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OTS Ignored Warnings on IndyMac, Report Finds

By Binyamin Appelbaum
Washington Post Staff Writer
Friday, February 27, 2009

Senior officials at the Office of Thrift Supervision repeatedly ignored warnings, including from their own employees, about the dangerous excesses at California mortgage lender IndyMac Bancorp, according to a report released yesterday by the Treasury Department's inspector general.

The report says IndyMac, which failed in July, ultimately was responsible for its own demise, but it adds that the OTS should have acted to restrain the company as early as 2005.

It is the latest blow to the agency, which oversees banks that specialize in mortgage lending. In the last year, several of the largest institutions under its supervision have collapsed as a consequence of profligate lending that OTS failed to prevent, including at Washington Mutual, IndyMac and Downey Savings and Loan Association.

The report says that regulators failed to notice basic problems, for example overlooking for years that IndyMac was making loans to residential developers without verifying that projects were fully funded. In other instances, it says that examiners identified problems but senior regulators failed to require reforms, for example allowing IndyMac to maintain its residential appraisal procedures even after finding that the company was violating basic standards.

The report does not mention names, but the inspector general has said previously that the former head of OTS's western region, Darrel W. Dochow, allowed the company to conceal its problems, in one instance by giving IndyMac permission to falsify a financial filing.

Dochow, who had been suspended from his position, said in a letter last week that he would resign in March.

The report also largely absolves Sen. Charles E. Schumer (D-N.Y.) of responsibility for IndyMac's collapse. Schumer wrote a letter to regulators in June that publicized the company's problems. Regulators blamed Schumer for precipitating a fatal run on the bank. The report found that Schumer's letter contributed to the timing of IndyMac's demise, but was not the cause because "the thrift was already on a course for probable failure."

Schumer's office issued a statement calling for an overhaul of the OTS.

"This scathing report is an 83-page case study in why our regulatory system needs to be rebuilt from scratch. In extraordinary detail, the audit documents that federal regulators not only turned a blind eye to IndyMac's reckless lending practices, but also actively participated in a cover-up to help the bank avoid scrutiny."

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