinctions nevertheless will remain, including a slightly greater range of activities for thrift institutions and the qualified thrift lender test.

For some SLHCs, especially those with significant nonbank businesses, the changes may have far-reaching effects. Indeed, in some cases, management of a savings institution may want to consider the relative merits of thrift and bank charters in light of its particular operations and business plans. Certain thrift organizations probably should retain the federal or state charter, however, including mutual savings associations, grandfathered unitary thrift holding companies, any thrift institutions that engage in real estate development or brokerage, and, possibly, those with greater concentrations of commercial real estate loans.

We do not address here the consumer protection and mortgage-related provisions of the Act, which are the subject of several User Guides that we have published.2 This bulletin covers changes to federal preemption, but a comprehensive discussion appears in our Federal Preemption User Guide.3


The majority of the Dodd-Frank changes will affect SLHCs, although on a day-to-day basis, primarily through examination and supervision, changes will be felt most acutely at the savings association level. Highlights for both SLHCs and savings associations are as follows.

  1. Savings and loan holding companies

    Control The FRB has replaced the OTS control rules with its existing rules for bank holding companies. Among other changes, a greater number of non-controlling investors likely will be required to enter into passivity commitments, and a non-controlling investor may not hold a seat on the board of directors. The new rules apply primarily on a going-forward basis, but in certain circumstances the FRB may review ownership structures created before July 21, 2011. Capital SLHCs ultimately will be required to adhere to the same capital standards as BHCs—and these capital standards are themselves in flux. SLHCs should take into account at least three sets of changes to capital planning. Composition of capital. The Collins Amendment to Dodd-Frank requires that BHCs and SLHCs adhere to the same capital requirements that now exist for their subsidiary insured depository institutions—effectively excluding (after a transition period) trust-preferred and other hybrid securities from Tier 1 capital. Basel III introduces a range of other requirements for the composition of Tier 1 capital. These changes will phase in over several years and at different speeds, depending on the size of the institution. New capital ratios. The Act does not provide for new capital ratios other than to require that capital rules incorporate a countercyclical element. However, Basel III provides a more robust set of ratios that U.S. regulators could apply to BHCs and SLHCs of much smaller size than those formally subject to Basel III. Liquidity. Dodd-Frank requires that the FRB adopt liquidity standards for the largest banks and systemically important nonbank financial institutions. Two new liquidity ratios are under review by the Basel Committee on Banking Supervision ("BCBS"), as part of the Basel III process. Source of strength All SLHCs are or will be required to serve as a source of strength for their subsidiary savings associations. Regulations implementing the doctrine are due in another year, on July 21, 2012. The FRB arguably has authority to enforce the doctrine now. Financial holding company activities—the well-capitalized and well-managed Requirements SLHCs engaged in activities permissible only for financial holding companies must be "well-capitalized" and "well-managed."4 The "well capitalized" requirement does not force SLHCs into the full capital framework for BHCs, however. Examination and supervision Each agency has its own philosophy and approach. In general, regulatory oversight is likely to be more intensive. Reporting requirements Largely over a two-year period, SLHCs will begin to be required to submit to the FRB many of the same reports as BHCs. These requirements may necessitate changes in what types of data SLHCs compile and how they compile it. Applications SLHCs are now required to file the same applications and follow the same procedures as BHCs. Mutual holding companies These companies now must follow new rules on application processing, dividend waivers, the submission of offering or proxy materials, and stock repurchases. Intermediate holding companies Grandfathered unitary thrift holding companies ("GUTHCs") may be required to form intermediate holding companies that will control all of the financial activities of the institution. The FRB is still analyzing how best to deal with these companies and has not yet issued a proposal. B. Savings associations

    The enactment of Dodd-Frank has or will result in several changes to the operations of savings associations. The Act amends federal banking law in several ways that affect banks and thrifts equally, but a few amendments are aimed specifically at savings associations. The transfer of the supervision of savings associations from OTS to the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") will mean other changes perhaps more important for routine operations than the specific provisions of Dodd-Frank. In particular, the two agencies have the supervisory authority to limit activities that are legally permissible for savings associations but not for banks.

    Commercial real estate lending Dodd-Frank does not amend the commercial real estate lending authority of a federal thrift, and this authority is broader than that available to national banks. The OCC historically has taken a stricter view of CRE lending than did OTS. Dodd-Frank and the OCC Interim Rule leave the broader authority for savings associations in place, but the OCC or the FDIC easily could impose institution-specific limits through its supervision function. Service corporations Under a provision of HOLA unchanged by Dodd-Frank or by the OCC, this type of subsidiary of a federal savings bank may engage in the broadest range of financial activities— residential real estate development and real estate brokerage among them—of any affiliate of an insured depository institution, including a holding company. This type of subsidiary is worth considering as a vehicle for new and broader business operations. Lending limits The Act extends the limits on loans to one borrower and to insiders to capture credit exposures arising from various transactions, including derivatives and repurchase agreements. Transactions with affiliates The Act also expands sections 23A and 23B to cover new arrangements or transactions with affiliates that create credit risk. For example, any fund for which a bank (or an affiliate) serves as an investment adviser is now deemed to be an affiliate of the bank for 23A and 23B purposes. The definition of a covered transaction is broadened to include derivatives and the borrowing and lending of securities. Repurchase agreements with affiliates are now subject to collateralization requirements. Insider transactions New limitations both on extensions of credit to insiders and on asset sales and purchases with insiders have now taken effect. QTL test Dodd-Frank imposes new sanctions for the failure by a savings association to comply with the qualified thrift lender test (the "QTL Test"). The principal change is that the one-year grace period to return to compliance is eliminated. These sanctions took effect the day after the enactment of Dodd-Frank. Preemption Dodd-Frank makes important changes to federal preemption in two key respects. First, the Act eliminates preemption for operating subsidiaries and agents on a going-forward basis. Second, four basic OTS preemption regulations, former sections 545.2, 550.136, 557.11, and 560.2 have been narrowed considerably. In addition, the Act has caused the OCC to revise its approach to preemption for national banks and, now, federal savings associations. Increased enforcement efforts by the states State attorneys general now have authority to enforce federal regulations against thrift (and other) financial institutions, in addition to the power to bring civil suits against federal savings associations. Examination and supervision Both the OCC and the FDIC have their own approaches to examinations. The impact on savings associations will vary by the particular association involved and is difficult to forecast. Reporting Beginning with the first quarter of 2012, savings associations will file the same call report as banks, and the thrift financial report will be eliminated. Applications Applications by savings associations and the processing of these applications historically has been largely the same as for banks. OCC has revised some of the filing requirements for federal savings associations. State-chartered savings associations should expect to follow the existing FDIC rules for state nonmember banks. Enforcement The OCC now has enforcement...

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