Now that savings and loan regulators have decided to modify the loans-to-one-borrower rule for thrifts, it may be a good time to take another look at the entire S&L bailout law to determine how it can be improved.

Implicit in the decision to ease loan limits for the nation's thrifts is an admission that at least one aspect of the S&L rescue law -- the Financial Institutions Reform and Recovery Act (FIRREA) -- is far too arbitrary. There could be other provisions that run counter to realities in the economy while making it more difficult to carry out the intent of the law -- rescuing the S&Ls.

Amid heavy lobbying by the construction industry and indications that restrictive loan regulations are causing problems in the economy, the Office of Thrift Supervision this week modified the so-called loans-to-one-borrower rule. Previously, S&Ls were barred under FIRREA from lending more than 15 percent of their capital to one borrower. Congress imposed the limit after being told that some thrifts had failed because such borrowers couldn't repay huge loans. That rationale failed to take into account that a small S&L could make a lot of bad small loans and go belly up.

The temporary change in the loan limit allows healthy thrifts to lend as much as 60 percent of their capital for residential projects until the end of 1990, 30 percent in 1991 and 15 percent thereafter. In what is perhaps the most crucial change for many, S&Ls will be permitted at the same time to renew existing loans to developers, putting some much needed slack in a tight real estate industry.

The OTS is to be commended for recognizing the need to be flexible, but the change falls a step short of a truly reasonable approach that's necessary to prevent wholesale failures of more S&Ls and a staggering increase in taxpayer liability.

For one thing, the agency probably needs to reexamine its definition of a healthy S&L. It's possible, critics contend, for an S&L to have few bad loans, be profitable and yet be classified as unhealthy.

"I have very few bad real estate loans -- less than 1 percent -- and I'm profitable but I'm in non-compliance," complained William F. Sinclair, the chairman and chief executive officer of Washington Federal Savings Bank. "I'm in noncompliance for one reason: I made a lot of real estate loans {so} I am just short of compliance in risk-weighted assets."

In the arcane language of financial institutions and regulators, S&Ls are required to maintain certain levels of core capital (stockholders' equity, essentially), tangible capital (core capital, minus intangible assets) and risk-based capital. In the last category, assets are assigned risk weights expressed in percentages. Assets representing investments in government obligations, for example, are given a weight of 20 percent. Residential first-mortgage loans are assigned a 50 percent risk weight.

The irony of Washington Federal's dilemma is that it did precisely what S&Ls are supposed to do -- make mortgage loans. It has a net worth of $20 million, compared with a negative net worth of $34 million in 1984, when Sinclair took over as chief executive. Still, it carries the stigma of being unhealthy.

"The big killer is that one-borrower rule," Sinclair grumbled. "I'm not asking for forbearance. I'm asking for reasonableness."

That was last week. The OTS rule change for healthy thrifts merely added to Sinclair's frustration. Without an exception to the old loans-to-one-borrower rule, he will be forced to call in loans that exceed 15 percent of Washington Federal's capital.

The situation at Washington Federal is by no means unique. When the other Washington Federals across the country are forced to call in loans because they exceed 15 percent of capital, the result could be disastrous for borrowers. Moreover, we could see scores of S&Ls collapse as earnings fall.

Sinclair's account of a recent decision by Washington Federal to call in a loan that didn't meet the 15 percent requirement has serious implications, not just for the S&L industry, but for other sectors of the economy as well.

"We had a developer come in for a $9 million land acquisition and development loan. We dispersed $4 million for him to acquire the land. He started building in 1988. Now the loan has come due. I had to call the loan because my loan {limit} to one borrower is $3 million. At this point, {the developer} needs money to complete the houses but I have to call his loan. He will take action against me because he's got a legal contract. His statement to me was, 'What are you going to do with the 100 lots I give you?' " in foreclosure?

"I'm going to have to hire him to complete the project. At the same time, my net worth falls. All over the country each of us will have to call several millions of dollars in loans. As a result, developers will go into default. In the next year or so, this thing will wreak havoc. What sense does it make to force us to call those loans and force builders into default?"

That's the crux of the question that S&L executives such as Sinclair and Perpetual Financial Corp. Chairman Thomas J. Owen asked repeatedly before Congress passed the so-called S&L rescue legislation last year. Owen argued long and passionately for some regulatory changes -- including the loans-to-one-borrower rule -- to be phased in to avoid almost certain disruptions in earnings and the economy.

The decision by the Office of Thrift Supervision to do just that, though limited in scope, is vindication of sorts for those who warned of the consequences of enforcing the restrictive 15 percent loan limit without benefit of a grandfather provision.

"I applaud {OTS director} Timothy Ryan," says Sinclair. "It was an aggressive move but he needs to go further. There's got to be some flexibility for those that are not in compliance to get healthy. I'm not asking the OTS to make a blanket change. Just do it on a case-by-case basis."

Sinclair insists, "The government shot itself in the foot with {the S&L bailout} legislation, hoping that it would cure things."

The pain could get worse if Congress and regulators fail to review the S&L rescue law in the context of an economy that is considerably weaker than when the measure was approved.