New U.S. Policy Gives Troubled S&Ls; a Break

The Federal Home Loan Bank Board, worried about financially troubled savings and loan associations in farming and oil-producing regions across the nation, said Thursday it will ease its rules to avoid forcing ailing institutions into mergers or shutdowns.

A new “forbearance” policy will allow these S&Ls; to keep operating under current management while they await an economic revival, thus providing what one industry official described as “some breathing room.”

The bank board regulators currently have the power to force an institution into a merger when its net worth--the difference between assets and liabilities--falls below 3% of assets. In contrast, the new policy would permit net worth to fall to 0.5% of assets, or even less in some cases, without the threat that federal officials might take drastic steps to put the company out of business through a merger.

“We welcome the forbearance policy,” the U.S. League of Savings Institutions, an industry trade organization, declared in a statement. “For some time, the U.S. League has urged these changes, and we are pleased to see the board move in this direction.”

Thus, well-managed S&Ls; whose problems result from weakness in the local economy will be given extra time to return to compliance with the normal rules for financial strength, officials said. A similar policy of “sympathetic regulation” was adopted last year by the federal officials who oversee commercial banks.

For example, the prolonged slump in farm commodity prices has endangered the soundness of mortgages held by institutions in farming regions. And oil prices, which tumbled last year, caused great disruptions for S&Ls; in Texas, Oklahoma and Louisiana.

In announcing the new policy, the bank board said: “Despite the difficult problems facing many thrifts in the oil and gas, agricultural or natural resources sectors, the board believes that most have sound prospects for the future.”

It added: “Even with the losses suffered by these thrifts and the likelihood that losses will continue to occur, these thrifts possess inherent value and capable management that adheres to sound lending policies.”

The new strategy calls for “supervisory policies that will support basically sound, well-managed thrifts in weathering what is expected to be a difficult but temporary period,” the bank board said.

Forbearance means that the board “is unlikely to take administrative action” to enforce its rule calling for net worth of at least 3% of assets if:

- The S&L; is in trouble because of problems in energy, agriculture or other areas of the local economy, rather than excessive growth or speculation at the S&L; itself.

- The S&L; must have a good record of past management, including the ability to develop an adequate plan to improve its status.

- The S&L; submits an “acceptable” proposal for rebuilding its financial health and furnishes annual progress reports.

The bank board said forbearance will enforce the new standard of 0.5% of assets in most cases, but may allow some institutions to drop even below that level “upon written request.” S&Ls; allowed to operate below the normal financial standard will not be able to acquire other institutions, the board said.

Forbearance depends on the good will of the federal regulators, the bank board noted. The easier financial rules will be canceled “for any thrift engaged in unsafe or unsound or other objectionable practices . . .,” it cautioned.