What is a Savings and Loan Association?

A savings and loan association (S&L) is a financial institution that specializes in savings deposits and mortgage loans, and has become one of the primary sources of mortgage loans for homebuyers today. It offers mortgage services to people from the savings and deposits received from private investors. Depositors and borrowers are members with voting rights and have the ability to direct the financial and managerial goals of the organization.

Characteristics of savings and loan associations:

• Privately or locally managed financial institutions
• Uses individuals’ deposits to make long-term amortized loans to home buyers.
• Disperses loans for home repairs, construction, and refinancing

The first U.S. savings and loan association was established in 1831, and the Federal Home Loan Bank System was set up in 1932 to administer it. The Federal Savings and Loan Insurance Corporation (FSLIC) was responsible for insuring the deposits of the savings and loan association. These associations underwent real expansion only after the Second World War. In the past, there were only two ways of organizing savings and loan associations: as mutual or capital stock institutions.

Savings and loan associations can be either state or federally chartered and must fulfill the state requirements to be incorporated. Incorporation is based on state law, and the articles of incorporation must clearly define the organizational structure, the rights of members, and the relationship between the stockholders and the association. In order to convert from state to a federal corporation, savings and loan associations must comply with the laws of the state. The Office of Thrift Supervision controls federally chartered savings and loan association. The stockholders of the corporation are the members of the savings and loan association who share profits and also have the right to partake in the management of the association. As members, liability of stockholders is equivalent only to their individual stock interest and as such they are not personally liable for negligence or debts of the savings and loan associations.

The day-to-day affairs of the association are controlled by the officers and directors whose job responsibilities include organizing and operating the association in compliance with the state and federal laws. Thus, they are accountable for breaches of these common-law duties that may occur due to violation of state or federal laws or corporation bylaws. They are also responsible for selecting competent staff for managing affairs of the association, devise operating policies, monitor operations, and assess audit reports.

Savings and loans can no longer afford to remain mere mortgage providers with their margins narrowing down as higher interest rates continue to inflate borrowing costs. At the same time, growing competition has impacted the lending rates making it impossible for S&Ls to reap the same level of profits they used to make earlier. Some of the major players in the mortgage market such as Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac), and Countrywide Credit Industries line, have taken over a huge portion of S&Ls business by offering mortgages at much lower rates on the secondary market. In order to offer substantial profits to their shareholders, S&Ls today choose to imitate other banks and offer commercial and automobile loans along with a host of other banking services and products such as mutual funds, checking and loans. Thus, it will be increasingly difficult to distinguish S&Ls from conventional banks due to this gradual transition from thrift to bank-like institutions.