What Is Federal Savings and Loan Association?
A Federal Savings and Loan Association (FSLA) is a type of financial institution that primarily focuses on accepting deposits from consumers and then using those funds to originate residential mortgage loans. These institutions are part of the broader category of depository institutions within the financial services industry. Unlike traditional commercial banks that offer a wide array of services to businesses and individuals, Federal Savings and Loans historically specialized in promoting homeownership by providing long-term mortgages and basic savings and checking accounts.
History and Origin
The concept of savings and loan associations in the United States traces back to the early 19th century, evolving from British building societies, with the first American "building and loan" associations emerging in the 1830s. These early organizations aimed to help working-class individuals save money and acquire homes by pooling their resources. Members would subscribe to shares and could borrow against these shares to finance a home purchase8.
The Great Depression of the 1930s severely impacted these institutions, leading to widespread failures and foreclosures. In response, the U.S. government intervened to stabilize the housing and financial markets. The Home Owners' Loan Act of 1933 was a pivotal piece of legislation enacted to provide emergency relief by refinancing home mortgages to prevent foreclosures and expand homebuying opportunities. This act also led to the creation of the Home Owners' Loan Corporation (HOLC). A significant outcome of this period was the establishment of federal charters for savings and loans, leading to the designation "Federal Savings and Loan Association." The Federal Home Loan Bank (FHLB) system was also created in 1932 to provide liquidity to these institutions.
Over the decades, Federal Savings and Loans played a crucial role in financing the post-World War II housing boom7. However, the industry faced significant challenges in the late 1970s and 1980s due to rising interest rates and deregulation6. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980, intended to help the banking industry, allowed thrifts to offer a broader range of products, including consumer and commercial loans, but also contributed to risky investments and mismanagement, culminating in the Savings and Loan Crisis. This crisis led to the failure of hundreds of institutions, prompting further government intervention. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established the Resolution Trust Corporation (RTC) to liquidate the assets of failed S&Ls and the Office of Thrift Supervision (OTS) to regulate the remaining thrifts. The OTS, which was part of the Department of the Treasury, was later dissolved in 2011, with its functions transferred to other regulatory bodies like the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board3, 4, 5.
Key Takeaways
- A Federal Savings and Loan Association (FSLA) is a financial institution focused on consumer deposits and residential mortgage lending.
- FSLAs emerged from the building and loan association movement and were federally chartered after the Great Depression to stabilize the housing market.
- They historically specialized in providing affordable home financing, distinguishing them from traditional commercial banks.
- The Savings and Loan Crisis of the 1980s led to significant reforms and the eventual dissolution of their primary regulator, the Office of Thrift Supervision (OTS).
- Today, the functions and oversight of former FSLAs are largely integrated into other banking regulatory structures.
Interpreting the Federal Savings and Loan Association
Understanding a Federal Savings and Loan Association involves recognizing its historical specialization and evolving role within the financial system. Initially, their primary purpose was to facilitate homeownership by offering specific types of loans. Their structure often meant they were mutually held, where depositors and borrowers were considered members with voting rights, fostering a community-centric approach to financial services.
In practice, the existence of FSLAs reinforced the idea of specialized financial institutions catering to specific needs. Their focus on residential mortgages meant they were a key source of funds for housing development and individual home purchases. For consumers, this often translated into more accessible and potentially more favorable terms for home loans compared to other types of lenders. The evolution of FSLAs, especially after the Savings and Loan Crisis, highlights the dynamic nature of financial regulation and the increasing convergence of different types of financial institutions.
Hypothetical Example
Imagine a young couple, Maria and David, in the early 1970s, looking to buy their first home. They approach "Community Federal Savings and Loan Association," a local FSLA. Instead of a large commercial bank, they choose the FSLA because it is known for its focus on home loans and its community-oriented approach.
The Community Federal Savings and Loan Association accepts their savings deposits, which accrue interest. When they are ready to apply for a mortgage, the FSLA offers them a 30-year fixed-rate mortgage with a competitive interest rate. The loan process is straightforward, as the institution's primary business is residential lending. They make their monthly mortgage payments to the FSLA, and their savings accounts remain with the same institution. This hypothetical scenario illustrates the traditional function of a Federal Savings and Loan: serving as a dedicated local provider for housing finance and basic savings.
Practical Applications
While the distinct identity of Federal Savings and Loan Associations has largely merged into broader banking categories, their legacy and core functions have several practical applications in understanding the financial landscape:
- Mortgage Lending: FSLAs were instrumental in the development of the modern mortgage market. Their specialized focus on residential real estate provided a stable source of capital for homebuyers for decades.
