HOME

TheInfoList



OR:

A savings and loan association (S&L), or thrift institution, is a
financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...
that specializes in accepting
savings Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
deposits and making
mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
and other loans. The terms "S&L" or "thrift" are mainly used in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
; similar institutions in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
,
Ireland Ireland ( ; ga, Éire ; Ulster-Scots: ) is an island in the North Atlantic Ocean, in north-western Europe. It is separated from Great Britain to its east by the North Channel, the Irish Sea, and St George's Channel. Ireland is the s ...
and some
Commonwealth A commonwealth is a traditional English term for a political community founded for the common good. Historically, it has been synonymous with "republic". The noun "commonwealth", meaning "public welfare, general good or advantage", dates from the ...
countries include building societies and trustee savings banks. They are often mutually held (often called mutual savings banks), meaning that the depositors and borrowers are members with voting rights, and have the ability to direct the financial and managerial goals of the organization like the members of a
credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned nonprofit financial cooperative. Credit unions generally provide services to members similar to retail banks, including deposit accounts, provis ...
or the policyholders of a
mutual insurance A mutual insurance company is an insurance company owned entirely by its policyholders. Any profits earned by a mutual insurance company are either retained within the company or rebated to policyholders in the form of dividend distributions or re ...
company. While it is possible for an S&L to be a
joint-stock company A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareholders a ...
, and even publicly traded, in such instances it is no longer truly a mutual association, and depositors and borrowers no longer have membership rights and managerial control. By law, thrifts can have no more than 20percent of their lending in commercial loans—their focus on mortgage and consumer loans makes them particularly vulnerable to housing downturns such as the deep one the U.S. experienced in 2007.


Early history

At the beginning of the 19th century,
banking A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...
was still something only done by those who had
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
s or
wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
that needed safekeeping. The first savings bank in the United States, the Philadelphia Saving Fund Society, was established on December 20, 1816, and by the 1830s, such institutions had become widespread. In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
, the first savings bank was founded in 1810 by the Henry Duncan, the minister of
Ruthwell Ruthwell is a village and parish on the Solway Firth between Dumfries and Annan in Dumfries and Galloway, Scotland. Thomas Randolph, Earl of Moray, gave Ruthwell to his nephew, Sir William Murray, confirmed to Sir John Murray, of Cockpool, in ...
Church in
Dumfriesshire Dumfriesshire or the County of Dumfries or Shire of Dumfries (''Siorrachd Dhùn Phris'' in Gaelic) is a historic county and registration county in southern Scotland. The Dumfries lieutenancy area covers a similar area to the historic county. I ...
,
Scotland Scotland (, ) is a country that is part of the United Kingdom. Covering the northern third of the island of Great Britain, mainland Scotland has a border with England to the southeast and is otherwise surrounded by the Atlantic Ocean to ...
. It is home to the Savings Bank Museum, in which there are records relating to the history of the savings bank movement in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
, as well as family memorabilia relating to Henry Duncan and other prominent people of the surrounding area. However, the main type of institution similar to U.S. savings and loan associations in the United Kingdom is not the savings bank, but the
building society A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially savings and mortgage lending. Building societies exist in the United Ki ...
and had existed since the 1770s.


U.S. savings and loan in the 20th century

The savings and loan association became a strong force in the early 20th century through assisting people with home ownership, through
mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
lending, and further assisting their members with basic saving and
investing Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
outlets, typically through
passbook A passbook or bankbook is a paper book used to record bank or building society transactions on a deposit account. Traditionally, a passbook was used for accounts with a low transaction volume, such as savings accounts. A bank teller or postma ...
savings accounts and term certificates of deposit. The savings and loan associations of this era were famously portrayed in the 1946 film '' It's a Wonderful Life''.


