The special investigator of Maryland's savings and loan crisis has proposed a sweeping new law to restrain the activities of state-chartered thrift associations and impose criminal and civil penalties -- including prison terms of up to 10 years and $100,000 fines -- for violations.

Legislation proposed by Wilbur D. Preston Jr., a Baltimore lawyer, would also strip many powers from the state Board of Savings and Loan Association Commissioners and invest broad new regulatory authority, including subpoena power, in the hands of a single official, the director of the Division of Savings and Loan Associations.

A copy of Preston's 183-page legislative proposal, which the administration of Gov. Harry Hughes is to introduce in the legislature this week, was obtained today by The Washington Post.

In an exhaustive report last week that was based on a long investigation, Preston attributed the state's eight-month thrift crisis to unscrupulous savings and loan operators and a state and private regulatory system that utterly failed to police the $9 billion industry.

The state's savings and loan crisis began last May with disclosures of management problems and alleged illegalities at the Old Court Savings & Loan in Baltimore. The state is conducting criminal investigations of six thrift associations in a scandal that could cost the state more than $200 million.

Preston told the legislature last week that the state "must make certain that it never happens again," and assured lawmakers that if his legislative proposal erred, it would err "on the side of strict regulatory accounting."

The proposal, which will be closely scrutinized by a special committee of the state Senate and the rest of the legislature, was described by one state official who had studied it as "draconian." If enacted by the General Assembly, the measure could revolutionize the way Maryland savings and loans do business.

The legislation is designed to prevent thrift owners from reaping large profits from the investments of their associations by prohibiting so-called "insider" trading, account overdrafts and excessive fees and by placing strict limits on most lending activities except for traditional home mortgages.

Moreover, the legislation would enable the savings and loan division director to set interest rate ceilings for state-chartered thrifts, a new power largely prompted by the thrifts' past tactic of raising cash by offering some of the highest rates in the nation.

The legislation also would prevent Maryland thrifts from investing most of their funds beyond the four states contiguous to Maryland and the District of Columbia. Many of Maryland's problem associations frequently launched commercial real estate ventures in the Sun Belt and other states, largely out of the view of state regulators.

Thrifts would also be subject to state examinations of their books once a year, rather than every two years, and would have to be audited yearly by independent accounting firms. Associations would also have to maintain reserve funds equal to 5 percent of their deposits to protect against losses.

All thrift officers must "discharge duties . . . in good faith and with the same diligence and care that an ordinarily prudent person would exercise under a similar circumstance," the legislation states.

The legislation would require thrifts to make at least one quarter of their investments in home mortgages and limit commercial and development loans -- once the bread and butter of the industry -- to a combined 20 percent of assets.

At the same time the legislation would sharply circumscribe the activities of state-chartered thrifts, it would give the state broad new authority to enforce the limits.

In addition to existing power to order thrifts to cease "unsafe or unsound" business practices, the division director would have the new authority to issue broad "emergency orders" for the "protection of depositors, members or stockholders of the association or the protection of the public."

Other highlights of the legislation include:

*Criminal penalties, including prison terms of one to 10 years and fines of $1,000 to $100,000, for thrift officers found guilty of conflicts of interest, making prohibited loans, profiting at the expense of the association, taking overdrafts, or circumventing the conflict prohibition by cross-lending with another thrift.

*New rules on the payment of fees to thrift directors, which the legislation said must be "reasonable and commensurate" with the directors' duties.

*Additional authority for the division director, including power to regulate thrifts' subsidiaries and to subpoena witnesses and records to investigate the "affairs, transactions and conditions" of any association. The director would also have the power to ask courts to place thrifts into conservatorship and receivership.

*A range of new civil violations, carrying $10,000 fines, in those cases where thrift officers are found to have broken the new rules through "gross negligence or recklessness." In assessing a civil penalty, the division director would have the power to order violators to forfeit any gain obtained by breaking the rules.