Office of Thrift Supervision: An Advocate, Not an Enforcer

by Damozel |  Yeah, this isn't exactly going to come as news to anyone who has been following the unravelling of our banking system, though perhaps the blatantly hands off, "aggressively deregulatory" stance of the self-styled regulatory agency might.  Anyway, WaPo would like for you to know:

In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out.

OTS is responsible for regulating thrifts, also known as savings and loans, which focus on mortgage lending. As the banks under OTS supervision expanded high-risk lending, the agency failed to rein in their destructive excesses despite clear evidence of mounting problems, according to banking officials and a review of financial documents.

Instead, OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low. When the housing market turned downward, the thrifts were left vulnerable. As borrowers defaulted on loans, the companies were unable to replace the money they had expected to collect...(WaPo)

I especially liked this anecdote illustrating the anti-regulatory attitude of regulators.

In the summer of 2003, leaders of the four federal agencies that oversee the banking industry gathered to highlight the Bush administration's commitment to reducing regulation. They posed for photographers behind a stack of papers wrapped in red tape. The others held garden shears. Gilleran, who succeeded Seidman as OTS director in late 2001, hefted a chain saw.  (WaPo)

Garden shears, eh?  A chain saw?  They had better be glad we live in a civilized age.  People whose retirement savings have been wiped out or who have lost their homes might start searching for the secaturs.  If you want to see the picture, click here. 

This Gilleran went about the task of regulating thrifts by (1) cutting a quarter of his personnel, even as his office's oversight responsibilities grew; and (2) reducing consumer protections. 

The other agencies that regulate banks review corporate health and compliance with consumer laws separately, which consumer advocates say helps ensure that each gets proper scrutiny from specialists. Gilleran merged the consumer exam into the financial exam....

[A[t the time he headed the agency, he defended the consolidation of the exams, saying thrifts would be required to conduct "self-evaluations of their compliance with consumer laws."

Then-Rep. John J. LaFalce (D-N.Y.), who at the time was the ranking Democrat on the House Financial Services Committee, wrote in a letter to Gilleran that this was "a complete abrogation of the mandate your agency has been given by Congress."

The consumer exam had in part monitored whether thrifts were complying with the law by providing quality loans in lower-income communities. During Gilleran's four-year tenure, OTS cited only one institution for failing to meet that obligation, compared with 12 citations in the previous four years.  (WaPo)

Woulda, coulda, shoulda.  WaPo's expert, "chief executive of the National Community Reinvestment Coalition, and other advocates" say that these consumer protections---just for example, enforcing rules against predatory lending---might have helped mitigate the disastrousness of the current disaster. (WaPo)

Calculated Risk writes:

The article also discusses how the OTS dragged their feet when new lending guidelines were proposed by the Office of the Comptroller of the Currency...I was outraged by the foot dragging at the time ... the regulators knew there was a lax lending problem in early 2005 (they were already late), and the continual foot dragging just made the inevitable crisis worse (as an example the peak year for Option ARM lending was in 2006).

This willful lack of oversight by certain regulators was outrageous. .

There's a lot more in this five-page article, including the enthralling story of how Countrywide reconstituted itself as a thrift in order to bring itself within the jurisdiction of OTS.

Senior executives at Countrywide...said OTS pitched itself as a more natural, less antagonistic regulator... Government officials outside OTS who were familiar with the negotiations provided a similar description.

"The general attitude was they were going to be more lenient," one Countrywide executive said. For example, he said other regulators, specifically OCC and the Federal Reserve, were very demanding that large banks not allow loan officers to participate in the selection of property appraisers. "But the OTS sold themselves on having a more liberal interpretation of it," the executive said.

  And the rest, of course, is history.

Via Memeorandum.

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