savings and loan association

n. (Abbr. S & L)
A financial institution, organized cooperatively or corporately, that holds the funds of its members or clients in interest-bearing accounts and certificates of deposit, invests these funds chiefly in home mortgage loans and may also offer checking accounts and other banking services.

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depository financial institution, federally or state chartered, that obtains the bulk of its deposits from consumers and holds the majority of its assets as home mortgage loans. A few such specialized institutions were organized in the 19th century under state charters but with minimal regulation. Reacting to the crisis in the banking and home building industries precipitated by the Great Depression, Congress in 1932 passed the Federal Home Loan Bank Act, establishing the federal home loan bank system to supplement the lending resources of state-chartered savings and loans (S&Ls). The Home Owners’ Loan Act of 1933 created a system for the federal chartering of S&Ls under the supervision of the Federal Home Loan Bank Board. Deposits in federal S&Ls were insured with the formation of the Federal Savings and Loan Insurance Corporation in 1934. A second wave of restructuring occurred in the 1980s. The depository institutions deregulation and monetary control act of 1980 set a six-year timetable for the removal of interest rate ceilings, including the S&Ls’ quarter-point rate advantage over the commercial bank limit on personal savings accounts. The act also allowed S&Ls limited entry into some markets previously open only to commercial banks (commercial lending, nonmortgage consumer lending, trust services) and, in addition, permitted mutual associations to issue investment certificates. In actual effect, interest rate parity was achieved by the end of 1982. The Garn-St Germain Depository Institutions Act of 1982 accelerated the pace of deregulation and gave the Federal Home Loan Bank Board wide latitude in shoring up the capital positions of S&Ls weakened by the impact of record-high interest rates on portfolios of old, fixed-rate mortgage loans. The 1982 act also encouraged the formation of stock savings and loans or the conversion of existing mutual (depositor-owned) associations to the stock form, which gave the associations another way to tap the capital markets and thereby to bolster their net worth.
In 1989, responding to a massive wave of insolvencies caused by mismanagement, corruption, and economic factors, Congress passed the financial institutions reform, recovery and enforcement act of 1989 (FIRREA) that revamped the regulatory structure of the industry under a newly created agency, the office of thrift supervision (OTS). Disbanding the federal savings and loan insurance corporation (FSLIC), it created the savings association insurance fund (SAIF), which later merged with the bank insurance fund (BIF) to form the deposit insurance fund (DIF) under the administration of the federal deposit insurance corporation (FDIC). It also created the resolution trust corporation (RTC) and resolution funding corporation (REFCORP) to deal with insolvent institutions and scheduled the consolidation of their activities with SAIF after 1996. The Federal Home Loan Bank Board was replaced by the Federal Housing Finance Board, which in 2008 was replaced by the federal housing finance agency (FHFA).
See also Savings Bank.

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Depository institutions that specialize in originating, servicing, and holding mortgage loans, primarily on owner-occupied residential property.


Example: Traditionally, savings and loan associations were distinguished from commercial banks by their emphasis on long-term home mortgage loans, separate regulations and deposit insurance mechanisms, and their affiliation with the federal home loan bank system.
Passage of firrea in 1990 destroyed most of these divisions. Today all depository institutions are eligible for affiliation with the Home Loan Bank System if they are willing to specialize in home mortgages.

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Savings and Loan Associations (S&Ls) under various names were among the self-help organizations that so impressed Alexis de Tocqueville on his visits to the United States in the 1800s. Pioneered in the Northeast in the 1830s, which was also the era of "free banking," when bank charters were available for the asking, savings and loan associations spread through the country after the Civil War. Their dual purpose was to provide a safe place for a community's savings and a source of financing for the construction of houses. In most instances, their charters restricted S&Ls to loans secured by residential property. A symmetry emerged here as the American financial system developed, for until 1927 nationally chartered commercial banks and most state-chartered commercial banks were prohibited from making loans secured by real property.

