The rush by big insurance firms to charter thrifts is sparking howls of protest from state banking regulators.
The state officials fret that their supervisory powers will be usurped by federal regulators and that consumer complaints will mushroom.
Seven insurers are lined up for federal charters from the Office of Thrift Supervision, and the agency already has approved two applications. Many insurers see the charter as a way to compete more effectively in the trust business, and some want to expand more broadly in banking.
Several state regulators argue that the OTS is simply trying to burnish its own image and promote the versatility of the thrift charter.
"Efforts by OTS to justify its continued existence and relevance by dispensing special powers and advantages to federal thrifts have not been well-received," Timothy C. Winslow, general counsel of the West Virginia Banking Department, wrote in a recent letter to State Farm Automobile Insurance Co.
The Bloomington, Ill., firm is one of insurers with pending applications at the OTS. The agency, which declined to comment, recently approved applications from Travelers Group and Principal Mutual Insurance Co.
Interest in chartering thrifts has surged because financial modernization legislation pending in the House would eliminate the charter. Companies that own a single thrift at the time of enactment would be frozen in place under the bill.
"The thrift charter is just about the only way for an insurance company to get into banking," said Ronald Glancz, a partner with the Venable law firm here. In addition, thrifts are attractive because they can conduct nationwide lending programs under the OTS' explicit power to preempt state laws.
But the OTS' broad preemptive authority clearly is not sitting well with state banking regulators.
Mr. Winslow, who also sent a copy of the Nov. 24 letter to the thrift agency, argued that the OTS does not have the authority to preempt a West Virginia statute mandating that only bank or thrift employees-not insurance agents-may offer banking products in the state.
In its June 30 application, State Farm said it would not open thrift branches. Instead, products would be sold through the insurer's network of 17,000 agents in the United States and Canada.
"Your proposal to conduct an out-of-state banking business through State Farm's insurance agency offices here is both contrary to West Virginia state law, and I believe beyond the OTS' lawful authority to permit under state law," he said.
Other state banking regulators said that consumers with complaints about insurance agents who sold them banking products will get short shrift.
"We'll have absolutely no power to protect the consumer other than blowing the whistle and making a lot of noise," Illinois Banking Commissioner Jack Schaffer said. "Our experience has been that Washington generally doesn't pay much heed when we refer customer complaints up the chain to them."
Mr. Winslow's letter was a response to one he received from State Farm lawyer John W. Ashenfelter. Mr. Ashenfelter said that State Farm's plans were allowed under West Virginia statute.
"Based upon our review of the West Virginia code ... State Farm's employee agents and independent agents may offer the savings bank's deposit and loan products in West Virginia," he said in the Oct. 28 letter. Reached by phone Friday, Mr. Ashenfelter declined to comment.
Arizona Superintendent of Banks Richard C. Houseworth received a similar letter from State Farm. He said his legal staff is checking to see if the insurer's plans would break any laws in the state.
Regardless of what his lawyers decide, Mr. Houseworth said that disputing the OTS' authority may be futile.
"I suspect that with an OTS charter, they can probably do anything they want, anytime they want, in anyplace they want," Mr. Houseworth said.
