Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)

Definition

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) is a United States federal law enacted in response to the Savings and Loan (S&L) crisis of the 1980s. FIRREA aimed to address the failures within the real estate and banking sectors by:

• Reforming the regulatory framework of financial institutions.
• Establishing stricter regulatory oversight and accountability.
• Enhancing the enforcement of laws against bank fraud and other financial crimes.
• Creating the Resolution Trust Corporation (RTC) to manage and dispose of assets held by insolvent thrifts.

Key Provisions

• Oversight: Abolished the Federal Home Loan Bank Board (FHLBB) and replaced it with the Office of Thrift Supervision (OTS) under the Department of the Treasury to oversee thrifts.
• Insurance: Enhanced the powers of the Federal Deposit Insurance Corporation (FDIC) to manage the insurance of deposits at savings institutions.
• Resolution Trust Corporation (RTC): Created to handle the disposition of assets from failed institutions.
• Appraisal Standards: Instituted the Appraisal Standards Board (ASB) to regulate appraisal practices affecting federally related transactions.
• Capital Requirements: Increased capital requirements for financial institutions to safeguard their stability.
• Penalties: Strengthened penalties for fraud, embezzlement, and other financial crimes affecting banks and S&Ls.

Examples

1. Enforcement Actions Against Fraud: Using FIRREA, the FDIC successfully pursued legal actions against executives of failed banks for misconduct, recovering significant financial penalties.
2. Resolution Trust Corporation (RTC): The RTC facilitated the liquidation of distressed real estate assets and managed the closure of insolvent S&Ls, stabilizing the industry.
3. Appraisal Reforms: The Appraisal Standards Board (ASB) established rigorous appraisal standards to ensure the reliability of property valuations in real estate transactions.

Frequently Asked Questions (FAQs)

What led to the creation of FIRREA?

• FIRREA was created in response to the Savings and Loan crisis of the 1980s, which saw the insolvency of numerous savings and loan associations due to poor financial management and deregulation.

What is the Resolution Trust Corporation (RTC)?

• The RTC was a federal agency established under FIRREA to manage and dispose of the assets of insolvent savings and loan institutions.

How does FIRREA impact appraisals in real estate transactions?

• FIRREA mandated the establishment of the Appraisal Standards Board (ASB), which set rigorous standards for appraisals in federally related transactions to enhance transparency and accuracy.

What role does the FDIC play under FIRREA?

• Under FIRREA, the FDIC’s role was expanded to include greater oversight and management of deposit insurance for savings institutions and the authority to impose stricter regulations on insured banks.

How did FIRREA strengthen penalties for financial crimes?

• FIRREA increased the financial penalties and prison sentences for bank fraud, embezzlement, and other related crimes, providing stronger deterrents against such activities.

Related Terms

• Savings and Loan (S&L) Crisis: A series of bank failures in the 1980s largely attributed to deregulation, high-risk lending practices, and inadequate oversight.
• Office of Thrift Supervision (OTS): A government agency created by FIRREA to regulate thrift institutions, now merged into the Office of the Comptroller of the Currency (OCC).
• Federal Deposit Insurance Corporation (FDIC): A U.S. government agency that provides insurance for deposits at banks and thrift institutions.
• Resolution Trust Corporation (RTC): A temporary federal agency established by FIRREA to manage and dispose of assets from failed savings and loans.

Online Resources

• Federal Deposit Insurance Corporation (FDIC)
• U.S. Department of the Treasury
• Federal Financial Institutions Examination Council (FFIEC)

References

• U.S. House of Representatives. “H.R.1278 - Financial Institutions Reform, Recovery, and Enforcement Act of 1989.” Congress.gov.
• Federal Deposit Insurance Corporation (FDIC). “Managing the Crisis: The FDIC and RTC Experience.”

Suggested Books for Further Studies

• “The Savings and Loan Crisis: Lessons from a Cautionary Tale” by James R. Barth, et al.
• “Law, Bubbles, and Financial Regulation” by Erik Gerding.
• “The Looming Bank Collapse” by John B. Taylor.

Real Estate Basics: FIRREA Fundamentals Quiz