S&Ls in most states were cooperatives or "mutuals." The significant exceptions were California, Texas, and Ohio. In theory and law, if not in reality, their depositors "owned" them, except that until 1966 the word "deposit" was wrong, as was the word "interest" as the reward for the deposit. By law, what the S&L "depositor" received was "shares" in an enterprise that paid "dividends" from interest earned on the mortgages in which the savings were invested. The boards of these institutions normally consisted of a builder, a real estate broker, a real estate lawyer, a real estate appraiser, a real estate insurer, and a real estate accountant who audited the books. Conflicts of interest were accommodated at all times. Self-dealing could be even worse in states that permitted for-profit operation of S&Ls by individual and corporate owners, especially in California, where the law permitted the payment of dividends beyond what the S&L actually earned.

Most charters for mutual S&Ls limited the institution's loans to residential real estate located within fifty miles of the office. California for-profit S&Ls could and did invest in other things, including corporate equity. Prior to the New Deal, these real estate loans were not "self-amortizing" mortgages. Typically, they ran for five years with a "balloon" payment at the end to be refinanced by the householder.

Until the 1970s these institutions did not offer third-party payment services, and they reserved the right to make "shareholders" wait as long as a year to get their money back. But participants expected that they could take their money out when they wanted it, and sometimes they could not. Mortgages on residential property could not be sold to get cash in times of trouble. The danger of a run was ever present, portrayed most memorably in the 1946 film It's a Wonderful Life. The earnings potential of a well-run S&L was limited by the need to keep substantial reserves in cash or U.S. government paper.

More than a third of the 16,000 such institutions in the United States at the end of the 1920s were sucked into the whirlpool of the Great Depression, stimulating the most long-lived of President Herbert Hoover's efforts to combat it. The Hoover administration created eleven geographically scattered Federal Home Loan Banks to be owned by the S&Ls of the district, as the Federal Reserve Banks are owned by the banks in their districts, but supervised by the Federal Home Loan Bank Board, as the Federal Reserve district banks are supervised by the board of governors of the Federal Reserve. Funded by the sale of notes in the money markets, these Home Loan Banks would make cash advances to the S&Ls in their jurisdiction, collateralized with mortgages.

The act also authorized the board to issue federal charters for mutual S&Ls and to establish the Federal Savings and Loan Insurance Corporation (FSLIC) to insure the par value of "shares" in S&Ls to the same $2,500 maximum the Federal Deposit Insurance Corporation (FDIC) would insure bank deposits. In 1974 the law was amended to permit corporate federal S&Ls. The Home Owners' Loan Corporation was formed to buy mortgages from S&Ls to liquefy the system, and the secretary of the treasury was encouraged to use public funds to purchase preferred stock in S&Ls that otherwise would be unable to write mortgages for their neighborhoods.

In 1934 the Federal Housing Administration (FHA) was created to insure mortgages on modest one-family homes, and after World War II the federal government subsidized Veterans Administration mortgages to reduce down payments on a home to 5 percent or less of the selling price. Government-insured mortgages were more likely to be sold to an insurance company or a bank, but S&Ls financed from a quarter to a third of the housing boom that changed the face of the country in the two decades after World War II and through the 1970s held more than two-fifths by face value of all home mortgages in the United States.

Precipitous Decline, Cushioned Fall

The legislation that created the FHA authorized a privately owned national mortgage administration to issue bonds for the purchase of mortgages. Nobody formed one, and in 1938 the government itself launched the Federal National Mortgage Administration (FNMA). Thirty years later, after the comptroller general required the Bureau of the Budget to count the purchase of these mortgages as a government expense, making the government deficit look worse, President Lyndon Johnson spun off Fannie Mae as a government-sponsored enterprise owned by shareholders with a small but symbolically important line of credit from the Treasury. FNMA, especially after it was privatized, was competition for the S&Ls. In response, the bank board in 1972 formed the Federal Home Loan Mortgage Corporation, known in the market as "Freddie Mac," which could buy mortgages from S&Ls and package them for sale to the markets.

These institutions eventually made S&Ls essentially obsolete. By the year 2000, they financed between them two-thirds of all home mortgages. Funding mortgages in the market through the agency of mortgage brokers was a lot cheaper than mobilizing deposits for the purpose, and fixed-rate mortgages were bad assets for the investment of deposits in a world of computer-driven, low-cost money markets. When interest rates fell, borrowers refinanced their mortgages, depriving the S&Ls of their higher-yielding assets. When interest rates rose, depositors demanded higher rates or dividends for their money, which could mean that an S&L had to pay more for funds than it was earning on its old mortgages.

