Thrifts and Housing Finance:

Implications of a Stricter Qualified Thrift Lender Test

GGD-91-24: Published: Apr 30, 1991. Publicly Released: Apr 30, 1991.

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Pursuant to a legislative requirement, GAO evaluated the implications of a more stringent test for qualifying savings and loan associations to operate as insured thrifts, focusing on: (1) requirements changing the minimum thrift portfolio proportion of housing-related assets from 60 percent to 70 percent; and (2) better definition and restriction of acceptable thrift investments.

GAO found that: (1) the supply of housing finance has become substantially less dependent upon thrifts' mortgage investments since the development and growth of mortgage-backed securities; (2) well-capitalized thrifts following nontraditional strategies performed comparably to well-capitalized thrifts following the traditional mortgage lending strategy; (3) if thrifts want to be profitable in the long term, they will have to broaden their activities or transform themselves into different sorts of financial institutions; (4) a more stringent qualified thrift lender test may not be necessary to ensure the availability of housing finance or to promote industry profitability and safety; (5) keeping the qualified thrift lender test at the current 60-percent level would help to ensure thrift industry safety and profitability and minimize the risks the industry presents to taxpayers; and (6) industry safety and soundness could be promoted by allowing safe and liquid assets, such as short-term U.S. Treasury securities, to be counted as qualified thrift investments.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Proposals to amend the qualified thrift lender test were passed as the Qualified Thrift Lender Reform Act of 1991. While the QTL percentage was left unchanged at 70 percent, the new law made it easier for institutions to qualify by increasing the liquid assets excludable from portfolios when determining the QTL asset base, and by expanding the investments that qualify.

    Matter: In view of the possibility that raising the qualified thrift lender test to a higher level may increase risks, Congress may wish to consider amending the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) to leave the qualified thrift lender test unchanged at the current 60-percent level, while retaining the FIRREA prospective and more precise language regarding those assets that qualify as housing related. Congress should also consider allowing safe investments, such as U.S. Treasury securities with less than 1 year to maturity, to qualify without limitation as qualified thrift investments. Such investments present little risk to the deposit insurance fund and can provide thrifts with liquidity to respond to marketplace changes and unstable environments.


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