[Federal Register Volume 62, Number 96 (Monday, May 19, 1997)]
[Rules and Regulations]
[Pages 27177-27181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12956]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 543, 552, and 571
[No. 97-48]
RIN 1550-AA76
De Novo Applications for a Federal Savings Association Charter
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of Thrift Supervision (OTS) is issuing its final
regulation describing the requirements for de novo applications for
federal savings association charters. The term ``de novo application''
generally refers to any application to establish a new federal savings
association, rather than applications from existing institutions that
merely wish to convert to federal savings association charters. This
final rule converts the agency's existing policy statement on de novo
applications into a regulation, conforms the regulation to current law,
and simplifies the regulatory requirements for establishing a de novo
federal association, thereby reducing compliance costs.
EFFECTIVE DATE: July 1, 1997.
FOR FURTHER INFORMATION CONTACT: Gary Masters, Financial Analyst,
Corporate Activities Division (202) 906-6729; Edward O'Connell, Project
Manager, Thrift Policy (202) 906-5694; Kevin Corcoran, Assistant Chief
Counsel, Business Transactions Division, Chief Counsel's Office (202)
906-6962; or Valerie J. Lithotomos, Counsel (Banking and Finance),
Regulations and Legislation Division, Chief Counsel's Office, (202)
906-6439, Office of Thrift Supervision, 1700 G Street, NW., Washington,
D.C. 20552.
SUPPLEMENTARY INFORMATION:
I. Background
The OTS is issuing a new regulation to revise and update its
treatment of de novo applications for federal savings association
charters.
The Federal Home Loan Bank Board (FHLBB), the OTS's predecessor
agency, originally promulgated a policy statement (policy statement),
which currently appears at 12 CFR 571.6, to explain its policies
relating to the approval of applications for de novo federal
associations. When the policy statement was issued, the FHLBB was the
operating head of the Federal Savings and Loan Insurance Corporation,
the insurance fund for thrifts. At that time, de novo applications
included not only applications for permission to organize and requests
for a federal charter, but also applications for insurance of accounts.
Subsequently enacted statutes, including the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 1 (FIRREA) and
the Federal Deposit Insurance Corporation Improvement Act of 1991
2 (FDICIA), made significant changes in the federal
regulatory structure for savings associations. Under FIRREA, the OTS
succeeded to the chartering and supervisory functions of the FHLBB, but
the insurance function was transferred to the Federal Deposit Insurance
Corporation (FDIC). FIRREA and FDICIA also revised much of the law
applicable to the de novo approval process. 3 Accordingly,
the OTS determined that revisions were needed to update and streamline
the de novo application requirements.
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\1\ Pub. L. 101-73, 103 Stat. 183 (1989).
\2\ Pub. L. 102-242, 105 Stat. 2236 (1991).
\3\ The preamble to the proposed rule included a detailed
discussion of the statutory requirements regarding de novo
applications. See 60 FR 12103 (March 6, 1995).
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Accordingly, on March 6, 1995, the OTS published in the Federal
Register a notice of proposed rulemaking
[[Page 27178]]
revising these application requirements.4 The OTS proposed
to codify the policy statement as a regulation, remove obsolete and
duplicative provisions, revise minimum capitalization and business plan
requirements, and update requirements on management officials.
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\4\ Id.
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The public comment period closed on May 5, 1995. The OTS did not
receive any comments on the proposal. Accordingly, the final rule
adopted today is substantially similar to the proposal, except for
certain changes intended to further reduce regulatory burden and to
enhance the clarity of the regulation. These changes are fully
described below.
II. Description of the Final Rule
A. Recodification
The requirements governing de novo applications for federal savings
association charters have been moved from Part 571 (Statements of
Policy) to Part 543 (Incorporation, Organization, and Conversion of
Federal Mutual Associations). In addition, the OTS has incorporated
these requirements into Part 552 (Incorporation, Organization, and
Conversion of Federal Stock Associations) by including cross-references
to Part 543. This recodification will make the de novo requirements
easier to locate, since the requirements will be grouped with other
corporate governance regulations, rather than with policies affecting
all savings associations. Recodifying these provisions as regulations
also makes the de novo provisions regulatory requirements.
B. Scope
A bank or other depository institution that converts to a thrift
charter generally is not a de novo federal association, as that term is
defined under the current OTS policy statement or the new regulation.