The extent of the peril was first revealed in California in 1966, when one of the largest state-chartered S&Ls had to be rescued from insolvency. The FSLIC agreed to consider S&L shares as a kind of deposit and to provide immediate redemption of the shares in a failed institution. In return for the rescue and the FSLIC agreement, the S&Ls accepted the same sort of government controls over the interest they could pay that the Federal Reserve imposed on banks. The rates S&Ls could pay depositors were set usually a quarter of a point higher than the rates banks were permitted to pay as part of the government's policy to encourage housing.

In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, which looked toward the complete elimination of controls on the interest rates banks and S&Ls could pay and authorized checking accounts at S&Ls, homogenizing what had been a divided banking industry. As the Federal Reserve drove rates ever higher in the fight against inflation in the early 1980s, the S&L industry with few exceptions became insolvent.

Nobody could think of an exit strategy other than a desperate effort for the S&Ls to "grow out of their problem" by acquiring high-yielding assets like junk bonds and real estate developments. Capital rules and accounting conventions were shattered by new regulations from the Home Loan Bank Board and by Congress in the 1982 Garn–St. Germain Act, which permitted S&Ls to avoid the recognition of losses in their portfolios and to expand their asset bases even when they were insolvent. Newcomers as well as established institutions were necessarily the beneficiaries of these changes, and the S&L industry drew a remarkable collection of crooks and Wall Street sharpies. Seen from their point of view, deposit insurance was a guarantee that, however worthless the asset they created with their loans, the government would buy it for its valuation on the books to make sure depositors were paid.

In 1987, Congress authorized the sale of $10.8 billion of special notes to cover the losses of the Federal Savings and Loan Insurance Corporation. The money was ludicrously too little. Finally, in 1989, the George H. W. Bush administration and Congress created the Financial Institutions Reform, Recovery, and Enforcement Act, which eliminated the bank board and awarded control of S&Ls to the Office of Thrift Supervision in the Treasury, made FSLIC a subsidiary of FDIC, and authorized about $125 billion of borrowings to keep FSLIC afloat as it spent good money for bad assets. The district Home Loan Banks were kept in existence partly to reinforce flows of money to housing and partly because they had committed $300 million a year to the Treasury to mitigate the drain of the S&L rescue, but they were made service institutions for all banks that invested in home mortgages, not just for S&Ls.

By 1999, the S&L industry no longer existed. Because nonfinancial companies could own holding companies built on S&Ls but not holding companies that included banks, the charter retained its value for entrepreneurs, but most thrifts decided to call themselves "banks" and were banks. In the fall of 1999, Congress, contemplating a world where commerce and finance would blend together in the great definitional mix of the law, passed the Gram-Leach-Bliley Act, which empowered all financial service holding companies to include securities underwriting and insurance subsidiaries. As the twenty-first century dawned, the S&L industry became the Cheshire Cat of finance, vanishing into the forest, smiling at its own disappearance.

Bibliography

Brumbaugh, R. Dan, Jr. Thrifts Under Siege: Restoring Order to American Banking. Cambridge, Mass.: Ballinger, 1988.

Carron, Andrew S. The Plight of the Thrift Institutions. Washington, D.C.: Brookings Institution, 1982.

Change in the Savings and Loan Industry: Proceedings of the Second Annual Conference, December 9–10, 1976, San Francisco, California. San Francisco: Federal Home Loan Bank of San Francisco, 1977.

Eichler, Ned. The Thrift Debacle. Berkeley: University of California Press, 1989.

Expanded Competitive Markets and the Thrift Industry: Proceedings of the Thirteenth Annual Conference, December 10–11, 1987, San Francisco, California. San Francisco: Federal Home Loan Bank of San Francisco, 1988.

Kane, Edward J. The Gathering Crisis in Federal Deposit Insurance. Cambridge, Mass.: MIT Press, 1985.

Marvell, Thomas B. The Federal Home Loan Bank Board. New York: Praeger, 1969.

Mayer, Martin. The Greatest-Ever Bank Robbery. New York: Scribner, 1990.

President's Commission on Housing. The Report of the President's Commission on Housing. Washington, D.C.: President's Commission on Housing, 1982.

