The Second S&L Scandal: OTS Ignored Reckless Lending and Gave Thrifts Cover


Center for Responsible Lending
January 21, 2009

The federal Office of Thrift Supervision (OTS) has failed in its responsibility to oversee the nation's thrift institutions and protect the public from reckless lending practices, according to a new report released today by the Center for Responsible Lending.

Read The Second S&L Scandal: How OTS allowed reckless and unfair lending to fleece homeowners and cripple the nation’s savings and loan industry, http://www.responsiblelending.org/mortgage-lending/policy-legislation/regulators/the-second-s-l-scandal.html.

CRL recommends that OTS be eliminated as a government agency and that its functions be folded into other federal banking regulators as part of the regulatory overhaul the new Administration and Congress are considering.

A CRL analysis of court records, government reports, financial data and other information shows how OTS's neglect of its duties contributed to the ongoing, historic mortgage and economic meltdown:

  • OTS allowed WaMu, IndyMac and other thrifts to engage in increasingly risky lending practices that harmed borrowers, undermined the institutions' own financial health and ran up enormous costs that have landed in the taxpayer's lap.
  • OTS was slow to act as the financial health of the banks it oversaw deteriorated. It failed to take action that would have significantly reduced the economic fallout from these bank failures.
  • The agency hid from investors and the public the seriousness of thrifts' financial problems.  In some instances, the OTS allowed banks to falsify financial results to mask poor results that would have raised alarms sooner.

The damage caused by OTS's failures is enormous. In 2008, five thrifts with assets totaling $354 billion collapsed. Seven other thrifts holding assets totaling another $350 billion have been sold or are entangled in their parent companies' bankruptcies.

OTS, a unit of the U.S. Treasury Department, is the agency responsible for overseeing federally-insured banks known as thrifts, or savings and loans. It was created from a predecessor agency where incompetence and regulatory lapses were major contributors to the first S&L scandal, until now the costliest taxpayer bailout in U.S. history. 

 "OTS was created in 1989 to clean up that era's S&L mess," says Michael Hudson, co-author of the CRL paper. "Now the agency is presiding over a second S&L scandal —one that couldn't have happened without inaction and negligence by the very agency responsible for policing the industry."

The report makes clear that OTS wasn't the only federal regulatory agency that failed to counter the growth of unsafe practices during the mortgage boom. The entire federal regulatory structure—including the OCC and the Federal Reserve—shares responsibility for the mortgage debacle. OTS's failures stand out, however, even within an overall regulatory meltdown. Given the rapid change and dramatic challenges that have unfolded over the last decade, the OTS's role of chartering and overseeing national thrifts is outdated

"The OTS faces two primary obstacles: The number and asset size of the thrifts it manages are falling, and those thrifts that remain are losing lots of money," said co-author Jim Overton. "The OTS is increasingly obsolete at a time when we need a new regulatory framework that will both protect consumers and bring stability to the banking system."

In addition to critiquing OTS's failures, the paper includes a body of recommendations for reforming the federal financial regulatory system. By protecting homeowners and families from the kind of unscrupulous lending practices that have proliferated in recent years, the report argues, regulators can also help ensure the safety and soundness of America's banking institutions. 

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Chris Kukla at (919) 313-8520 or chris.kukla@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.