Feb. 26 (Bloomberg) -- IndyMac Bancorp Inc.’s collapse last year cost the U.S. government about $10.7 billion and occurred because the company’s primary regulator didn’t track the lender’s “unsafe and unsound” practices, an audit concluded.

While the Office of Thrift Supervision had blamed Senator Charles Schumer for sparking a run on the bank by releasing a letter critical of IndyMac, today’s audit said the company was already headed for probable failure. The OTS, which regulates the Pasadena, California-based lender, “failed to prevent a material loss” to the Federal Deposit Insurance Corp., the Treasury Department said in the report.

“The thrift’s high-risk business strategy warranted more careful and much earlier attention” from regulators, according to the report distributed by the Treasury’s Office of the Inspector General.

IndyMac’s “nontraditional” loans and “insufficient underwriting” helped lead to its seizure by regulators in July, according to the audit. The FDIC estimated last month that IndyMac’s failure would cost the insurance fund $8.5 billion to $9.4 billion, up from its prediction in July of $4 billion to $8 billion.

“IndyMac did not even appear on OTS’s problem thrift list provided to our office, including the June 2008 list provided to us less than a month before the thrift was closed,” the Treasury said in its report.

The OTS is expanding regulatory efforts by creating a division to monitor the largest 25 thrifts, OTS Director John Reich said today at a news briefing in Washington. It is also setting up new standards for reviewing and approving enforcement actions, said Reich, who is leaving the agency tomorrow.

Leader in Mortgages

IndyMac was once the second-biggest independent mortgage lender behind Countrywide Financial Corp., which almost failed before being bought by Bank of America Corp. It was also the second-largest lender to collapse last year, behind Washington Mutual Inc., as a deepening national recession sent home foreclosures rising.

Schumer, a Democrat from New York who is vice chairman of the Joint Economic Committee, sent a letter to the FDIC and OTS in June, outlining his concerns about the lender. A $1.55 billion run on deposits followed. Schumer’s letter was a “contributing factor in the timing of IndyMac’s demise,” the Treasury said today in its report.

“This scathing report is an 83-page case study in why our regulatory system needs to be rebuilt from scratch,” Schumer spokesman Brian Fallon said in a statement.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: February 26, 2009 17:22 EST