The big California thrifts are threatening to sue the Federal Housing Finance Board over its decision to allow the Federal Home Loan banks to hold some home loans.

Only one such project has been approved so far: a $750 million experiment at the Federal Home Loan Bank of Chicago. But others may be in the works.

In an interview, the president of the Western League of Savings Institutions, Louis H. Nevins, warned the controversy could escalate into a lawsuit if the Finance Board doesn't back down.

"We're looking for some sort of signal that there won't be any more nontargeted pilot programs. Absent a signal like that, I think clearly opponents will have to consider other options including the possibility of legal action," Mr. Nevins said.

On Friday, the Western League and the California Bankers Association sent a letter to California's congressional delegation protesting the Chicago program, which, they said, "brings the Chicago (Federal Home Loan) bank into direct and unfair competition with private mortgage lenders."

Together, the two trade groups represent virtually all the members of the San Francisco Federal Home Loan Bank-the largest of 12 in the system.

Under the terms of the experiment, the Chicago Federal Home Loan Bank will invest in single-family loans made by member banks and thrifts. The lenders will absorb the first credit losses.

While some thrifts and banks worry that such programs will pave the way for the 12 Federal Home Loan banks to become formidable government-backed competitors, advocates say the experiments actually make lenders more competitive.

Bruce Morrison, chairman of the Finance Board, could not be reached for comment on the threatened lawsuit. But in an interview Friday, he reiterated that the pilot was a "controlled experiment" that fits the Federal Home Loan banks' mission to facilitate mortgage finance.

He would not say whether the Finance Board is talking to other Home Loan banks about similar pilots.

Mr. Morrison said key members of both congressional banking committees had been briefed on the pilot and have expressed support for at least testing the idea.

Mr. Nevins of the Western League said his group isn't eager to press its claim in court. "It's expensive and a very uncertain way to proceed," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.