Thrift Failures:

Costly Failures Resulted From Regulatory Violations and Unsafe Practices

AFMD-89-62: Published: Jun 16, 1989. Publicly Released: Jun 16, 1989.

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GAO reviewed the Federal Savings and Loan Corporation's (FSLIC) activities to: (1) identify the common characteristics of the most costly failed thrifts, focusing on violations of federal laws or regulations, related unsafe practices, and fraud and insider abuse; (2) compare and contrast the characteristics with solvent thrifts; and (3) identify the impact of deregulation, regional or local economic factors, and federal regulators' supervision and enforcement efforts for both types of thrifts.

GAO found that: (1) almost all of the failed thrifts changed from traditional home mortgage lending to higher-risk activities permitted under deregulation; (2) violations of laws included inaccurate appraisals for real estate investments, excessive loans for single borrowers, business with prohibited persons or insiders, and inadequate assessments of borrowers' ability to repay loans; (3) all of the failed thrifts had indications of fraud and insider abuse, of which the majority involved thrift officers or directors; (4) thrift personnel generally reported allegations of criminal misconduct in solvent thrifts, while bank system personnel generally reported misconduct in failed thrifts; (5) although changes in law and the economy affected all thrifts, poor regional economic conditions compounded the problems in failed thrifts, while solvent thrifts followed prudent business practices that enabled them to survive; and (6) although FSLIC developed new training programs and an office to oversee regulatory efforts and ensure nationwide consistency, it did not address FSLIC and district banks' multiple and conflicting roles as promoters, regulators, and bankers of thrifts.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: As a condition for deposit insurance, Congress should enact legislation requiring each insured thrift to have the thrift's independent auditor report on the management assertions described and submit such reports with the independent auditor's audit report to the thrift's regulator.

    Status: Closed - Implemented

    Comments: The House Banking Committee had an auditor review the requirement in its version of FIRREA. The requirement was deleted in conference. No further action is planned.

    Matter: As a condition for deposit insurance, Congress should enact legislation requiring each insured thrift to prepare an annual management report which: (1) describes management's responsibility for complying with laws and regulations relating to the safety and soundness of thrift operations and for establishing methods to monitor compliance; and (2) contains management's assessment of the thrift's compliance with laws and regulations related to operations.

    Status: Closed - Implemented

    Comments: The House Banking Committee had a management report requirement in its version of FIRREA. The requirement was deleted in conference. No further action is planned.

    Matter: As a condition for deposit insurance, Congress should enact legislation requiring each insured thrift to prepare an annual management report which: (1) describes management's responsibility for preparing financial statements and for establishing and maintaining an effective internal control structure; and (2) contains management's assessment of the effectiveness of the internal control structure.

    Status: Closed - Implemented

    Comments: The House Banking Committee had a management report requirement in its version of FIRREA. The requirement was deleted in conference. No further action is planned.

    Matter: Any legislation that Congress passes restructuring regulatory and insurance activities of the thrift industry should include provisions for certain regulatory and examination responsibilities for the insurer.

    Status: Closed - Implemented

    Comments: The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) includes provisions which provide the Federal Deposit Insurance Corporation the authority to examine insured thrifts and limited regulatory authority, especially over state-chartered thrifts.

    Matter: Congress should enact legislation requiring that insurers identify applicable laws and regulations which have material consequences on the safety and soundness of thrift operations to be reviewed and reported on in management reports.

    Status: Closed - Implemented

    Comments: The House Banking Committee included such a requirement in its version of FIRREA. The requirement was deleted in conference. No further action is planned.

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