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Savings and Loan Association

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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, and tax law changes.

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, analysts claim that it will take approximately 30 years to fully bail out the savings and loan associations at a cost of approximately $480.9 billion.

Further Readings

American Bar Association. 1995. "How a Good Idea Went Wrong: Deregulation and the Savings and Loan Crisis." Administrative Law Review 47.

——. The Committee of Savings and Loan Associations Section of Corporation, Banking, and Business. 1973. Handbook of Savings and Loan Law. Chicago: American Bar Association.

Calavita, Kitty, Henry N. Pontell, and Robert H. Tillman. 1999. Big Money Crime: Fraud and Politics in the Savings and Loan Crisis. Berkeley: Univ. of California Press.

Gorman, Christopher Tyson. 1994–95. "Liability of Directors and Officers under FIRREA: The Uncertain Standard of §1821(K) and the Need for Congressional Reform." Kentucky Law Journal 83.

Turck, Karsten F. 1998. The Crisis of American Savings & Loan Associations: A Comprehensive Analysis. New York: P. Lang.

U.S. House. 1989. 101st Cong., 1st sess. H.R. 54 (I). United States Code Congressional and Administrative News.

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