Savings And Loan Association Definition

What is a savings and loan association?

A savings and loan association (S&L) is a financial institution that provides banking and home lending services. It is somewhat comparable to a bank or credit union — especially the latter — but has a different overarching goal and structure.

Also known as savings banks, thrift institutions or just thrifts, S&Ls are typically private institutions owned by customers or shareholders, though some are publicly traded companies. They receive savings from individuals and use those funds to provide loans, primarily residential mortgages. They might also offer checking accounts, home equity loans or other financial products and services.

History of savings and loan associations

The modern savings and loan association arose from the New Deal’s efforts to stimulate the housing market during the Great Depression. S&Ls played a big role in making homeownership possible for millions of middle-class Americans throughout much of the 20th century.

The Federal Home Loan Bank Act of 1932 established the Federal Home Loan Bank System, a network of 11 (originally 12) government-sponsored entities designed to fund and support member home-lending institutions. This is similar to today’s Federal Reserve System for commercial banks.

As a result, a wave of local, federally-chartered savings and loans developed around the U.S. Backed by low-cost government funding, the S&Ls were able to offer long-term home loans at fixed interest rates. These eventually evolved into the 30-year mortgage as we know it today.

In 1980, there were approximately 4,000 savings and loan associations. As of 2023, there were less than 600, according to the Federal Deposit Insurance Corp. (FDIC).

Many closed their doors during the savings and loan crisis of the 1980s and 1990s. Inflation and competition from other lenders made some insolvent, while unscrupulous practices by other players tarnished the entire industry’s reputation.

For most of their existence, S&Ls had been insured by the Federal Savings and Loan Insurance Corp (FSLIC). Bankrupted by having to bail out so many thrifts, the FSLIC was abolished in 1989, and S&Ls fell under the purview of the FDIC,  which also insures banks.

Savings and loan association pros and cons

Pros

• Competitive interest rates and fees: Historically, thrifts have offered higher interest rates on savings accounts compared to banks thanks to the low-interest funding they get from the Federal Home Loan Banks. You might also be able to get a lower mortgage rate and fees through an S&L.
• More personalized service: Because S&Ls serve specific communities with brick-and-mortar locations, you might have a more personalized experience than if you went with a large national bank or an online lender. A thrift might also be able tailor a home loan product more closely to you, or offer terms or discounts you might not see elsewhere.

Cons

• No longer widely available: S&Ls are a rare find today. Depending on where you live, it’s often much more convenient to go to a local bank or credit union.
• Fewer products and services: Unlike banks and credit unions, S&Ls tend to focus only on mortgages. Notably, they don’t work much with commercial customers.

What borrowers should know about savings and loan associations today

While nowhere near as commonplace today, savings and loan associations still exist, usually to extend financing to homebuyers. They operate similarly to banks and credit unions in that they offer many of the same services: banking accounts and home loans. However, unlike most banks, they focus on mortgages and savings accounts, and retail (individual) clients: They are limited in the extent of the commercial lending they can do. By law, 65 percent of their assets need to be in consumer loans or products.

While they’re much smaller than the big brands in banking, savings and loan associations tend to boast higher interest rates on savings vehicles, not unlike credit unions. The corporate structure of many S&Ls is also similar to that of credit unions: Both are “mutual” societies, meaning they are technically owned by their clientele — depositors and borrowers.