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Asavings and loan association (S&L), orthrift institution, is afinancial institution that specializes in acceptingsavings deposits and makingmortgage and other loans. While the terms "S&L" and "thrift" are mainly used in theUnited States, similar institutions in theUnited Kingdom,Ireland and someCommonwealth countries includebuilding societies andtrustee savings banks. They are oftenmutually held (often calledmutual 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 acredit union or the policyholders of amutual insurance company. While it is possible for an S&L to be ajoint-stock company, 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 20 percent of their lending in commercial loans—their focus on mortgage and consumer loans made them particularly vulnerable during theUnited States housing bubble and the2008 financial crisis.
At the beginning of the 19th century,banking was still something only done by those who hadassets orwealth that needed safekeeping. The first savings bank in the United States, thePhiladelphia Saving Fund Society, was established on December 20, 1816, and by the 1830s, such institutions had become widespread.
In theUnited Kingdom, the first savings bank was founded in 1810 byHenry Duncan, the minister ofRuthwell Church inDumfriesshire,Scotland. It is home to the Savings Bank Museum, in which there are records relating to the history of thesavings bank movement in theUnited Kingdom, 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 thebuilding society and had existed since the 1770s.
The savings and loan association became a strong force in the early 20th century through assisting people with home ownership, throughmortgage lending, and further assisting their members with basicsaving andinvesting outlets, typically throughpassbook savings accounts and term certificates of deposit.
The savings and loan associations of this era were famously portrayed in the 1946 filmIt's a Wonderful Life.
The earliest mortgages were not offered by banks, but byinsurance companies, and they differed greatly from the mortgage or home loan that is familiar today. Most early mortgages were short with some kind ofballoon payment at the end of the term, or they wereinterest-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 throughforeclosure when they were unable to make the balloon payment at the end of the term of that loan.[citation needed]
The US Congress passed theFederal Home Loan Bank Act in 1932, during theGreat Depression. It established theFederal Home Loan Bank and associatedFederal Home Loan Bank Board 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.
Savings and loans were given a certain amount of preferential treatment by theFederal Reserve inasmuch as they were given the ability to pay higherinterest rates on savings deposits compared to a regularcommercial bank. 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 moremortgage loans, which would keep the mortgage market liquid, and funds would always be available to potential borrowers.[citation needed]
However, savings and loans were not allowed to offerchecking 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. TheUnited States Congress granted all thrifts in 1980, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. TheDepository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980[1] 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 providenegotiable 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, theGarn-St. Germain Depository Institutions Act[2] 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.[3]
During thesavings and loan crisis, from 1986 to 1995, the number of federally insured savings and loan institutions in the United States declined from 3,234 to 1,645.[5] Analysts mostly attribute this to unsound real estate lending.[6] The market share of S&Ls for single family mortgage loans went from 53% in 1975 to 30% in 1990.[7]
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:[8]
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.
As a result, theFinancial 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:[9]
TheTax Reform Act of 1986 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.
The most important purpose of savings and loan associations is to makemortgage loans on residential property. These organizations, which also are known as savings associations, building and loan associations, cooperative banks (inNew England), and homestead associations (inLouisiana), 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:
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 thePhiladelphia Savings Fund Society (PSFS).[citation needed] 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.[citation needed] The rules were loosened so that savings banks could offer automobile loans, credit cards, and actual checking accounts.[citation needed] 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".
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