Rather, a de novo association is a federal savings association
chartered by the OTS, the business of which has not been conducted
previously under any charter nor conducted in the previous three years
in substantially the same form as is proposed by the de novo federal
association.
C. Obsolete Statutory References and Certain Duplicative Factors
Today's final rule adopts without change the proposed deletions of
certain obsolete statutory references and other duplicative provisions.
The final rule deletes requirements contained in paragraph (b)(1) of
Sec. 571.6, which implemented former section 5(a)(2) of the FDIA and
required the OTS to certify to the FDIC that it has considered the
factors listed under section 6 of the FDIA.5 FDICIA
eliminated this certification requirement from the FDIA. These pre-
FDICIA certification requirements are also contained in current
Secs. 543.2(g)(2) and 552.2-1(b)(2), which address the organization of
federal mutual and federal stock institutions, respectively. These
provisions have also been deleted. Of course, the FDIC will continue to
consider the factors listed in section 6 of the FDIA when evaluating an
application for deposit insurance.
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\5\ 12 U.S.C.A. 1816 (West 1989).
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Today's final rule also deletes requirements contained in
Sec. 571.6(b)(2), regarding certain factors considered in evaluating
applications to organize a federal savings association. These factors
duplicate requirements currently contained in Secs. 543.2(g)(1) and
552.2-1(b)(1).
D. Minimum Initial Capitalization Requirement
The final rule also adopts the proposed provisions governing the
minimum initial capitalization requirement for de novo federal
associations. It is important to distinguish between the minimum
initial capitalization requirement, which applies only to de novo
federal associations at the time they commence operations, and the
standard regulatory capital requirements, which apply to all savings
associations on a continuous basis.6 De novo federal
associations must meet both requirements.
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\6\ 12 CFR part 567.
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Under the standard regulatory capital requirements, savings
associations must maintain prescribed minimum levels of capital
measured as a percentage of assets. By contrast, the minimum initial
capitalization requirement for de novo federal associations is a
specified amount. The purpose of the minimum initial capitalization
requirement is to ensure that a de novo federal association has a
sufficient amount of capital to launch its business successfully,
support reasonable initial growth, and provide an adequate buffer
against losses to the deposit insurance fund. The need for a
substantial initial capitalization is accentuated by the fact that de
novo federal associations have no operating or supervisory history.
It is difficult to pinpoint objectively the precise amount of
start-up capital necessary to ensure that a de novo federal association
will be able to operate safely and soundly. However, the OTS has
concluded that the $3 million initial capital requirement in the policy
statement has been too high and may unnecessarily discourage community
groups and local investors from seeking to establish new savings
associations. The FDIC customarily requires a minimum of only $2
million in start-up capital for new institutions applying for federal
deposit insurance. 7 The OTS believes that this is an
effective and workable standard for the FDIC. Accordingly, the final
rule adopts the minimum initial capitalization requirement contained in
the proposed rule, which reduces the minimum initial capital
requirement for de novo federal associations from $3 million to $2
million. The OTS also has retained the authority, at new
Sec. 543.3(b)(2), to impose a higher or lower capital requirement on a
case-by-case basis.
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\7\ See FDIC Policy Statement, 57 FR 12822 (April 13, 1992).
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E. Business Plan Requirements
Because de novo federal associations have no operating or
supervisory history, the OTS believes that a thorough business plan is
essential to ensuring that a de novo federal association will be
operated in a safe and sound manner. In the proposed rule, the OTS
proposed to revise existing business plan requirements to consolidate
certain provisions, to update the requirements, and to delete obsolete
statutory references. The required elements of the business plan were
clarified, including descriptions of lending, leasing and investment
activity, plans for meeting the qualified thrift lender (QTL)
requirements, deposit, savings and borrowing activity, compliance with
the Community Reinvestment Act, continuation or succession of competent
management, and information on the proposed institution's ability to
maintain required minimum regulatory capital levels. The final rule
adopts the proposed provisions on business plans without substantive
change, except to delete obsolete cross references to the QTL
regulations formerly located at Sec. 563.50 and to state expressly that
the business plan must include any additional information required by
the OTS.
F. Composition of the Board of Directors
Proposed Sec. 543.3(d) included various requirements governing the
composition of the de novo federal association's board of directors.