Strunk, Norman, and Fred Case. Where Deregulation Went Wrong: A Look at the Causes Behind Savings and Loan Failuresin the 1980s. Chicago: U.S. League of Savings Institutions, 1988.

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This entry contains information applicable to United States law only.

A financial institution owned by and operated for the benefit of those using its services. The savings and loan association's primary purpose is making loans to its members, usually for the purchase of real estate or homes.

The savings and loan industry was first established in the 1830s as a building and loan association. The first savings and loan association was the Oxford Provident Building Society in Frankfort, Pennsylvania. As a building and loan association, Oxford Provident received regular weekly payments from each member and then lent the money to individuals until each member could build or purchase his own home. Building and loan associations were financial intermediaries, which acted as a conduit for the flow of investment funds between savers and borrowers.

Savings and loan associations may be state or federally chartered. When formed under state law, savings and loan associations are generally incorporated and must follow the state's requirements for incorporation, such as providing articles of incorporation and bylaws. Although it depends on the applicable state's law, the articles of incorporation usually must set forth the organizational structure of the association and define the rights of its members and the relationship between the association and its stockholders. A savings and loan association may not convert from a state corporation to a federal corporation without the consent of the state and compliance with state laws. A savings and loan association may also be federally chartered. Federal savings and loan associations are regulated by the Office of Thrift Supervision.

Members of a savings and loan association are stockholders of the corporation. The members must have the capacity to enter into a valid contract, and as stockholders they are entitled to participate in management and share in the profits. Members have the same liability as stockholders of other corporations, which means that they are liable only for the amount of their stock interest and are not personally liable for the association's negligence or debts.

Officers and directors control the operation of the savings and loan association. The officers and directors have the duty to organize and operate the institution in accordance with state and federal laws and regulations and with the same degree of diligence, care, and skill that an ordinary prudent person would exercise under similar circumstances. The officers and directors are under the common-law duty to exercise due care as well as the duty of loyalty. Officers and directors may be held liable for breaches of these common-law duties, for losses that result from violations of state and federal laws and regulations, or even for losses that result from a violation of the corporation's bylaws.

The responsibilities of the officers and directors of a savings and loan association are generally the same as the responsibilities of officers and directors of other corporations. They must select competent individuals to administer the institution's affairs, establish operating policies and internal controls, monitor the institution's operations, and review examination and audit reports. Furthermore, they also have the power to assess losses incurred and to decide how the institution will recover those losses.

Prior to the 1930s, savings and loan associations flourished. However, during the Great Depression the savings and loan industry suffered. More than 1,700 institutions failed, and because depositor's insurance did not exist, customers lost all of the money they had deposited into the failed institutions. Congress responded to this crisis by passing several banking acts. The Federal Home Loan Bank Act of 1932, 12 U.S.C.A. § 1421 et seq., authorized the government to regulate and control the financial services industry. The legislation created the Federal Home Loan Bank Board (FHLBB) to oversee the operations of savings and loan institutions. The Banking Act of 1933, 48 Stat. 162, created the Federal Deposit Insurance Corporation (FDIC) to promote stability and restore and maintain confidence in the nation's banking system. In 1934 Congress passed the National Housing Act, 12 U.S.C.A. § 1701 et seq., which created the National Housing Administration (NHA) and the Federal Savings and Loan Insurance Corporation (FSLIC). The NHA was created to protect mortgage lenders by insuring full repayment, and the FSLIC was created to insure each depositor's account up to $5,000.

The banking reform in the 1930s restored depositors' faith in the savings and loan industry, and it was once again stable and prosperous. However, in the 1970s the industry began to feel the impact of competition and increased interest rates; investors were choosing to invest in money markets rather than in savings and loan associations. To boost the savings and loan industry, Congress began deregulating it. Three types of deregulation took place during this time.

The first major form of deregulation was the enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980 (94 Stat. 132). The purpose of this legislation was to allow investors higher rates of return, thus making the savings and loan associations more competitive with the money markets. The industry was also allowed to offer money-market options and provide a broader range of services to its customers.

