New Pressure to Abolish Thrifts’ Qualified Lender Test

Mortgage & Real Estate









Every so often, market forces and political interests align enough to juice up an old policy debate.

That seems to be the case with the Qualified Thrift Lender test, which has restricted the types of loans that thrifts can make since the height of the savings and loan crisis.

Many thrifts, especially mutual thrifts, have chafed at the 1989 federal law, saying it needlessly limits their expansion into more-lucrative commercial lending. The drumbeat has intensified given the strength of the business-lending market, weakness in mortgages and higher regulatory costs.

Such changes are hard to get through Congress, but the thrifts have a surprising new ally in Comptroller of the Currency Thomas Curry.

The OCC has seen a steady wave of thrift departures since July 2011, when it took over regulation from the dissolved Office of Thrift Supervision. The number of federal thrifts has declined by nearly 30% in the past three years, from 647 in June 2011 to 466 as of June this year.

Mergers and failures accounted for some of the 181 defections, but 80 of them were conversions to state charters.

Curry recently proposed abolishing the QTL test, which many interpret as a way to stem the loss of charters under his jurisdiction.

“Curry is trying to address some of these charter flips,” said Kip Weissman, an attorney at Luse Gorman who advises banks and thrifts on conversions. “The OCC doesn’t want to keep losing federal charters to state charters.”

There should continue to be both thrift charters and bank charters, Curry said at a July 24 forum. But the thrift charter should be made more flexible by removing the QTL test, he said.

“The laws and regulations that govern federal thrifts make it difficult for you to adapt your business strategies to changing economic and business environments,” Curry said, according to a transcript of his remarks. Federal thrifts “are hamstrung by the QTL test.”

An OCC spokesman declined to comment further for this story.

The QTL test requires thrifts to maintain at least 65% of total assets in “qualified thrift investments,” which are primarily designated as 1-to-4 single family residential mortgages.

Federally chartered thrifts also may not hold more than 20% of their assets in secured consumer credit. The law forces them to hold the bulk of their assets in residential mortgage loans.

Many agree that it’s time for the QTL test to go.

“It’s antiquated,” said Donald Musso, president and chief executive of FinPro, a bank consulting firm. “I don’t see any need to break out residential lenders into their own charter type.”

Several thrifts that recently defected from the federal charter cited the QTL as a primary driver of the move. The $6.3 billion-asset Berkshire Hills Bancorp, in Pittsfield, Mass., converted to a state charter in July.

“It does give us greater flexibility with respect to the future of commercial lending since the bank will no longer be required to comply with the Qualified Thrift Lender test,” Michael Daly, Berkshire’s president and CEO, said during a July 24 conference call.

When Fox Chase Bancorp, a $1.1 billion-asset company in Hatboro, Pa., received regulatory approval in October for its conversion to a state charter, CEO Thomas Petro said in a news release that the move “will allow us to continue the strong growth of our commercial lending business.”

Other federal thrifts that recently converted to state charters include the $1.6 billion-asset Territorial Savings Bank in Honolulu, and the $1.8 billion-asset Yakima Federal Savings and Loan Association in Yakima, Wash.

But abolishing the QTL test may not go far enough to slow the rate of conversions. Lake Federal Bank, a $68 million-asset mutual thrift in Hammond, Ind., has applied to convert its federal charter to a state charter. But the move was not driven by QTL lending restrictions, said Gerald Skrabala, Lake Federal’s president.

“We felt that maybe, after talking with the [Indiana Department of Financial Institutions], they would understand more about the needs of thrifts than the OCC,” Skrabala said.

Lake Federal’s members will vote on Tuesday on the conversion plan, Skrabala said.

The $1.4 billion-asset Savings Institute Bank Trust Co., in Willimantic, Conn., was bumping up against its QTL-test lending limits a year ago, said Rheo Brouillard, president and CEO. But after its acquisition of Newport Bancorp, which was heavily engaged in mortgage lending, it diversified its lending portfolio away from residential mortgages and it’s no longer in danger of a QTL violation, Brouillard said.

Savings Institute recently asked for approval to convert its federal charter to a state charter, citing general regulatory concerns and the sensitivity of state regulators to its needs. But, curiously, the thrift would still be subject to the QTL test, because it’s retaining its savings-and-loan holding company. That means Savings Institute could once again be restricted in its lending by the QTL test, Brouillard said.

The Newport acquisition “brought us back in line and gave us quite a bit of latitude away from the risk of falling outside of QTL,” he said. “If we end up getting back to a point where we might violate the QTL, then we might change [our] holding company charter.”

Mutuals have also long had issues with the restrictions of the QTL. A bill was introduced last year to create a new federal thrift charter that would allow mutuals to make more commercial loans. The bill has since been withdrawn and no legislation is currently pending, said Bob Davis, executive vice president at the American Bankers Association.

Instead of abolishing the QTL, mutuals would have preferred that Curry had simply endorsed the creation of a new commercial thrift charter, said Doug Faucette, an attorney at Locke Lord who advises mutuals. It is a tall order to eliminate the QTL test, since it would require an act of Congress, Faucette said.

“When [Curry] says we’re going to abolish the QTL test, I don’t see what that really accomplishes,” Faucette said. “If it was doable, it would be fine and dandy. But it’s not doable.”

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