A watchdog said the Office of Thrift Supervision could have taken a harder look at Downey Savings and Loan's concentration of risky loans before its November failure.
The Treasury Department's inspector general noted the "strong" informal action against the $12.8 billion-asset Downey and attempts to force capital improvements but said the OTS could have been tougher toward Downey's emphasis on option adjustable-rate mortgages.
"Although OTS examiners reported their concerns about Downey's concentration" in risky loans from the 2002 to 2006 exams, "they did not direct Downey to take corrective actions to limit the thrift's concentration in these loans," the inspector general said in an oversight report released Tuesday.
During the crisis all the regulators have been subject to such reviews, which are required when a failure causes a "material loss" to the Deposit Insurance Fund.
The Downey report is the fifth involving the OTS and the second since Friday. The Downey failure was the sixth-largest involving a thrift.
The report cited an OTS internal review, which urged a more forceful response to institutions with high concentrations of exotic loans.
A spokesman for the OTS said it agrees with the inspector general's findings.