NORTH PROVIDENCE – Federal regulators have slapped a series of tough restrictions on Union Federal Savings Bank in response to a big increase in the number of student loans on the bank’s balance sheet caused by the credit crunch.

Union Federal will not be able to originate any additional student loans for the rest of the year, during which time the bank is required to reduce its exposure to losses from student loans, under the terms of agreements signed last Thursday by the U.S. Office of Thrift Supervision (OTS), Union Federal and its parent company, The First Marblehead Corp.

OTS signed off on the November 2006 acquisition of Union Federal by Boston-based First Marblehead (NYSE: FMD), but the amount of student loans on Union Federal’s books is now considerably higher than had been projected when the sale was approved, according to 8-K regulatory filings with the Securities and Exchange Commission.

First Marblehead said Union Federal has been unable to package and sell the student loans to investors since September 2007 “due to severe and continuing disruption in the securitization markets.” The bank stopped making new student loans early last year, and First Marblehead said it has been increasing the bank’s reserves to prepare for losses since then.

“We have been working diligently on addressing these issues in collaboration with the OTS,” Daniel M. Meyers, First Marblehead’s CEO, said in a statement. “We have already taken several steps to reduce the private student loan concentration at the bank, and First Marblehead has acted as a source of strength for the bank, providing capital and operational support.”

“We are committed to continuing this progress and resolving all of these issues completely,” Meyers added.

The agreement also requires Union Federal to develop new liquidity plans and submit new business plans for the next three years to OTS by early September. The bank is also required to have an outside analysis performed on its student loan portfolio.

“This [agreement] in no way affects our customers’ deposit or loan accounts,” Rodney C. Whitwell, Union Federal’s CEO, said in a statement. “All deposit accounts are fully covered up to the FDIC limits of $250,000, and customers can expect the same level of friendly and efficient service from the bank.”

The Office of Thrift Supervision has come under fierce criticism from lawmakers and analysts in recent months for failing to adequately perform oversight on the institutions under its jurisdiction. The agency would be eliminated under the regulatory overhaul plan proposed by the Obama administration last month.

Additional information is available at UnionFSB.com.