Supervisory Guidance for Examining Compliance with the Qualified Thrift Lender Test
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551
SUPERVISION AND REGULATION
September 7, 2017
TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
Supervisory Guidance for Examining Compliance with the Qualified Thrift Lender Test
Applicability: This guidance applies to state savings banks and insured cooperative banks that are members of the Federal Reserve System and that have made an election pursuant to section 10(l) of the Home Owners' Loan Act for their parent holding companies to be treated as savings and loan holding companies.
The Federal Reserve is providing supervisory guidance regarding the Qualified Thrift Lender (QTL) test under section 10(m) of the Home Owners' Loan Act (HOLA).1 Section 10(l) of HOLA permits a state savings bank or insured cooperative bank (referred to as an "electing bank") that meets the QTL test to be deemed a savings association solely for the purpose of determining the status of the electing bank's parent holding company as a savings and loan holding company (SLHC) under section 10 of HOLA.2 Specifically, this letter provides an overview of the Federal Reserve's QTL requirements and the consequences of failing the QTL test for electing banks that are members of the Federal Reserve System and their parent holding companies. This letter also outlines procedures examiners should consider when assessing an institution's QTL compliance program.
A state-chartered savings bank is eligible to make an election under section 10(l) of HOLA if it transacts its ordinary banking business strictly as a savings bank under state laws imposing special requirements on such banks governing the manner of investing their funds and of conducting their business.3 A bank that is not subject to such state laws is not eligible to make an election under section 10(l) of HOLA. A cooperative bank is eligible if its deposits are insured.4
Qualified Thrift Lender Test
Upon application by an electing bank and a determination by the appropriate federal banking agency that the electing bank meets the QTL test, the electing bank's parent is treated as an SLHC subject to section 10 of HOLA and the Board's regulations concerning the operations and activities of SLHCs. In order to meet the QTL test, either (i) 65 percent or more of the electing bank's portfolio assets must be qualified thrift investments (QTIs), or (ii) the electing bank must qualify as a domestic building and loan association as defined in the Internal Revenue Code. For electing banks who meet the QTL test by holding the appropriate amount of QTIs, the electing bank's QTIs must continue to equal or exceed 65 percent of the electing bank's portfolio assets, on a monthly average basis, for nine out of any twelve month period.5
Qualified Thrift Investments
Section 10(m) of HOLA provides instructions for calculating the proportion of an electing bank's portfolio assets that are QTIs. An electing bank's amount of QTIs equals the sum of (i) assets that are includable without limit and (ii) assets that are includable up to 20 percent of portfolio assets. Only the portion of a loan or investment that is used for purposes described below may be counted as a QTI.6 Goodwill and other intangible assets are not QTIs.7
Section 10(m) defines portfolio assets as the sum of the electing bank's total assets minus (i) goodwill and other intangible assets, (ii) the value of property used by the electing bank to conduct its business, and (iii) liquid assets in an amount not to exceed 20 percent of the electing bank's total assets.8
Assets that are includable without limit:
- Loans made to purchase, refinance, construct, improve, or repair domestic residential housing or manufactured housing.
- Home-equity loans.
- Securities backed by or representing an interest in mortgages on domestic residential housing or manufactured housing.
- Direct or indirect obligations of the Federal Deposit Insurance Corporation, Federal Savings and Loan Insurance Corporation (FSLIC), the FSLIC Resolution Fund, and the Resolution Trust Corporation issued pursuant to agreements entered into after July 1, 1989. These obligations are includable without limit only for five years from the date they were issued.
- Stock of Federal Home Loan Banks.
- Education loans, small business loans, and loans made through credit cards or credit card accounts.
Assets that are includable up to 20 percent of portfolio assets:
- 50 percent of the sum of residential mortgage loans originated by an electing bank and sold within 90 days of origination.
- Investments in a service corporation that derives at least 80 percent of its annual gross revenues from activities related to acquiring, refinancing, constructing, improving, or repairing domestic residential real estate or manufactured housing.
- 200 percent of the sum of loans and investments to acquire, develop, and construct one- to four-family residential real estate with a purchase price less than or equal to 60 percent of the area median value of similar newly-constructed residential real estate in the same community. A maximum of 25 percent of this amount may be attributed to loans and investments used for commercial property, but only if the commercial property serves the residents of the residential property related to the loan.
- 200 percent of the dollar amount of loans for the acquisition or improvement of residential real property, churches,9 schools, and nursing homes, and loans for any other purpose to any small business, provided such loans are located within an area that has been identified in connection with a review or examination of community reinvestment practices by the Federal Reserve as a geographic area or neighborhood in which the credit needs of low- and moderate-income residents are not being met.
- Loans for purchasing, constructing, improving, or maintaining churches, schools, nursing homes, and hospitals (other than those reported as assets in the previous bullet).
- Loans for personal, family, or household purposes other than education loans, small business loans, and loans made through credit cards or credit card accounts.
- Shares of the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National Mortgage Association (Fannie Mae).
