What it means
In the 1980s, many savings and loan associations (thrifts that took deposits and made home loans) ran into trouble because of rising interest rates, risky lending and weak oversight. The deposit insurer for thrifts could not cover the losses, and taxpayers faced a large bill.
FIRREA was Congress's attempt to restore confidence and fix the structure. The act abolished the thrift insurer and the regulator then in charge, and moved deposit insurance for thrifts to the Federal Deposit Insurance Corporation (FDIC).
It created the Office of Thrift Supervision to regulate savings institutions, and it set up the Resolution Trust Corporation to take over failed thrifts and sell their assets. It also required thrifts to meet higher capital standards, similar to those of banks.
FIRREA tightened real estate lending and appraisal rules. It required that appraisals for federally related transactions be done by qualified, state-certified or licensed appraisers, which reduced the practice of inflated property values supporting weak loans.
These requirements still shape mortgage underwriting today. The law also increased civil and criminal penalties for fraud affecting federally insured institutions.
In later years, prosecutors have used its civil penalty provisions against large financial firms, since it allows action based on mail or wire fraud that affects a bank. That makes it relevant to compliance teams well beyond the thrift industry.
Many of the structures it created have since been merged or replaced; for example, the thrift regulator no longer exists as a separate agency. Even so, the principles it set, that insured institutions need adequate capital, honest valuations and strong enforcement, remain at the heart of bank regulation.
The law is also a lesson in how losses are shared. When a deposit insurer runs short of money, the cost falls on taxpayers or on the surviving institutions through higher premiums.
FIRREA put the thrift insurance fund under the FDIC and raised premiums, so that the industry paid a larger share of the cost of protecting depositors.
In practice
Real-world examples.
Example
A mortgage lender hires a state-certified appraiser for every loan it sells to an investor. This is part of the standards that arose from the 1989 reforms, and the lender must keep appraisal records for audit. If an appraiser is found to have inflated values, the lender can be required to repurchase the loan from the investor.
Example
A compliance lawyer at a large bank assesses the risk of civil penalties. She notes that FIRREA allows the government to pursue penalties based on fraud that affects a federally insured institution, even years after the event. She advises the board that the longer limitation period makes careful record keeping essential.
Example
A financial historian lecturing on banking crises uses FIRREA as an example of how a crisis led to a change in structure. She explains how the creation of the Resolution Trust Corporation showed the government managing and selling the assets of failed institutions. Students compare it with later crisis responses to see what policymakers repeated and what they changed.
Case study
Seen in the real world.
Valleyview Savings is an illustrative, fictional thrift from the 1980s that made large commercial real estate loans well beyond its expertise. When property values fell, the thrift became insolvent, and the insurer was not able to cover its depositors in full.
Under the reforms that followed, an authority took over the thrift's assets and its loans were sold to investors. The thrift's managers were investigated, and one executive who had approved inflated appraisals faced civil and criminal action.
In this illustrative story the episode shows why the law demanded higher capital, independent appraisals and stronger enforcement. Observers saw the case as typical of the failures that prompted Congress to act. Readers of the case are reminded that lax valuation standards can hide losses until it is too late.
Watch out
Common mistakes.
- Believing FIRREA applies only to savings and loans, when its fraud penalties can reach many financial firms, including large banks and their employees.
- Assuming the agencies it created still exist, when several were later merged or closed.
- Confusing FIRREA with the Dodd-Frank Act, which came two decades later after the 2008 crisis.
Questions
People also ask.
What was FIRREA's main purpose?
To resolve the savings and loan crisis, restructure thrift regulation and deposit insurance, and strengthen enforcement against fraud.
What was the Resolution Trust Corporation?
A temporary government agency that took over failed thrifts and sold their assets to recover value for taxpayers, and which closed once its work was done.
Why is FIRREA still cited today?
Its civil penalty provisions and appraisal rules continue to be used by regulators and prosecutors, so compliance teams still need to understand them.
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