WASHINGTON In a move designed to slash costs but sure to spark controversy, the Office of Thrift Supervision has decided to stop conducting separate exams for compliance with consumer laws such as the Truth in Lending Act.
The agency plans to fold its compliance exam into the more general safety-and-soundness exam, OTS officials confirmed Monday. Thrifts would be expected to perform a compliance self-evaluation before the combined exam, but agency officials would not say what this would require of thrifts or what weight it would carry in the supervision process.
Details of the plan emerged as the agency and its director, James Gilleran, came under increasingly harsh criticism from employees over the handling of ongoing staff cuts. The agenccuts. The agencys net losses topped $23.2 million between 1998 and 2000, and it estimates it spent $4.1 million more last year than it earned from fees on thrifts.
To get the budget back in balance, Mr. Gilleran is reducing the agencys 1,165-employee work force by 20%. The majority of those being laid off are in administrative positions, a spokesman said last week, but at least 60 examiners are expected to lose their jobs.
OTS officials have been reluctant to provide many details on the downsizing or even when the new combined exams will commence. But employees are filling the gap, claiming anonymously that the cuts to the examiner base were disproportionately focused on compliance experts.
No date has been set, but the agency plans to hold a press conference to discuss job reductions and exam changes. Thrift industry representatives are getting impatient. I do think its time for the OTS to provide for the industry an overview of their changes, said Americas Community Bankers president Diane Casey.
The OTS separated compliance and safety-and-soundness exams in 1989, following the lead of the Federal Reserve Board, which had done so a decade earlier. The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency followed suit in the early 1990s.
Compliance examiners are responsible for ensuring that banks adhere to more than 25 laws, including the Gramm-Leach-Bliley, Truth in Lending, Real Estate Settlement Procedures, Home Mortgage Disclosure, and Community Reinvestment acts. An OTS spokesman said the agency employs 685 examiners, but he could not say how many of those specialize in compliance exams.
Though skeptical sources argued that compliance issues have become so complex in recent years it is practically impossible to recombine them with safety and soundness in a single exam, OTS spokesman Sam Eskenazi insisted that the coming changes will not undermine the effectiveness of the agencys compliance exams. He said that some compliance examiners will be retained and that safety-and-soundness experts will be cross-trained in compliance issues.
Charles Koch, the chief executive officer of Charter One Financial Inc. in Cleveland, which only recently converted from a thrift charter to a national bank charter, applauded the OTS plans. If this makes them a more efficient operation, then that is a good thing.
But community groups that focus on CRA and fair-lending issues opposed the move.
This is a radical change that will move the OTS from being the most rigorous CRA enforcement agency to the softest, said Joshua B. Silver, vice president of research and policy at the National Community Reinvestment Coalition.
NCRC finds this plan totally unacceptable, he said. Allowing thrifts to police themselves is a violation of why the OTS was created, and will eliminate meaningful CRA and fair-lending oversight.
The changes at the OTS are almost certain to attract the attention of Senate Banking Committee Chairman Paul Sarbanes, who is a strong supporter of consumer issues. Indeed, several sources said that the Maryland Democrat became alarmed when Federal Deposit Insurance Corp. Chairman Don Powell announced in February that he would fold the agencys division of consumer and compliance affairs into the division of supervision. Sen. Sarbanes quietly protested the move, and has been in discussions with the FDIC ever since.
Sources said Sen. Sarbanes was likely to be more upset with the OTS changes, which go much further than the FDIC has gone. For example, the FDIC continues to maintain separate compliance exams and compliance examiners. Congress is in recess, and calls to Sen. Sarbanes office were not returned.
The controversy over the changes to exam procedures came as OTS employees were still smarting from a round of layoffs two weeks ago that cost as many as 140 employees their jobs in the agencys five regional offices.
Employees were informed of cutbacks in a videoconference with Deputy Director Richard M. Riccobono last month. In some cases they returned to their desks to find that they had been locked out of the regulators computer system.
An employee in the Chicago office said: The way the whole thing has been handled has left a bad taste in peoples mouths. We were immediately taken off of all computer systems, like we were going to sabotage the agency or something. Legally they are probably within their rights, but it just doesnt seem right.
The OTS net losses were $168,000 in 1998, $10 million in 1999, and $13.1 million in 2000. The agency expects its net loss was $4.1 million last year and could be nearly $2 million this year.
The OTS, which funds itself by collecting assessments from the institutions it regulates, has been able to absorb the losses by dipping into a reserve fund made up of retained earnings from profitable years and a supply of operating capital that dates back to its formation in 1989.
