The Office of Thrift Supervision should have been tougher with PFF Bank and Trust, but delaying a formal action against the Pomona, Calif., thrift while an investor mulled a takeover was proper, a watchdog said Friday.

The Treasury Department's inspector general said the OTS could have taken more aggressive action in reining in PFF's construction loan troubles and forcing the $3.7 billion-asset thrift to raise capital. The agency's own "failed bank review concluded that OTS did not effectively follow up on its October 2002 limited examination" to limit PFF's concentrations.

But the inspector general's report, required by law because PFF's failure caused a "material loss" to the Deposit Insurance Fund, supported the OTS' use of informal actions — rather than a formal order — when an investor appeared ready to buy the thrift.

"Although the planned acquisition ultimately did not occur, we concluded that OTS' regulatory discretion … during this time was reasonable," the report said.

An OTS spokesman said the report noted the agency's "ratcheting up of our enforcement" as problems worsened, but he said the agency agreed with the recommendations for improvement.

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