Under intense lobbying by the home building, real estate and thrift industries, the Bush administration is considering a plan to temporarily set aside one of the key reforms of last year's thrift rescue bill and sharply increase the amount of money that a savings and loan institution can lend to any one home builder.
The proposal, now being reviewed by the Treasury Department, would allow healthy S&Ls to lend home builders four times as much money as they were permitted to borrow under strict lending limits passed by Congress last summer.
The S&L rescue bill drastically tightened the "loans to one borrower" limit after research by the General Accounting Office concluded that a number of thrifts had failed because they made excessively large loans to developers and builders who then were unable to repay their debts. The goal was to limit the damage to an S&L if one large borrower got into trouble.
Officials of the Office of Thrift Supervision described the plan as a "transition rule" that would help the thrift and real estate industries adapt to the lower limits. OTS attorneys said they believe the agency has the flexibility to interpret how the congressionally mandated limits are to be implemented.
The National Association of Home Builders, the National Association of Realtors and thrift industry groups have been waging a large-scale lobbying campaign against the lower lending limits. They complain that the restrictions are cutting off credit to home builders, crippling the construction industry and slowing down the nation's economy. About 50 members of the House of Representatives are sponsoring legislation to loosen the limits and support for the measure is building in the Senate.
The OTS proposal, first reported by American Banker, a trade daily, would give the real estate industry much less than it is asking for. It would loosen the lending limit only for home builders, but not for commercial real estate developers. And the higher lending limits would apply only to the roughly 17 percent of thrifts that already meet the higher capital requirements that go into effect three years from now. The thrift and real estate lobbyists want the rule to apply to any S&L that meets the first phase of the new requirements.
"All we were asking for was time to adapt to the new rules," said Floyd Williams, legislative counsel for the NAHB. "They were changing the rules overnight," he said, forcing builders who had long-standing relationships with thrifts to find new lenders because they could no longer borrow enough to finance their operations.
The S&L rescue and reform law passed by Congress last summer required thrifts to comply with the same limit that has applied to banks for more than 50 years: They can lend no more than 15 percent of their capital to a single borrower. Capital is the money that is put up by the owners of a financial institution; like the deductible on an insurance policy, the capital is used up first when the institution starts losing money. Once the capital is depleted, the institution fails and has to be taken over by the government.
For years, S&Ls were allowed to lend the equivalent of 100 percent of their capital to a single borrower. The OTS proposal would set the lending limit at 60 percent of capital for the remainder of next year, at 30 percent the year after and then 15 percent. The phase-in schedule is similar to one proposed by Sen. Richard Shelby (D-Ga.).
One of the most outspoken advocates of lowering that limit has been William Taylor, the top banking regulator for the Federal Reserve Board and President Bush's unofficial choice to be the next head of the Federal Deposit Insurance Corp.
Taylor has testified on several occasions that when S&Ls are allowed to lend 100 percent of their capital to a single borrower, "If you make one bad loan you're out of business." With a 15 percent limit, he said, it takes seven bad loans before a thrift is wiped out.
The same point was made yesterday by a Senate Banking Committee source who opposed the OTS proposal: "Should we really allow the owners of a federally insured thrift to bet the entire institution on one or two loans?"