These provisions require that the board of directors must be
representative of the state in which the savings association is
located. In addition, the board of directors must be diversified, and
must be composed of
[[Page 27179]]
individuals meeting specified requirements relating to their
experience, personal integrity, and competence. Where a de novo federal
association is owned by a holding company that does not have
substantial independent economic substance, these additional
requirements also apply to the holding company's board of directors.
The final rule adopts the proposed requirements without change.
G. Policies Pertaining to Management Officials
1. Capital Maintenance Agreements
The OTS proposed to delete existing provisions in Sec. 571.6
governing capital maintenance agreements and pledges of stock. Section
571.6(d)(4) required controlling shareholders to agree to maintain a de
novo federal association's required regulatory capital level under Part
567 for a minimum of five years. Controlling shareholders were also
prohibited from pledging more than 50% of their stock to secure
borrowed funds to finance their stock purchase for a period of three
years.8
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\8\ See 12 CFR 571.6(d)(3)(iii) (1996).
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The final rule adopts the proposed revisions deleting these
requirements. The OTS has not required controlling shareholders
applying to charter a de novo federal association to execute capital
maintenance agreements since 1991. The OTS has recognized that
sufficient statutory and regulatory protections now exist to ensure
that savings associations maintain adequate capital and to enable the
OTS to address capital deficiencies promptly and
thoroughly.9 The restriction on controlling shareholders who
pledge their stock is deleted because the restriction is unnecessary
and may be unduly burdensome to organizers of a de novo federal
association.
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\9\ Under the Prompt Corrective Action provisions of section 38
of FDICIA (12 U.S.C.A. 1831o(e)(2)(C) (West Supp. 1996)) and
implementing regulations (12 CFR 565.5), the OTS may not approve a
capital restoration plan for any ``undercapitalized'' institution
unless each company that controls the institution: (1) guarantees
that the institution will comply with the plan until the institution
has been adequately capitalized for four consecutive quarters; and
(2) provides appropriate assurances of performance of the plan.
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2. Conflicts of Interest and Usurpation of Corporate Opportunity
Today's rule also adopts the proposal to delete provisions
requiring the organizers of a de novo federal association to file a
plan identifying areas where conflicts of interest and abuse of
corporate opportunity may occur, and describing specific policies and
actions that the association will institute to avoid that abuse. The
OTS has made clear that directors, officers, and other persons having
the power to direct the management of a savings association stand in a
fiduciary relationship to the association and its accountholders or
shareholders. This fiduciary relationship requires them to avoid
conflicts of interest and self-dealing. The OTS regulations on
conflicts of interest and corporate opportunity provide guidance on
these issues.10 Conflicts of interest and usurpation of
corporate opportunity also are addressed by the statutory and
regulatory provisions governing transactions between savings
associations and their affiliates and insiders.11
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\10\ See 12 CFR 563.200 and 563.201.
\11\ See 12 U.S.C.A. 371c, 371c-1, 375 and 375b (West 1989 and
Supp. 1996) and 12 CFR 563.41, 563.42 and 563.43. See also 12
U.S.C.A. 1468 (West Supp. 1996).
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The OTS continues to believe that the statutory and regulatory
structure governing these areas is sufficiently detailed. Accordingly,
the final rule does not require organizers of de novo federal
associations to file plans for avoidance of conflicts of interest and
usurpations of corporate opportunity. Of course, if organizers submit a
business plan that raises concerns about conflicts of interests or
usurpations of corporate opportunity, the OTS will address such
concerns before acting on the application.
3. Standard Approval Conditions
The OTS proposed to incorporate standard approval conditions for de
novo federal associations into the regulation. The final rule, however,
omits these conditions. The OTS recognizes that, in some instances, it
may be appropriate to omit or modify one or more standard conditions.
Accordingly, this change was made so as to preserve regulatory
flexibility and to prevent the imposition of unnecessary regulatory
burdens.
To ensure that the public is aware of the conditions that the OTS
typically imposes in approving de novo applications, these conditions
will be published in the OTS Application Processing Handbook
(Handbook). The OTS anticipates that its Handbook guidance regarding
standard conditions will reflect the conditions suggested in the
proposed rule.