Mortgage lending

The earliest mortgages were not offered by banks, but by
insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
companies, and they differed greatly from the mortgage or home loan that is familiar today. Most early mortgages were short with some kind of balloon payment at the end of the term, or they were interest-only loans which did not pay anything toward the principal of the loan with each payment. As such, many people were either perpetually in debt in a continuous cycle of refinancing their home purchase, or they lost their home through
foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mort ...
when they were unable to make the balloon payment at the end of the term of that loan. The US Congress passed the
Federal Home Loan Bank Act The Federal Home Loan Bank Act, , is a United States federal law passed under President Herbert Hoover in order to lower the cost of home ownership. It established the Federal Home Loan Bank Board to charter and supervise federal savings and loan i ...
in 1932, during the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. It established the Federal Home Loan Bank and associated
Federal Home Loan Bank Board The Federal Home Loan Bank Board (FHLBB) was a board created in 1932 that governed the Federal Home Loan Banks (FHLB or FHLBanks) also created by the act, the Federal Savings and Loan Insurance Corporation (FSLIC) and nationally-chartered thrifts ...
to assist other banks in providing funding to offer long term, amortized loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes. Savings and loan associations sprang up all across the United States because there was low-cost funding available through the Federal Home Loan Bank Act.


Further advantages

Savings and loans were given a certain amount of preferential treatment by the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
inasmuch as they were given the ability to pay higher
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
rates on savings deposits compared to a regular
commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with ...
. This was known as Regulation Q (''The Interest Rate Adjustment Act of 1966'') and gave the S&Ls 50 basis points above what banks could offer. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more
mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
s, which would keep the mortgage market liquid, and funds would always be available to potential borrowers. However, savings and loans were not allowed to offer checking accounts until the late 1970s. This reduced the attractiveness of savings and loans to consumers, since it required consumers to hold accounts across multiple institutions in order to have access to both checking privileges and competitive savings rates. In the 1980s the situation changed. The
United States Congress The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
granted all thrifts in 1980, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 was designed to help the banking industry to combat disintermediation of funds to higher-yielding non-deposit products such as money market mutual funds. It also allowed thrifts to make consumer loans up to 20 percent of their assets, issue credit cards, and provide negotiable order of withdrawal (NOW) accounts to consumers and nonprofit organizations. Over the next several years, this was followed by provisions that allowed banks and thrifts to offer a wide variety of new market-rate deposit products. For S&Ls, this deregulation of one side of the balance sheet essentially led to more inherent interest rate risk inasmuch as they were funding long-term, fixed-rate mortgage loans with volatile shorter-term deposits. In 1982, the Garn-St. Germain Depository Institutions Act was passed and increased the proportion of assets that thrifts could hold in consumer and commercial real estate loans and allowed thrifts to invest 5 percent of their assets in commercial, corporate, business, or agricultural loans until January 1, 1984, when this percentage increased to 10 percent.