The second major form of deregulation was the enactment of the Garn-St. Germain Depository Institutions Act of 1982 (96 Stat. 1469). This act allowed savings and loan associations to diversify and invest in other types of loans besides home construction and purchase loans, including commercial loans, state and municipal securities, and unsecured real estate loans.

The third form of deregulation decreased the amount of regulatory supervision. This deregulation was not actually an "official" deregulation; instead it was the effect of a change in required accounting procedures. The Generally Accepted Accounting Principles were changed to Regulatory Accounting Procedures, which allowed savings and loan associations to include speculative forms of capital and exclude certain liabilities, thus making the thrifts appear to be in solid financial positions. This resulted in more deregulation.

In the 1980s the savings and loan industry collapsed. By the late 1980s at least one-third of the savings and loan associations were on the brink of insolvency. Eight factors were primarily responsible for the collapse: a rigid institutional design, high and volatile interest rates, deterioration of asset quality, federal and state deregulation, fraudulent practices, increased competition in the financial services industry, tax law changes, and moral hazard (the risk that their owners would allow them to fail to collect the insurance).

In an effort to restore confidence in the thrift industry, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (103 Stat. 183). The purpose of FIRREA, as set forth in section 101 of the bill, was to promote a safe and stable system of affordable housing finance; improve supervision; establish a general oversight by the Treasury Department over the director of the Office of Thrift Supervision; establish an independent insurance agency to provide deposit insurance for savers; place the Federal Deposit Insurance System on sound financial footing; create the Resolution Trust Corporation; provide the necessary private and public financing to resolve failed institutions in an expeditious manner; and improve supervision, enhance enforcement powers, and increase criminal and civil penalties for crimes of fraud against financial institutions and their depositors.

FIRREA increased the enforcement powers of the federal banking regulators and conferred a wide array of administrative sanctions. FIRREA also granted federal bank regulators the power to hold liable "institution-affiliated parties" who engage in unsound practices that harm the insured depository institution. The institution-affiliated parties include directors, officers, employees, agents, and any other persons, including attorneys, appraisers, and accountants, participating in the institution's affairs. FIRREA also allows federal regulators to seize the institution early, before it is "hopelessly insolvent" and too expensive for federal insurance funds to cover.

Criminal penalties were also increased in 1990 by the Crime Control Act, 104 Stat. 4789, which included the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 (104 Stat. 4859). This act increased the criminal penalties "attaching" to crimes related to financial institutions.

FIRREA created the Office of Thrift Supervision (OTS) and the Resolution Trust Corporation (RTC). FIRREA eliminated the FHLBB and created the OTS to take its place. The RTC was created solely to manage and dispose of the assets of thrifts that failed between 1989 and August 1992. In addition, the FSLIC was eliminated, and the FDIC, which oversaw the banking industry, began dealing with the troubled thrifts.

The RTC was in existence for six years, closing its doors on December 31, 1996. During its existence, it merged or closed 747 thrifts and sold $465 billion in assets, including 120,000 pieces of property. The direct cost of resolving the failed thrifts amounted to $90 billion; however, when indirect costs such as the interest on government spending for the rescue are included, the cost of the bailout is estimated to be $480.9 billion.

The need for savings and loan associations has declined considerably. In 1980 savings and loan associations originated 40 percent of residential mortgage loans, mortgage banks originated 29 percent, commercial banks originated 22 percent, and other lenders originated 8 percent of home mortgage loans. However, by 1994 savings and loan association mortgage loans had dropped to 18 percent of all home mortgage loans, whereas the percentage of mortgage bank loans had increased to 52 percent, and the percentage of commercial bank loans had increased to 26 percent.

See: banks and banking.

A financial institution that resembles a bank but that historically did not offer services such as personal checking accounts and that invested capital mainly in home mortgages. In the late 1970s, Congress passed legislation freeing savings and loan associations (often called S&Ls) from their traditional dependency on home mortgage loans. In response, S&Ls invested their capital, often unwisely, in a range of enterprises, especially real estate. In the late 1980s, hundreds of S&Ls went bankrupt, leaving the federal government, which insured the accounts of depositors, with an enormous bill. Since then they have been subject to tighter regulation.

For a list of words related to savings and loan association, see:

• Banking and Financial Services - savings and loan association: S and L; institution owned by depositors and making long-term real estate and other loans; building and loan association

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