If financial reform legislation approved by the House Banking Committee becomes law, 1,084 federal thrifts would have to give up their charters within two years.
The bill would make converting to a national bank charter easy for thrifts and promises to protect their unique powers. However, converted thrifts would still be required to fund home loans and may be forced to forfeit their protected powers in a sale.
Although the legislation would permit national banks to do anything federal thrifts may do today, it's still unclear exactly what that would mean. For example, would thrifts be able to continue nationwide lending programs under the Office of Thrift Supervision's right to preempt state laws? And would that plum be handed to national banks?
The assessment of the legislation's impact began in earnest Wednesday as the House banking panel released the final draft of its bill. Next, House GOP leaders will set a time limit on the Commerce Committee's consideration. The latter panel is not expected to alter the provisions governing thrift charter conversions.
Supportive lawmakers insist the legislation does no harm.
"There's no reason for thrifts to complain," said Rep. Bill McCollum, R- Fla., who sponsored the charter conversion plan in the sweeping financial reform bill approved June 20 by the House Banking Committee. "We've done a lot to give them protection."
But thrift leaders are complaining.
"Most of the changes would cause an immediate writedown of an institution's capital value," said Robert R. Davis, director of government relations for America's Community Bankers.
Under the banking panel's bill, federal thrifts would be allowed to convert to national or state bank charters or to state-chartered thrifts.
The bulk of federal thrifts are expected to become national banks, and lawmakers have tried to make the switch easy.
For starters, thrifts would not be required to file applications with regulators or pay conversion fees. On the law's two-year anniversary, thrift executives would simply wake up with a new supervisor: the Office of the Comptroller of Currency.
To become a state institution, a thrift would have to follow conversion rules in the state where it is headquartered. The banking panel agreed to let institutions that convert to a state charter keep the word "federal" in their name, however.
Thrifts that want to convert to national banks before the two-year deadline could take advantage of an accelerated approval process. Under that option, a federal thrift would file a conversion notice with the Comptroller's Office stating when the switch would occur. No decision has been made on how much, if anything, an early conversion would cost.
Thrift holding companies would not need Federal Reserve Board approval to convert to bank holding companies when subsidiaries convert.
For three years after the bill's enactment, OTS holding company rules would apply even if the thrift subsidiary converted to a bank charter. That gives thrift owners some breathing room before the Fed's stricter supervision kicks in, said Brian P. Smith, ACB's director of policy and economic research. "The OTS really doesn't attempt to regulate holding companies."
(Two years after enactment, the OTS would be folded into the Comptroller's Office.)
Lawmakers agreed to "grandfather" existing thrift activities, which means thrifts may retain businesses not allowed under the national bank charter.
In addition, thrifts could continue to be affiliated with their commercial parents. Thrifts could keep branches and insurance sales offices that otherwise would be restricted by state laws.
However, the legislation would curb thrifts' ability to branch nationwide. For example, some states prevent banks from serving only a few big markets by requiring them to branch into adjoining counties when they expand. Such laws would apply to thrifts that convert.
Also, state laws requiring institutions to enter by acquisition, rather than starting from scratch, would for the first time apply to converted thrifts.
Though the banking panel voted to eliminate the thrift charter, lawmakers want these institutions to retain their focus on residential lending.
To qualify for grandfathered powers, converted institutions would still have to keep at least 60% of their loans in mortgages, credit cards, and student loans. Consumer loans would be capped at 35% of assets, while commercial loans would be limited to 20% of assets.
Converted thrifts would be forced to divest protected businesses if they grew by merger, unless the resulting institution continues to meet these lending criteria.
Converted institutions also would lose their special powers when sold to any buyer other than another grandfathered institution.