Electing banks and examiners may refer to the Office of the Comptroller of the Currency (OCC) Qualified Thrift Lender Handbook for the following definitions: residential housing, manufacturing housing, and small business loans.10
Domestic Building and Loan Association
An electing bank may also satisfy the QTL test if it qualifies as a domestic building and loan association, as defined in 26 U.S.C. 7701(a)(19).11 The Internal Revenue Service has prescribed requirements for entities to qualify as domestic building and loan associations.12
Consolidation and Accounting Rules
Section 10(m) of HOLA requires an electing bank to use the same consolidation and accounting rules when determining the bank's QTIs and portfolio assets.13 An electing bank must consolidate the portfolio assets of its subsidiaries with the electing bank's portfolio assets if either (a) the electing bank also consolidates the assets of its subsidiaries to determine the electing bank's amount of QTIs, or (b) the electing bank also consolidates residential mortgage loans originated and sold by its subsidiaries within 90 days of origination to determine the electing bank's QTIs.
Consequence of Failing the QTL Test
An electing bank that makes an effective election pursuant to section 10(l) of HOLA and later fails to meet the ongoing requirement of the QTL test is prohibited from being treated as a QTL and a savings association – and thus from having its parent holding company treated as an SLHC – for five years.14 Consequently, the electing bank ceases to be treated as a savings association for purposes of HOLA, and its parent holding company must seek the Board's approval under section 3 of the Bank Holding Company Act of 1956, as amended, to be a bank holding company.15
Examination of QTL Compliance
Electing banks and their primary federal bank supervisor are responsible for assessing compliance with the QTL test. In the case of electing banks that are state member banks, Federal Reserve examiners must confirm these institutions' QTL status during each full scope examination. Safety and soundness examiners should consider the attached examination procedures when assessing the QTL compliance of electing banks.
Federal Reserve Banks are asked to distribute this letter to their supervised financial institutions and to appropriate supervisory and examination staff. Questions regarding this letter should be directed to the following individuals:
- Division of Supervision and Regulation: Karen Caplan, Manager SLHC Section, at (202) 452-2710; Elskin Butler, Supervisory Financial Analyst, at (202) 245-4226; or Josh Smolevitz, Financial Analyst, at (202) 912-7814.
- Legal Division: Michael Waldron, Special Counsel, at (202) 452-2798; Tate Wilson, Counsel, at (202) 452-3696; or Josh Strazanac, Attorney, at (202) 452-2457.
In addition, questions may be submitted via the Board's public website.16
Supervision and Regulation
- 12 U.S.C. 1467a(m). Return to text
- 12 U.S.C. 1467a(l). Return to text
- 12 U.S.C. 1467a(l)(1) (cross referencing section 3(g) of the Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1813(g)).Return to text
- Id. (cross referencing section 3(h) of the FDI Act, 12 U.S.C. 1813(h), which defines insured banks). Return to text
- 12 U.S.C. 1467a(m)(1)(B)(ii) Return to text
- See 12 U.S.C. 1467a(m)(4)(C)(v)(I). Return to text
- 12 U.S.C. 1467a(m)(4)(C)(v)(II). Return to text
- 12 U.S.C. 1467a(m)(4)(B)(i)-(iii). Liquid assets include: (1) cash; (2) balances maintained in a Federal Reserve bank, or passed through a Federal home loan bank or another depository institution to a Federal Reserve bank; (3) time and savings deposits in Federal home loan banks or commercial banks; (4) obligations of the United States and banker acceptances; (5) shares or certificates of any open-end management investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (the "SEC Act") and the portfolio of which is restricted by such investment company's investment policy, changeable only if authorized by shareholders vote, solely to any of the obligations or other investment enumerated in 12 U.S.C. 1465(A), (C)(i)-(ii), (iv)-(vii) (1999); (6) liquid, high-quality corporate debt obligations with three years or less remaining until maturity; (7) high-quality commercial paper with 270 days or less remaining until maturity; (8) mortgage-related securities that have one year or less remaining until maturity or are subject to an agreement to be purchased within one year by another insured depository institution that is in compliance with applicable capital standards, a primary dealer in U.S. government securities, or a broker or dealer registered under the SEC Act; and (9) mortgage loans on the security of a first lien on residential real property, if the mortgage loans qualify as backing for mortgage-backed securities issued by the Fannie Mae or Freddie Mac or guaranteed by the Ginnie Mae, and either the mortgage loans have one year or less remaining until maturity, or the mortgage loans are subject to an agreement of purchase (including a repurchase agreement, put option, right of redemption, or takeout commitment) that requires an insured depository institution that is in compliance with applicable capital standards to purchase the loans within one year. 12 U.S.C. 1467a(m)(4)(B)(iii). Return to text
- The term "churches" includes other places of worship. Return to text
- The Comptroller's Handbook Qualified Thrift Lender (M-QTL) is available at https://occ.gov/publications/publications-by-type/comptrollers-handbook/m-qtl.pdf Return to text
- 12 U.S.C. 1467a(m)(1)(A). Return to text
- See 26 CFR 301.7701-13A. Return to text
- 12 U.S.C. 1467a(m)(5)(A)-(B) Return to text
- 12 U.S.C. 1467a(l)(2). Return to text
- 12 U.S.C. 1842(a). Because the holding company would no longer enjoy treatment as an SLHC, it would meet the definition of "bank holding company" under the Bank Holding Company Act of 1956, as amended. 12 U.S.C. 1841(a). Return to text
- See http://www.federalreserve.gov/apps/contactus/feedback.aspx. Return to text