Decline

During the savings and loan crisis, from 1986 to 1995, the number of federally insured savings and loans in the United States declined from 3,234 to 1,645. Analysts mostly attribute this to unsound real estate lending. The market share of S&Ls for single family mortgage loans went from 53% in 1975 to 30% in 1990. The following is a detailed summary of the major causes for losses that hurt the S&L business in the 1980s according to the United States League of Savings Associations: # Lack of net worth for many institutions as they entered the 1980s, and a wholly inadequate net worth regulation. # Decline in the effectiveness of Regulation Q in preserving the spread between the cost of money and the rate of return on assets, basically stemming from inflation and the accompanying increase in market interest rates. # Inability to vary the return on assets with increases in the rate of interest required to be paid for deposits. # Increased competition on the deposit gathering and mortgage origination sides of the business, with a sudden burst of new technology making possible a whole new way of conducting financial institutions generally and the mortgage business specifically. # A rapid increase in investment powers of associations with passage of the Depository Institutions Deregulation and Monetary Control Act (the Garn-St Germain Act), and, more important, through state legislative enactments in a number of important and rapidly growing states. These introduced new risks and speculative opportunities which were difficult to administer. In many instances management lacked the ability or experience to evaluate them, or to administer large volumes of nonresidential construction loans. # Elimination of regulations initially designed to prevent lending excesses and minimize failures. Regulatory relaxation permitted lending, directly and through participations, in distant loan markets on the promise of high returns. Lenders, however, were not familiar with these distant markets. It also permitted associations to participate extensively in speculative construction activities with builders and developers who had little or no financial stake in the projects. # Fraud and insider transaction abuses, especially in the case of state-chartered and regulated thrifts, where regulatory supervision at the state level was lax, thinly-spread, and/or insufficient (e.g.: Texas, Arizona). # A new type and generation of opportunistic savings and loan executives and owners — some of whom operated in a fraudulent manner — whose takeover of many institutions was facilitated by a change in FSLIC rules reducing the minimum number of stockholders of an insured association from 400 to one. # Dereliction of duty on the part of the board of directors of some savings associations. This permitted management to make uncontrolled use of some new operating authority, while directors failed to control expenses and prohibit obvious conflict of interest situations. # A virtual end of inflation in the American economy, together with overbuilding in multifamily, condominium-type residences and in commercial real estate in many cities. In addition, real estate values collapsed in the energy states —
Texas Texas (, ; Spanish: ''Texas'', ''Tejas'') is a state in the South Central region of the United States. At 268,596 square miles (695,662 km2), and with more than 29.1 million residents in 2020, it is the second-largest U.S. state by ...
,
Louisiana Louisiana , group=pronunciation (French: ''La Louisiane'') is a state in the Deep South and South Central regions of the United States. It is the 20th-smallest by area and the 25th most populous of the 50 U.S. states. Louisiana is bord ...
,
Oklahoma Oklahoma (; Choctaw: ; chr, ᎣᎧᎳᎰᎹ, ''Okalahoma'' ) is a state in the South Central region of the United States, bordered by Texas on the south and west, Kansas on the north, Missouri on the northeast, Arkansas on the east, New ...
particularly due to falling oil prices — and weakness occurred in the mining and agricultural sectors of the economy. # Pressures felt by the management of many associations to restore net worth ratios. Anxious to improve earnings, they departed from their traditional lending practices into credits and markets involving higher risks, but with which they had little experience. # The lack of appropriate, accurate, and effective evaluations of the savings and loan business by public accounting firms, security analysts, and the financial community. # Organizational structure and supervisory laws, adequate for policing and controlling the business in the protected environment of the 1960s and 1970s, resulted in fatal delays and indecision in the examination/supervision process in the 1980s. # Federal and state examination and supervisory staffs insufficient in number, experience, or ability to deal with the new world of savings and loan operations. # The inability or unwillingness of the
Federal Home Loan Bank Board The Federal Home Loan Bank Board (FHLBB) was a board created in 1932 that governed the Federal Home Loan Banks (FHLB or FHLBanks) also created by the act, the Federal Savings and Loan Insurance Corporation (FSLIC) and nationally-chartered thrifts ...
and its legal and supervisory staff to deal with problem institutions in a timely manner. Many institutions, which ultimately closed with big losses, were known problem cases for a year or more. Often, it appeared, political considerations delayed necessary supervisory action. While not specifically identified above, a related specific factor was that S&Ls and their lending management were often inexperienced with the complexities and risks associated with commercial and more complex loans as distinguished from their roots with "simple" home mortgage loans.


