Overview:
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Part of the Department of the Treasury, the Office of Thrift Supervision (OTS) is charged with regulating banks known as thrifts, or savings and loans. OTS monitors thrifts and their holding companies to ensure their solvency and compliance with consumer laws. Currently, OTS oversees 831 thrifts with assets of $1.57 trillion, as well as 470 holding companies with US assets of $8.5 trillion. Examples of financial institutions that OTS monitors are Capitol One FSB, Chevy Chase Bank, Citicorp Trust Bank FSB, ING Bank FSB and Washington Mutual Bank. OTS has found itself in the thick of the mortgage and housing crisis, and it has offered suggestions for resolving the mess. But like its predecessor, which was dismantled by federal officials in the wake of the savings and loan crisis of the 1980s, OTS is in danger of being shutdown as part of reforms being discussed in Washington, DC.
History:
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The nations’ first savings and loan, Oxford Provident Building Association, was established in 1831 in Frankford, Pennsylvania, by local townspeople who pooled their money together in order to help finance home ownership. In time, more than 5,000 savings associations opened for business across the country during the 1800s. The institutions—known by various names such as savings and loans, building and loans, thrift and loans, thrifts, savings banks, building associations, thrift associations and savings associations—were typically founded by people who lived in the same neighborhoods or worked in the same factories.
By the 1920s, there were about 12,000 savings institutions in the United States. Housing growth during this time was fueled largely by the influx of Americans into the cities from rural areas, driving up the demand for housing. But when the Great Depression hit in 1929, it devastated the housing market and caused many savings associations to fail. The federal government stepped in with a series of laws to support homeownership.
The first law established the Federal Home Loan Bank System of 12 regional Federal Home Loan Banks that provided mortgage funding for savings associations across the country. In addition, Congress created the Federal Home Loan Bank Board, the predecessor to the Office of Thrift Supervision, to grant federal charters for savings associations and to regulate the industry. A third law founded the Federal Savings and Loan Insurance Corporation to insure deposits at the nation’s savings and loan institutions.
After the end of World War II, the housing industry enjoyed a tremendous boom, thanks to returning veterans who purchased new homes throughout the country. Savings and loan associations, or S&Ls, were major players in the growth of the housing markets and the housing economy during this time, providing mortgages for individual homes and entire new housing developments. Demand remained strong throughout the 1950s and 1960s, when S&Ls provided two-thirds of the nation’s home mortgages. At the time, most savings associations held more than 80% of their assets in home loans, relying on a business model that hinged on interest received from mortgages being comfortably higher than the interest paid out to depositors.
The economic climate that supported this business model began to change in the late 1970s as interest rates rose sharply and competition for deposits increased dramatically. Consumers seeking better deposit-rate returns had more choices among financial services providers. Also, a federal ban on adjustable-rate mortgages locked S&Ls into long-term, fixed-rate mortgage loans that produced below market-rate returns as interest rates rose.
In the early 1980s, interest rates climbed to unprecedented levels, undermining the viability of the S&L business model. Many institutions became economically insolvent.
In an effort to help the industry “grow” out of its problems, the government deregulated the lending and investment powers of savings and loans and gave them full access to federally insured deposits to fund their new lending and investment powers. Marginally profitable and unprofitable savings and loans began to engage in aggressive and risky investment and lending strategies that compounded their existing problems. As a result, hundreds of S&Ls failed and closed in the late 1980s and early 1990s.
The so-called S&L crisis resulted in 747 savings and loan associations going out of business at a total cost of $160 billion. Among the many S&Ls that failed was Silverado Savings and Loan, which was run by Neil Bush, brother of President George W. Bush, and son of then-President George H. W. Bush. Another prominent Republican implicated in the scandal was Sen. John McCain (R-AZ), who was part of the “Keating Five”—a group of lawmakers who pressured federal regulators on behalf of savings and loan mogul Charles Keating.
In response to the S&L crisis, Congress passed a bailout plan in 1989, the Financial Institutions Reform Recovery and Enforcement Act (FIRREA). FIRREA abolished the Federal Home Loan Bank Board and FSLIC, and switched S&L regulation to the newly-created Office of Thrift Supervision (OTS). The deposit insurance function shifted to the Federal Deposit Insurance Corporation (FDIC). A new entity, the Resolution Trust Corporation, was created to deal with the insolvent S&Ls.
