Office of Thrift Supervision (OTS)

The Office of Thrift Supervision is an agency of the United States Treasury created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which was enacted August 9, 1989 to help depositors hurt by the failure of thrifts (aka savings and loans) in the 1980's and 1990's. The OTS is the main regulator of thrifts and other depository institutions. Originally, they were insured by the Savings Association Insurance Fund (SAIF). However, the FDI Reform Act merged the SAIF with the Bank Insurance Fund that insured commercial banks, forming the Deposit Insurance Fund; this fund now covers all banks except for credit unions, which are covered by the National Credit Union Administration. The OTS also charters new federal savings and loans associations, federal savings banks, and their holding companies.

The OTS pays its budget by collecting fees from the banks it regulates. In fact, it competed with several other federal agencies that regulated banks, and it was this competition that apparently caused OTS to lower its reserve requirements for risky loans so that it could attract larger banks. For example, Washington Mutual and Countrywide Financial paid fees that equaled 18% of the OTC's budget. Countrywide Financial switched to OTS regulation in 2006 because of its relaxed standards, especially as to its reserve requirements to cover its loans. Consequently, reserve requirements for thrifts declined to 1/3 of their average in 2002; several years later, borrowers started defaulting in large numbers.

OTS also did not impose higher lending standards for option ARMs—mostly issued by banks regulated by OTS—which caused many of the delinquencies after the mortgage rates were set higher. OTS even allowed loan officers to select property appraisers.

During the credit crisis of 2008, IndyMac Bancorp, Washington Mutual, and Downey Savings and Loan Association—all supervised by OTC—were seized by the federal government; others were taken over by healthier institutions.