De Novo Applications for a Federal Savings Association Charter

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

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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