The first U.S. savings and loan association was founded in 1831. In 1932, the Federal Home Loan Bank System was created to oversee the savings and loan associations, with deposits to be insured by the Federal Savings and Loan Insurance Corporation (FSLIC). Since 1933 the federal government has chartered savings and loan associations, although they have not generally been required to be federally chartered. After World War II, the associations began a period of rapid expansion. Historically, savings and loan associations could be organized in two ways: either as a mutual or a capital stock institution. A mutual organization would be similar in operation to a mutual savings bank.
The savings and loan institution went through many changes in recent years, primarily due to deregulatory measures instituted in the 1980s by the U.S. federal government, allowing them to offer a much wider range of services than ever before. The deregulatory measures allowed savings and loan associations to enter the business of commercial lending, trust services, and nonmortgage consumer lending. The Depository Institutions Deregulation and Monetary Control Act of 1980 began these sweeping changes, one of which was to raise deposit insurance from $40,000 to $100,000. Many contend that this extension of insurance coverage encouraged savings and loan associations to engage in riskier loans than they might otherwise have sought.
Two years later, the Depository Institutions Act gave savings and loan institutions the right to make secured and unsecured loans to a wide range of markets, permitted developers to own savings and loan associations, and allowed owners of these institutions to lend to themselves. Under the new laws, the Federal Home Loan Bank Board (FHLBB) was given a number of new powers to secure the capital positions of the savings and loan associations. Under these new laws, the FHLBB allowed savings and loan associations to print their own capital, and escape charges of insolvency through such measures as "goodwill," in which customer loyalty and market share were counted as part of a capital base. As a result, a thrift that was technically insolvent could resist government seizure.
Savings and loan associations began to engage in large-scale speculation, particularly in real estate. Financial failure of the institutions became rampant, with well over 500 forced to close during the 1980s. In 1989, after the FSLIC itself became insolvent, the Federal Deposit Insurance Corporation took over the FSLIC's insurance obligations, and the Resolution Trust Corporation was created to buy and sell defaulted savings and loan associations. The Office of Thrift Supervision was also created, in an attempt to identify struggling savings and loan organizations before it was too late. The savings and loan crisis ultimately cost the government some $124 billion.
See A. Teck, Mutual Savings Banks and Savings and Loan Associations (1968); F. E. Balderston, Thrifts in Crisis: Structural Transformation of the Savings and Loan Industry (1985).
They are often mutually held (often called mutual 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. It is possible for a savings and loan to be a joint stock company and even publicly traded. This means, however, that it truly no longer is an association and depositors and borrowers no longer have any managerial control.
At the beginning of the 19th century, banking was still something only done by those who had assets or wealth that needed safekeeping. The first savings bank in the United States, the Philadelphia Savings Fund Society, was established on December 20, 1816, and by the 1830s such institutions had become widespread. 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".
In the United Kingdom, the first savings bank was founded in 1810 by the Reverend Henry Duncan, Doctor of Divinity, the minister of Ruthwell Church in Dumfriesshire, Scotland. It is home to the Savings Bank Museum, in which there are records relating to the history of the savings bank movement in Great Britain, 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 the building society and had existed since the 1770s.
The savings and loan associations of this era were famously portrayed in the 1946 film It's a Wonderful Life.
The US Congress passed the Federal Home Loan Bank Act in 1932, during the Great Depression. It established the Federal Home Loan Bank and associated Federal 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 sprung up all across the United States because there was low-cost funding available through the Federal Home Loan Bank for the purposes of mortgage lending.
Savings and loans were given a certain amount of preferential treatment by the Federal Reserve inasmuch as they were given the ability to pay higher interest rates on savings deposits compared to a regular commercial bank. The idea was that with marginally higher savings rates, savings and loans would attract more deposits that would allow them to continue to write more mortgage loans, which would keep the mortgage market liquid, and funds would always be available to potential borrowers.
However, savings and loans were not allowed to offer checking 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. The United 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. Designed to help the thrift industry retain its deposit base and to improve its profitability, the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 allowed thrifts to make consumer loans up to 20 percent of their assets, issue credit cards, accept negotiable order of withdrawal (NOW) accounts from individuals and nonprofit organizations, and invest up to 20 percent of their assets in commercial real estate loans.
In 1982, the Garn-St Germain Depository Institutions Act 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 loans until January 1, 1984, when this percentage increased to 10 percent .
The following is a detailed summary of the major causes for losses that hurt the savings and loan business in the 1980s according to the United States League of Savings:
The most important purpose of these institutions is to make mortgage loans on residential property. These organizations, which also are known as savings associations, building and loan associations, cooperative banks (in New England), and homestead associations (in Louisiana), 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: