The Dodd-Frank Wall Street Reform and Consumer Protection Act ("DFA")1 is having a significant impact throughout the financial services industry, but its effects are particularly acute for the U.S. thrift industry. In particular, significant changes in the regulation of thrifts and their holding companies pose unique considerations with respect to how the law affects their future business operations. In light of these changes, the most important question for thrifts and their parent holding companies ("SLHCs") is whether it makes business sense to continue to operate as a thrift in light of the few remaining advantages – and mounting disadvantages – of the thrift charter relative to a commercial bank charter. This article examines the business and legal considerations applicable to thrifts and SLHCs, as well as issues regarding the longer-term viability and retention of the thrift charter.
DFA Impact on the Thrift Charter
The federal thrift charter was created in 1933 pursuant to the Home Owners' Loan Act ("HOLA")2 primarily to provide for the channeling of depositor funds to the provision of credit for residential mortgage loans.3 Until recently, the thrift industry typically accounted for between 20-25% of annual U.S. mortgage loan originations, and in some years closer to one-third of all mortgage loans originated in the U.S. This residential lending focus and mandate of the thrift charter has long served as the basis for the differences between federal thrifts and national banks. Historically, there were a number of statutory advantages of the thrift charter that served to support the charter's primary residential lending focus. Over the years, however, these unique advantages have been eliminated and differences between federal thrifts and national banks have slowly eroded through regulation and legislation, culminating most recently in the DFA.
Prior to the DFA, the key remaining advantages of the federal thrift charter included: (1) consolidated supervision by the Office of Thrift Supervision ("OTS") of both a thrift and its parent SLHC; (2) broad interstate branching authority; (3) "field preemption" under OTS regulations for thrift lending and deposit-taking activities; and (4) the absence of uniform regulatory holding company capital and "source of strength" requirements. The "trade-offs" for these benefits included statutory commercial lending limits and restrictions under the so-called qualified thrift lender, or "QTL," test.
Pursuant to the DFA, however, most of the remaining benefits of the thrift charter have been eliminated, calling into question the continued viability of the charter and, particularly, the federal thrift charter. The key areas impacted by the DFA include:
Elimination of the OTS and Consolidated Supervision. The DFA abolishes the OTS and transfers regulatory jurisdiction of approximately 670 federal thrifts and 60 state-chartered thrifts, and their parent SLHCs, to the other Federal Banking Agencies ("FBAs") – the Office of the Comptroller of the Currency ("OCC"), the Federal Reserve Board ("FRB"), and the Federal Deposit Insurance Corporation ("FDIC"). Under the law, effective July 21, 2011,4 except for consumer protection functions,5 OTS supervision and rulemaking functions relating to federal thrifts will transfer to the OCC, supervision and rulemaking functions relating to SLHCs will transfer to the FRB, and supervision of state-chartered thrifts will transfer to the FDIC. Although the transfer date is more than five months away, thrifts and SLHCs are already experiencing changes in the way they are supervised and examined. In particular, examiners from each of the successor agencies are coordinating with OTS examination and supervisory staff, as well as participating with OTS examiners in thrift and SLHC examinations. The FBAs' recently issued Joint Implementation Plan ("JIP") provides a specific roadmap for merging the OTS out of existence and transferring its regulatory oversight of thrifts and SLHCs to the other FBAs. Based on the JIP and subsequent interagency proposals on February 3, 2011, it is evident that the transition of supervisory functions from the OTS to the OCC, FDIC, and FRB is altering oversight of thrift and SLHC operations to more closely align with the supervisory policies and procedures of the applicable successor agencies. Branching. Historically, federal thrifts have been able to branch nationwide without geographic restrictions. Prior to enactment of the DFA, a national or state-chartered commercial bank generally could open a de novo branch in another state only if the particular state expressly permitted out-of-state banks to establish a de novo branch in that state. However, the DFA removed the state "opt-in" requirement for national banks and state chartered banks, thereby providing banks with de novo branching powers. Thus, commercial banks are now on an equal footing with federal thrifts with respect to branching. Federal Preemption. Historically, federal thrifts have enjoyed broad federal preemption authority based on OTS regulations asserting "field preemption" over any state law that purports to regulate any aspect of a federal thrift's lending or deposit-taking activities.6 The DFA, however, eliminates federal thrift preemption as a separate doctrine, and instead pegs the preemption standards applicable to federal thrifts to the same standards applicable to national banks.7 Further, this new standard, which becomes effective July 21, 2011, specifies that federal preemption authority will be available only to national banks and federal thrifts, not their respective operating subsidiaries or affiliates. Thus, operating subsidiaries of both national banks and federal thrifts will no longer have the benefit of federal preemption protections.8 Holding Company Requirements. One of the most significant changes affecting the thrift charter is that the DFA now subjects SLHCs to the same capital and activity requirements as those applicable to bank holding companies ("BHCs"). Historically, SLHCs were not subject to formalized capital requirements or a formal "source of strength" requirement that a SLHC provide financial support to a subsidiary thrift in the event the thrift experiences financial distress. In contrast, holding company capital requirements and the "source of strength" doctrine are key attributes for a BHC under the Bank Holding Company Act of 1956 ("BHCA") and the FRB's implementing regulations. While the OTS has taken the view that SLHCs should support their thrift subsidiaries, the DFA codifies for SLHCs the FRB's long-standing "source of strength" doctrine.9 With respect to formal capital requirements, however, the DFA provides for a five-year phase-in period for SLHCs in regard to new minimum leverage capital and risk-based capital requirements.10 The DFA also imposes the same financial activities restrictions on SLHCs as are applicable to BHCs that qualify as financial holding companies ("FHCs") under the BHCA. In this regard, the DFA requires that SLHCs as well as their...