OTS Curbs Use of Lawyers, Contractors by Sick S&Ls

WASHINGTON - The Office of Thrift Supervision has issued a rule barring troubled thrifts from using attorneys, accountants and other outside contractors without its approval.

The policy, aimed at preventing sick institutions from squandering their funds on needless or overpriced projects, has angered some attorneys, who view it as an inappropriate encroachment into business decisions by a government agency.

|Early Intervention by Fiat'

The policy does not affect what the regulator calls "contracts in the normal course of business," such as annual audits or routine legal advice. But ultimately, the regulator will draw the line for troubled thrifts.

"It is early intervention by fiat," said Gilbert Schwartz, partner with Skadden, Arps, Slate, Meagher & Flom in Washington. "It seems to be a step toward the nationalization of the institutions that are arguably in trouble."

Charles J. Cooper, a partner with Shaw Pittman Potts & Trowbridge, also in Washington, said on its face the guideline enable the regulator to deny a thrift its choice of an attorney if it wants to sue the agency.

Affected Institutions

The directive, issued last week as Thrift Bulletin 50 and signed by Jonathan L. Fiechter, deputy director of the agency, applied restrictions on "third party contracts" to thrifts that score one of the two lowest grades - 4 or 5 - on the regulator's Macro scale.

The Macro rating is based on an assessment of management, asset quality, capital adequacy, risk management, and operating results.

The most troubled thrifts' contracts with lawyers, accountants, or consultants "require justification and approval" by the savings institution's board, and then must be reviewed by the regulator's regional director, who will make a case-by-case judgment on whether the function is needed.

Areas Covered by Rule

While the agency's bulletin would not restrict contracts for annual audits, debt collections, or routine legal services, it would apply to services associated with proposed mergers, capital raising efforts, major asset sales, internal investigations by a thrift's board, and defenses against regulatory rulings.

The more troubled an institution becomes, the more "important it is for us to know what the institution is doing with its money, because you are much closer to the taxpayers at that point," said an attorney with the agency who requested anonymity.

According to the published bulletin, excessive contract costs "may ultimately increase the cost of [an institution's] failure to the deposit insurance fund."

Criteria for Approval

The agency set several guidelines for how it will judge proposed contracts:

* Contracts must be for services that are "clearly identified and relate to the savings association's approved business or capital plan."

* Fees and payment terms must be shown to be "within prevailing market norms and consistent with the interests of the insurance fund."

* Only "necessary costs directly related to the service provided" can be reimbursed. Entertainment and unnecessary travel "are not considered reasonable."

* Each contract must have a provision stating that it can be canceled for "non-or unsatisfactory performance."

Mr. Cooper of Shaw Pittman charged that, "Thrift Bulletin 50 is in perfect consonance with the OTS' flagrant and utter disregard for the most basic aspects of constitutional due process."

The agency's attorney disagreed, saying the agency's intent is to control costs.

"It really has nothing to do with who are the attorneys and what do we think of them," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.