4. Oath of Director for Savings Associations
Existing Sec. 571.6(d)(2) required each new director of a de novo
federal association to sign an Oath of Director for Savings
Associations, and submit the original to the Regional Director. The OTS
believes that this requirement is more appropriate as guidance in the
Handbook. Moreover, the OTS is studying the retention of this
requirement in light of the practices of the other federal banking
agencies.
III. Executive Order 12866
The Director of the OTS has determined that this final rule does
not constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
IV. Paperwork Reduction Act
The reporting requirements contained in this final rule have been
submitted to and approved by the Office of Management and Budget under
OMB Control No. 1550-0005, in accordance with the Paperwork Reduction
Act of 1980 (44 U.S.C. 3504(h)). Comments on the collection of
information should be sent to the Office of Management and Budget,
Paperwork Reduction Project (1550), Washington, D.C. 20503, with copies
to the Office of Thrift Supervision, 1700 G Street, NW., Washington,
D.C. 20552.
Respondents are not required to respond to this collection of
information unless it displays a currently valid OMB control number.
The reporting requirements in this final rule are found in 12 CFR
543.3. The information is needed by the OTS to determine whether
applicants will operate a federal savings association in a safe and
sound manner and to reduce the risk of loss to newly-chartered
institutions and the Savings Association Insurance Fund.
V. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OTS certifies that this final rule will not have a significant economic
impact on a substantial number of small entities. The final rule does
not impose additional burdens or requirements upon a small entity that
files an application to become a de novo institution. To the contrary,
the final rule reduces burden for all de novo federal associations,
including those that may be small businesses.
VI. Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, 104 Pub.
L. 104-4 (signed into law on March 22, 1995) requires that an agency
prepare a budgetary impact statement before promulgating a rule that
includes a federal mandate that may result in expenditure by State,
local, and tribal governments, in the aggregate, or by the
[[Page 27180]]
private sector, of $100 million or more in one year. If the budgetary
impact statement is required, section 205 of the Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this final rule is limited in application to de novo applications for a
federal savings association charter. The OTS has therefore determined
that the final rule will not result in expenditure by State, local, or
tribal governments or by the private sector of more than $100 million.
Accordingly, the Unfunded Mandates Reform Act does not apply to this
rulemaking.
List of Subjects
12 CFR Part 543
Reporting and recordkeeping requirements, Savings associations.
12 CFR Part 552
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 571
Accounting, Conflict of interests, Investments, Reporting and
recordkeeping requirements, Savings associations.
Accordingly, the Director, Office of Thrift Supervision, hereby
amends Parts 543, 552, and 571, chapter V, title 12 of the Code of
Federal Regulations, as set forth below:
PART 543--INCORPORATION, ORGANIZATION, AND CONVERSION OF FEDERAL
MUTUAL ASSOCIATIONS
1. The authority citation for part 543 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901 et
seq.
2. Section 543.2 is amended by removing ``and'' at the end of
paragraph (g)(1)(iv), by removing the period at the end of paragraph
(g)(1)(v) and adding ``; and'' in its place, by adding paragraph
(g)(1)(vi), by removing paragraph (g)(2) and by redesignating paragraph
(g)(3) as paragraph (g)(2), to read as follows:
Sec. 543.2 Application for permission to organize.
* * * * *
(g) Approval. (1) * * *
(vi) Whether the factors set forth in Sec. 543.3 are met, in the
case of an application that would result in the formation of a de novo
association, as defined in Sec. 543.3(a).
* * * * *
3. Section 543.3 is added to read as follows:
Sec. 543.3 ``De novo'' applications for a Federal savings association
charter.
(a) Definitions. For purposes of this section, the term ``de novo
association'' means any Federal savings association chartered by the
Office, the business of which has not been conducted previously under
any charter or conducted in the previous three years in substantially
the same form as is proposed by the de novo association. A ``de novo
applicant'' means any person or persons who apply to establish a de
novo association.
(b) Minimum initial capitalization. (1) A de novo association must
have at least two million dollars in initial capital stock (stock
institutions) or initial pledged savings or cash (mutual institutions),
except as provided in paragraph (b)(2) of this section. The minimum
initial capitalization is the amount of proceeds net of all incurred
and anticipated securities issuance expenses, organization expenses,
pre-opening expenses, or any expenses paid (or funds advanced) by
organizers that are to be reimbursed from the proceeds of a securities
offering. In securities offerings for a de novo association, all
securities of a particular class in the initial offering shall be sold
at the same price.