- Deposit Services: They offered essential deposit accounts like savings accounts and checking accounts to individuals, promoting personal finance and savings within communities.
- Community Banking Model: Many FSLAs operated under a mutual ownership structure, emphasizing a community-based approach. This model still influences the structure of some credit unions and mutual savings banks today.
- Regulatory Evolution: The history of Federal Savings and Loans, particularly the S&L Crisis, serves as a significant case study in financial regulation and the importance of appropriate oversight for financial institutions. The Resolution Trust Corporation (RTC), established in 1989, resolved 747 failed thrifts with total assets of $394 billion, demonstrating the scale of the government's intervention during the crisis.
Limitations and Criticisms
The Federal Savings and Loan Association model, despite its historical importance, faced significant limitations and criticisms, particularly leading up to and during the Savings and Loan Crisis of the 1980s.
One primary limitation was their heavy reliance on long-term, fixed-rate mortgages funded by short-term deposits. When interest rates rose sharply in the late 1970s and early 1980s, the interest income from their existing mortgage portfolios could not keep pace with the higher interest payments required for deposits, leading to severe profitability issues and widespread insolvency.
Furthermore, deregulation in the early 1980s, intended to help FSLAs compete, allowed them to engage in riskier investments beyond traditional home mortgages, often without adequate risk management expertise. This led to speculative real estate lending, fraud, and significant losses for many institutions. The subsequent cost to taxpayers for resolving these failures through entities like the Resolution Trust Corporation was substantial1, 2.
Another criticism was the regulatory oversight itself. The Office of Thrift Supervision (OTS), which succeeded the Federal Home Loan Bank Board, was criticized for being lax in its supervision during the lead-up to the 2008 financial crisis, even after the lessons of the S&L crisis had supposedly been learned. The ultimate dissolution of the OTS and the transfer of its responsibilities to other agencies underscore the perceived regulatory failures of the time.
Federal Savings and Loan Association vs. Commercial Bank
The primary distinction between a Federal Savings and Loan Association (FSLA) and a commercial bank historically lay in their core business models and regulatory frameworks. FSLAs, often referred to as "thrifts," were primarily established to promote homeownership by accepting consumer deposits and originating residential mortgages. Their lending activities were historically restricted, with a significant portion of their assets required to be in housing-related loans. Many FSLAs were also mutually owned, meaning depositors were members with voting rights, aligning their interests more closely with their customers.
In contrast, commercial banks traditionally offered a broader range of financial products and services. These include various types of loans (commercial, consumer, real estate), a wider array of deposit accounts, and services for businesses such as cash management and trade finance. Commercial banks are typically organized as stock corporations and are owned by shareholders. While both types of institutions are now regulated by similar federal agencies, the historical differentiation in their primary focus, ownership structure, and regulatory emphasis defined their unique roles within the financial system. The lines have blurred considerably over time, with many former FSLAs now operating much like commercial banks.
FAQs
What is the main purpose of a Federal Savings and Loan Association?
The main purpose of a Federal Savings and Loan Association (FSLA) was to encourage and facilitate homeownership by providing residential mortgage loans and accepting savings deposits from the public.
Are Federal Savings and Loan Associations still common today?
While the term "Federal Savings and Loan Association" still exists, the distinct operational differences between them and commercial banks have largely diminished. Many have either converted into commercial banks or merged with larger financial institutions. The regulatory body that specifically oversaw them, the Office of Thrift Supervision, was dissolved in 2011.
How did the Savings and Loan Crisis impact Federal Savings and Loans?
The Savings and Loan Crisis of the 1980s led to the failure of hundreds of Federal Savings and Loans due to risky investments, mismanagement, and changing interest rate environments. This crisis resulted in significant government intervention, including the creation of the Resolution Trust Corporation to manage failed assets and major reforms to financial regulation.
Are deposits at Federal Savings and Loans insured?
Yes, deposits at federally chartered savings and loan associations are insured by the Federal Deposit Insurance Corporation (FDIC). This protection helps safeguard depositors' money in case of institutional failure, similar to commercial banks.
What is a "thrift" institution?
"Thrift institution" is a broader term that includes Federal Savings and Loan Associations, as well as savings banks and credit unions. These institutions traditionally focused on accepting savings deposits and providing home financing and other consumer loans, often emphasizing a community-oriented approach.