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3:30 Dale Stuart, Pres. NAHB W/TR, Dorce 822-04
Meeting with James Grogan, Vice President of Lincoln Savings and Loan Association, Irvine, California on Federal Home Loan Bank Board proposed regulation to restrict the direct investment authority of thrifts.
Brief History of the Issue on Direct Investment
On May 16, 1984, the FHLBB published for comment its proposed regulation limiting to the greater of 10% of assets or twice net worth the amount an insured thrift institution may invest in service corporations, real estate and equity securities (stocks). Comments were due by July 16, 1984 and the role was scheduled to become final September, 1984. There was a great deal of opposition to this rule from Congress. Many letters were written asking the FHLBB to delay the final rule until next year when Congress would have adequate time to review it and the Federal Insurance system.
This rule would mainly affect State chartered S&L's that have been given direct real estate investment powers over 10% such as in Texas, Florida, Ohio and California. However, California seems to be the target of this regulation. While California State chartered be the target of this regulation. While California State chartered thrifts have had 10% investment powers for a number of years, as of January 1st, this year they were permitted to invest 100% of their assests in service corporations, real estate, and equity secu- rities. The FHL88 feels that there powers are a threat to the safety and soundness of the insurance (FSLIC) fund because they have concluded that these investments are riskier than making home loans.
II. Status of the Regulation
Because of the controversy over the proposed regulation the FHLBB did not proceed in September. On December 10, they published a modified proposal for comment that requires pre-approval of the FHL38 before any savings institution could undertake direct investments greater than 10%. The regulation as currently drafted in no way reflects their prior view that direct investments are "unsafe or risky" but will have the same effect as restricting the activity by pre-approval requirements. The comment period is 30 days on this modified proposal until January 12, 1985. Presuming that it will take the FHL38 two weeks to review the comments, the
proposal could become final anywhere between 4 and 6 weeks after January 12, 1985. The original fear of the interested groups was that the Bank Board would proceed to a final regulation while Congress was out of session.
Attached is a letter from AC to the FHLBB dated July 11, 1984 requesting delay of final action on the original Regulation of May 10, 1984, until Congress had an opportunity to review this issue. AC has never taken a substantive position on direct investments, but only that it is an issue of the nature that Congress should review.
III. Mr. Grogan and Lincoln S&L
Mr. Grogan, is from Arizona and formerly was a constituent of Senator DeConcini. His goup recently purchased Lincloin Savings and Loan Association in California. Lincoln has direct investments in real estate far exceeding 10% of their assests so their future growth and viability will be seriously impaired by this proposed regulation along with most other State Chartered California thrifts. Mr. Grogin has spent a great deal of money fighting the FHLB8 on this issue including the Greenspan study to refute the FHLBB arguments on the need for this regulation. He has also organized California S&L's who oppose the regulation.
IV. State Charterd thrifts vs Federally Chartered thrifts in California
The Federally chartered S&L's in California originally supported and pushed Ed Grey of the FHLBB to crack down on the State Chartered S&L's in California because the State chartered S&L's have broader powers under State law than Federally S&L's. This has always been the case under the dual regulatory system.
the case under the dust regulatory system. This is the first time however that a Federal regulator has attempted to directly preempt the state laws of all states to stop activities occuring in four states and basically only in California.
In any event, this issue in the past has separated the California state chartered S&L's who opposed the regulation from the California sace chartered S&L's wno supported the regulation.
Because re modified rule has just been published, the California League U.S. League do not have official cosicions as of yet. i succcate fact that this modified regulation will bermic the FHL38e:nto the day to day activities of all S&L's may unite
the California Federal S&L's with the State chartered California California S&L's against the FHLBB proposal. Under the rule all S&L's must seek preapproval from the FHL38 each time an S&L seeks to invest in real estate, or equities, etc.
1. Mr. Grogan probably wants you to reaffirm your support for this matter being decided in the Congress. I suggest that you do so and indicate that you will ask Senator Garn to have hearings.
2. Congressman Barnard in the house plans to have hearings ༤ early next year on these issues.
3. The FHLB8 backed down from its original proposal to prohibit all direct investment over 10% because of the letters from Congress such as yours. I met with the FHLBB staff in November to be briefed on this regulation along with Senate and House staffs. Because of the anticipated opposition the FHLBB came out with a modified approach but in my view it is doubtful that the FHLBB has the legal authority to preempt or modify state law without legislation and this is what they are trying to do here. 4. During next week, while I am in Los Angeles, I will be meeting with Dean Cannon, California League and Ernie Leff the attorney representing those in opposition to the regulation to get a better idea of their suggested strategies on this issue in 1985.
Attached are some of the letters sent to the FHLBB by Congress on this issue and the Greenspan study, refuting the FHLB8's arguments that direct investments in real estate are unsound.
Additionally, you should be aware of the fact that the California S&L Commissioner (Taggart) has resigned, because of the pressure from the FHL38 (Ed Grey) on this issue and the brokered deposit issue.
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