(2) On a case by case basis, the Director may, for good cause,
approve a de novo association that has less than two million dollars in
initial capital or may require a de novo association to have more than
two million dollars in initial capital.
(c) Business and investment plans of de novo associations. (1) To
assist the Office in making the determinations required under section
5(e) of the Home Owners' Loan Act, a de novo applicant shall submit a
business plan describing, for the first three years of operation of the
de novo association, the major areas of operation, including:
(i) Lending, leasing and investment activity, including plans for
meeting Qualified Thrift Lender requirements;
(ii) Deposit, savings and borrowing activity;
(iii) Interest-rate risk management;
(iv) Internal controls and procedures;
(v) A Community Reinvestment Act statement, pursuant to 12 CFR part
563e, and plans for meeting the credit needs of the proposed de novo
association's community (including low- and moderate-income
neighborhoods);
(vi) Projected statements of condition;
(vii) Projected statements of operations; and
(viii) Any other information requested by the Office.
(2) The business plan shall:
(i) Provide for the continuation or succession of competent
management subject to the approval of the Regional Director;
(ii) Provide that any material change in, or deviation from, the
business plan must receive the prior approval of the Regional Director;
(iii) Demonstrate the de novo association's ability to maintain
required minimum regulatory capital under 12 CFR parts 565 and 567 for
the duration of the plan.
(d) Composition of the board of directors. (1) A majority of a de
novo association's board of directors must be representative of the
state in which the savings association is located. The Office generally
will consider a director to be representative of the state if the
director resides, works or maintains a place of business in the state
in which the savings association is located. If the association is
located in a Metropolitan Statistical Area (MSA), Primary Metropolitan
Statistical Area (PMSA) or Consolidated Metropolitan Statistical Area
(CMSA) that incorporates portions of more than one state, a director
will be considered representative of the association's state if he or
she resides, works or maintains a place of business in the MSA, PMSA or
CMSA in which the association is located.
(2) The de novo association's board of directors must be
diversified and composed of individuals with varied business and
professional experience. In addition, except in the case of a de novo
association that is wholly-owned by a holding company, no more than
one-third of a board of directors may be in closely related businesses.
The background of each director must reflect a history of
responsibility and personal integrity, and must show a level of
competence and experience sufficient to demonstrate that such
individual has the ability to direct the policies of the association in
a safe and sound manner. Where a de novo association is owned by a
holding company that does not have substantial independent economic
substance, the foregoing standards will be applied to the board of
directors of the holding company.
(e) Management Officials. Proposed stockholders of ten percent or
more of the stock of a de novo association will be considered
management officials of the association for the purpose of the Office's
evaluation of the character and qualifications of the management of the
association. In connection with the Office's consideration of an
application for permission to organize and subsequent to issuance of a
Federal savings association charter to the association by the Office,
any individual
[[Page 27181]]
or group of individuals acting in concert under 12 CFR part 574, who
owns or proposes to acquire, directly or indirectly, ten percent or
more of the stock of an association subject to this section, shall
submit a Biographical and Financial Report, on forms prescribed by the
Office, to the Regional Director.
(f) Supervisory transactions. This section does not apply to any
application for a Federal savings association charter submitted in
connection with a transfer or an acquisition of the business or
accounts of a savings association if the Office determines that such
transfer or acquisition is instituted for supervisory purposes, or in
connection with applications for Federal charters for interim de novo
associations chartered for the purpose of facilitating mergers, holding
company reorganizations, or similar transactions.
PART 552--INCORPORATION, ORGANIZATION, AND CONVERSION OF FEDERAL
STOCK ASSOCIATIONS
4. The authority citation for part 552 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a.
Sec. 552.2-1 [Amended]
5. Section 552.2-1 is amended by adding the phrase ``and
Sec. 543.3'' after the phrase ``of 543.2'' in paragraph (a), and by
removing and reserving paragraph (b)(2).
PART 571--STATEMENTS OF POLICY
6. The authority citation for part 571 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.
Sec. 571.6 [Removed]
7. Section 571.6 is removed.
Dated: May 13, 1997.
By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 97-12956 Filed 5-16-97; 8:45 am]
BILLING CODE 6720-01-P