Consequences of U.S. government acts and reforms

As a result, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) dramatically changed the savings and loan industry and its federal regulation. Here are the highlights of this legislation, signed into law on August 9, 1989: # The
Federal Home Loan Bank Board The Federal Home Loan Bank Board (FHLBB) was a board created in 1932 that governed the Federal Home Loan Banks (FHLB or FHLBanks) also created by the act, the Federal Savings and Loan Insurance Corporation (FSLIC) and nationally-chartered thrifts ...
(FHLBB) and the Federal Savings and Loan Insurance Corporation (FSLIC) were abolished. # The Office of Thrift Supervision (OTS), a bureau of the
United States Treasury Department The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...
, was created to charter, regulate, examine, and supervise savings institutions. # The Federal Housing Finance Board (FHFB) was created as an independent agency to oversee the 12
Federal Home Loan Banks The Federal Home Loan Banks (FHLBanks, or FHLBank System) are 11 U.S. government-sponsored banks that provide liquidity to the members of financial institutions to support housing finance and community investment. Overview The FHLBank System wa ...
(also called district banks), formerly overseen by the FHLBB. # The Savings Association Insurance Fund (SAIF) replaced the FSLIC as an ongoing insurance fund for thrift institutions. (Like the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
(FDIC), FSLIC was a permanent corporation that insured savings and loan accounts up to $100,000.) SAIF was administered by the FDIC alongside its sister fund for banks, Bank Insurance Fund (BIF) until 2006 when the Federal Deposit Insurance Reform Act of 2005 (effective February 2006) provided, among other provisions, that the two funds merge to constitute the Depositor Insurance Fund (DIF), which would continue to be administered by the FDIC. # The Resolution Trust Corporation (RTC) was established to dispose of failed thrift institutions taken over by regulators after January 1, 1989. # FIRREA gave both
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...
additional responsibility to support mortgages for low- and moderate-income families. The
Tax Reform Act of 1986 The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986. The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The ...
had also eliminated the ability for investors to reduce regular wage income by so-called "passive" losses incurred from real estate investments, e.g., depreciation and interest deductions. This caused real estate value to decline as investors pulled out of this sector.


Characteristics

The most important purpose of savings and loan associations is to make
mortgage loans A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
on residential property. These organizations, which also are known as savings associations, building and loan associations, cooperative banks (in
New England New England is a region comprising six states in the Northeastern United States: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. It is bordered by the state of New York to the west and by the Canadian provinces ...
), and homestead associations (in
Louisiana Louisiana , group=pronunciation (French: ''La Louisiane'') is a state in the Deep South and South Central regions of the United States. It is the 20th-smallest by area and the 25th most populous of the 50 U.S. states. Louisiana is bord ...
), are the primary source of financial assistance to a large segment of American homeowners. As home-financing institutions, they give primary attention to single-family residences and are equipped to make loans in this area. Some of the most important characteristics of a savings and loan association are that: # It is generally a locally owned and privately managed home financing institution. # It receives individuals' savings and uses these funds to make long-term amortized loans to home purchasers. # It makes loans for the construction, purchase, repair, or refinancing of houses. # It is state or federally chartered.


Differences from savings banks

Accounts at savings banks were insured by the FDIC. When the Western Savings Bank of Philadelphia failed in 1982, it was the FDIC that arranged its absorption into the Philadelphia Savings Fund Society (PSFS). Savings banks were limited by law to only offer savings accounts and to make their income from mortgages and student loans. Savings banks could pay one-third of 1% higher interest on savings than could a commercial bank. PSFS circumvented this by offering "payment order" accounts which functioned as checking accounts and were processed through the Fidelity Bank of Pennsylvania. The rules were loosened so that savings banks could offer automobile loans, credit cards, and actual checking accounts. In time PSFS became a full commercial bank. Accounts at savings and loans were insured by the FSLIC. Some savings and loans did become savings banks, such as First Federal Savings Bank of Pontiac in Michigan. What gave away their heritage was that their accounts continued to be insured by the FSLIC. Savings and loans accepted deposits and used those deposits, along with other capital that was in their possession, to make loans. What was revolutionary was that the management of the savings and loan was determined by those that held deposits and in some instances had loans. The amount of influence in the management of the organization was determined based on the amount on deposit with the institution. The overriding goal of the savings and loan association was to encourage savings and investment by common people and to give them access to a financial intermediary that otherwise had not been open to them in the past. The savings and loan was also there to provide loans for the purchase of large ticket items, usually homes, for worthy and responsible borrowers. The early savings and loans were in the business of "neighbors helping neighbors".


See also

* Cooperative banking *
Credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned nonprofit financial cooperative. Credit unions generally provide services to members similar to retail banks, including deposit accounts, provis ...


References


External links


Office of Thrift Supervision
{{DEFAULTSORT:Savings And Loan Association Cooperative banking *