U.S. Moves to Close a Thrift Loophole

Federal thrift regulators are moving to restrict the conversion of savings and loans into state-chartered savings banks that enjoy federal deposit insurance without being subject to the scrutiny of federal regulation.

A legal opinion released Wednesday by the Office of Thrift Supervision gives the agency a basis on which to restrict the number of savings and loans that convert to state savings banks, agency spokesman Paul Lockwood said.

The opinion, written by OTS Chief Counsel Harris Weinstein, concludes that the agency can deny an application to convert if a thrift fails to show that it is not merely trying to evade federal regulation by asking to become a savings bank.

Meanwhile, Senate Banking Committee Chairman Don Riegle (D-Mich.) and the panel’s ranking Republican, Jake Garn of Utah, introduced a bill Tuesday that would close the loophole that allows thrifts to escape federal regulation by converting to state savings banks.

Lockwood said the OTS supports the legislation.

By becoming state savings banks, thrifts can evade the restrictions of last year’s thrift cleanup law, the Financial Institutions Reform, Recovery and Enforcement Act.

That law was meant to stop abuses in the thrift industry that led to a massive government bailout expected to total $500 billion with interest charges.

But if converted, the institutions would still be insured by the federal government.

Federal restrictions include bans on junk bond holdings and certain equity investments, restrictions on certain real estate loans and limits on loans to any one borrower.

So far this year, the OTS said it has approved 23 thrift conversions to savings banks, including four that plan to remain savings banks. Another 33 conversion applications are pending, including 11 that plan to remain savings banks.