Federal Savings and Loan

A federal savings and loan institution is a type of thrift that has historically been focused on residential mortgages. These companies are typically private businesses, mutually owned by their customers. However, they can also be publicly traded.

Federal savings and loans have their roots in the building and loan associations that were prominent prior to the Great Depression. Like their predecessors, S&Ls focus on making home loans accessible for middle-class individuals and families.

Many building and loan associations were mutually held institutions—that is, owned by their members. They largely relied on a share-accumulation model whereby members committed to buying shares in the association and subsequently had the right to borrow against the value of those shares in order to purchase a home.

When many of these institutions began to struggle during the Depression, however, the Hoover and Roosevelt administrations stepped in to overhaul the industry. The government provided charters for federal savings and loans and established the Federal Home Loan Banking system to ensure that these new—or, at least, rebranded—lenders had sufficient liquidity.

Deposits in federally chartered S&Ls were insured by the new Federal Savings & Loan Insurance Corporation (FSLIC), which aimed to provide depositors with the assurance that they would not take on losses.

Federal savings and loan businesses are operated in one of two ways. Under the mutual ownership model, an S&L is owned by its depositors and borrowers. Alternatively, an S&L can be established by a group of shareholders who own all the shares in the thrift.

This is different from commercial banks, which are typically owned and managed by a board of directors chosen by stockholders. Commercial banks are also more diversified in terms of the offerings they provide. Much of their lending is geared toward businesses and construction projects. They also often provide a broader array of services to consumers, such as credit cards and wealth management solutions.

By contrast, S&Ls are much more focused on the residential mortgage market. By law, they can only lend up to 20% of their assets for commercial loans. In addition, to qualify for Federal Home Loan Bank lending, S&Ls must show that 65% of their assets are invested in residential mortgages and other consumer-related assets.

The post–World War II boom marked the peak of the thrifts’ influence, with the total number of S&Ls reaching 6,071 by 1965. That growth would be threatened, however, when in 1966 Congress limited the interest rates that S&Ls and commercial banks could place on depository accounts. When interest rates rose in the 1970s, consumers began withdrawing their funds and putting them into accounts that offered a higher yield. Moreover, a stagnant economy meant that thrifts had fewer borrowers who could qualify for a loan.

In order to address these challenges, legislators passed laws to deregulate S&Ls in the early 1980s. They now had the ability, for example, to offer a broader range of products and use less-restrictive accounting procedures. But rather than alleviating the thrifts’ problems, the laws seemed to contribute toward multiple cases of mismanagement and fraud later in the decade. By 1990 the government estimated that S&L misconduct had cost the American public as much as $75 billion.

In reaction to the growing insolvency of the savings and loan industry, the government in 1989 reestablished stronger oversight and created the Office of Thrift Supervision. This regulatory body, itself a division of the Treasury Department, helped to ensure the safety and stability of member savings and loans. It was dissolved in 2011 and its functions were subsumed into other agencies. Savings and loan deposits came under the protection of the Federal Deposit Insurance Corporation (FDIC) and remain so today. 

While S&Ls survived the crisis, their prevalence has dwindled significantly since their zenith in the 1960s. As of Dec. 31, 2018, there were 691 FDIC insured savings institutions.