Other major provisions of FIRREA included: $50 billion of new borrowing authority, with most financed from general revenues and the industry; meaningful net worth requirements and regulation by the OTS and FDIC; allocation of funds to the Justice Department to help finance prosecution of S&L crimes. Additional bank crime legislation was adopted the next year: the Crime Control Act of 1990, which ordered a study by the National Commission on Financial Institution Reform, Recovery and Enforcement to uncover the causes of the S&L crisis and come up with recommendations to prevent future debacles.
In 2008, the country was rocked by one of the largest housing crisis in US history, which threatened to bring down numerous banks and thrifts. By the summer, federal regulators had stepped in and closed several national banks, including IndyMac of Pasadena (see Controversies), First National Bank of Nevada and First Heritage Bank of Newport Beach, CA. Some banking experts predicted that approximately 100 financial institutions would fail by the time the crisis was over. Others, however, described such an estimate as
, arguing the final number would be much higher.
What it Does:
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The Office of Thrift Supervision (OTS) monitors savings associations and their holding companies to ensure their solvency and compliance with consumer laws. OTS oversees savings associations, officially known as Federal Savings Banks (FSB), which have established their charters through the office. As of 2007, OTS kept watch over 831 thrifts with assets of $1.57 trillion plus 470 holding companies with US assets of $8.5 trillion.
Examples of institutions that OTS monitors are Capitol One FSB, Chevy Chase Bank, Citicorp Trust Bank FSB, ING Bank FSB and Washington Mutual Bank. Other examples can be found through OTS’ database.
OTS carries out audits of FSBs every 12-18 months, and when it finds violations, issues enforcement actions (PDF). Examiners also monitor the condition of thrifts through off-site analysis of regularly submitted financial data and regular contact with thrift personnel.
The agency’s legal division drafts legal opinions, directs the OTS enforcement program, helps draft proposed legislation and write regulations, provides guidance on charter-related applications, litigates cases and oversees attorneys in regional offices.
The OTS has five regional offices in Jersey City, Atlanta, Chicago, Dallas and San Francisco. The agency also has field offices within its regions. Three quarters of the agency’s staff works out of the regional offices.
A large volume of financial and other data is published by OTS for public consumption. These reports cover industry performance, thrift financials, industry statistics and other information.
OTS receives no money from Congress. Its budget is funded through assessments paid by the industry.
Where Does the Money Go:
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The Office of Thrift Supervision spent $95.7 million this decade on private contractors, according to USAspending.gov. A total of 994 companies received payments for goods and services such as maintenance and repair of office buildings ($17.3 million), auditing services ($6.1 million), ADP software ($4.9 million) and ADPE system configuration ($4.5 million).
The top 10 contractors are:
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Emcor Group, Inc.
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$17,367,810
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Apptis Inc.
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$7,409,425
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Insys, Inc.
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$4,540,733
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US Government
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$3,498,151
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Prudential Financial, Inc.
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$3,411,900
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Dell Inc.
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$2,461,503
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Thomas Ho Company
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$2,268,000
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Xerox Corporation
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$2,247,348
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Government Acquisitions Inc.
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$2,103,626
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Domus Holdings Corporation
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$1,862,433
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Controversies:
Federal authorities estimated that the takeover of IndyMac, which had $32 billion in assets, would cost the FDIC $4 billion to $8 billion. Regulators said deposits of up to $100,000 were safe and insured by the FDIC. The agency’s insurance fund has assets of about $52 billion.
Reich went on to publicly say that there was a reason why federal banking regulators like OTS don’t publish their findings of thrifts and banks. “We believe it is critically important to maintain the confidentiality of examination and supervision information. Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy.”
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Thrift Regulators Shutter IndyMac, Blame Senator for Failure
In July 2008, regulators from the Office of Thrift Supervision took over struggling mortgage lender IndyMac Bank, the second-largest failure ever of a US financial institution and the largest since the Great Depression. The bank’s 33 branches were closed temporarily until the Federal Deposit Insurance Corporation (FDIC) officially reopened the bank as IndyMac Federal Bank. During the closure, customers were unable to bank by phone or Internet, causing many to panic over what would become of their deposits.
Federal authorities estimated that the takeover of IndyMac, which had $32 billion in assets, would cost the FDIC $4 billion to $8 billion. Regulators said deposits of up to $100,000 were safe and insured by the FDIC. The agency’s insurance fund has assets of about $52 billion.
OTS Director John Reich said IndyMac’s failure was a “unique” incident that did not “signal a direction for the industry as a whole.” In fact, Reich blamed the lender’s demise on a deposit run that came after Sen. Charles E. Schumer (D-NY) sent a letter to regulators on June 26 questioning IndyMac's viability. That move prompted customers to withdraw $1.3 billion in the 11 business days following Schumer’s letter. Reich was not at all pleased with Schumer’s public disclosure about IndyMac.
“When a member of the United States Senate makes such a public statement, it doesn't take much to frighten the depositors of an institution,” Reich said. “It was an unprecedented act on the senator’s part and the result speaks for itself.”
Reich went on to publicly say that there was a reason why federal banking regulators like OTS don’t publish their findings of thrifts and banks. “We believe it is critically important to maintain the confidentiality of examination and supervision information. Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy.”
Schumer and his defenders, in turn, accused Reich and his supporters of attacking Schumer as a way of shifting the focus away their own failure to properly regulate the IndyMac collapse.
IndyMac Bank seized by federal regulators (by Kathy M. Kristof and Andrea Chang, Los Angeles Times)
Struggling Mortgage Lender Taken Over by Regulators (by Dina ElBoghdady and Renae Merle, Washington Post)
Regulators to Schumer on IndyMac: Please shut up (Los Angeles Times blog)
Sen. Schumer defends comments on IndyMac
(Associated Press)
Suggested Reforms:
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Treasury Secretary Wants to Shut Down OTS
When the S&L crisis of the late 1980s occurred, the agency in charge of thrifts—the Federal Home Loan Bank Board—was shown the door by officials in Washington and replaced by the Office of Thrift Supervision. In 2008, as national leaders wrestle with the current mortgage crisis and its affects on the financial industry, OTS may be in danger of being shut down as well.
In March, Treasury Secretary Henry Paulson proposed the most ambitious overhaul of the financial regulatory system since the stock market crash of 1929. The plan would change how the government regulates thousands of businesses from the nation’s biggest banks and investment houses down to the local insurance agent and mortgage broker.
Among the recommendations was closing the Office of Thrift Supervision and moving its functions to the Office of the Comptroller of the Currency, which regulates banks.
Democrats in Congress reacted negatively to Paulson’s overhaul plan, and it was unclear where the majority party stood on the issue of eliminating OTS.
White House unveils Wall Street overhaul (Associated Press)
Doubts Greet Treasury Plan on Regulation (by Stephen Labaton, New York Times)
Thrift Office Proposes Solution to Mortgage Crisis
In February 2008, the Office of Thrift Supervision was crafting a plan to help solve the mortgage crisis that would work in conjunction to ideas being considered by Congress and the White House. Under OTS’ proposal, homeowners would refinance their mortgages into government-insured loans that would cover the current value of their homes. The refinancing would pay part of what’s owed to the original lender. For the remainder, the lender would get what OTS called “negative equity certificate.” The lender could redeem the certificate if the home was eventually sold at a higher price.
The plan would separate a troubled mortgage into two parts. The first would cover the current fair-market value of the home and would be refinanced by the Federal Housing Administration. The remainder would be issued to the original lender as a certificate.
If the borrower eventually sold the home, the FHA mortgage would be paid off first. Remaining cash would be applied to paying off the value of that certificate. Anything left over would go to the borrower.
If there was not enough profit to pay off the certificate, the original lender would take a loss, which made this plan of OTS’ a tough sell to the industry.
Mortgage Plan Seeks To Stem Foreclosures (by Dina ElBoghdady, Washington Post)
OTS Wants to Come Down on Credit Card Companies
In May 2008, the Office of Thrift Supervision joined with the Federal Reserve and the National Credit Union Administration in supporting tough new rules for the credit card industry. Among the proposed changes were categorizing certain industry practices as “unfair or deceptive,” such as: charging interest on debt that has been repaid; assessing late fees when consumers are not given a reasonable amount of time to make a payment; prohibiting companies from applying a consumer’s payment first to the balance with the lowest rate when different interest rates apply. The changes, which don’t require Congress’ approval, could go into effect by the end of 2008.
Aggressive Fed Rules Challenge Credit Cards
(by Nancy Trejos, Washington Post)
- Table of Contents
- Overview
- History
- What it Does
- Where Does the Money Go
- Controversies
- Suggested Reforms
- Comments
- Leave a comment
Founded: 1989
Annual Budget: $250 million
Employees: 1,000
Official Website: https://www.treasury.gov/about/history/Pages/ots.aspx
Office of Thrift Supervision
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