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What is a savings and loan association (S&L)?
A savings and loan association — also called an S&L, a thrift, or simply a savings and loan — is a financial institution similar to a bank that specializes in helping people get residential mortgages. Savings and loan associations can be owned either by their customers or by shareholders, but they were primarily meant to let the average person pool his money so that members could purchase homes.
In the early 20th century, the U.S. government wanted to encourage people to buy a home, and Congress passed the Federal Home Loan Bank Act to charter savings and loan associations. These institutions are mutually owned, letting working-class people pool their money in order to help members finance mortgages. By the 1950s, S&Ls had dramatically expanded in order to accommodate the mass migration of baby boomers into the suburbs.
In the mid-1980s to mid-1990s, nearly a third of S&Ls became insolvent after a steep rise in interest rates exceeded their ability to cover deposits and customers moved their money into other savings instruments like money market accounts. The ensuing savings and loan crisis cost taxpayers $132.1 billion.
Savings and loan associations were insured by the Federal Savings and Loan Insurance Corp. until the crisis. Since 1989, S&Ls have come under the purview of the Federal Deposit Insurance Corp (FDIC).
Mortgages comprise the majority of the financial products sold by S&Ls, and generally they offer a wider variety of mortgage types than commercial banks. However, savings and loan associations have unique legal restrictions as to how their assets can be used: they may only lend up to 20 percent of their assets in commercial loans and must lend at least 65 percent of their assets as mortgages.
Regulators allowed S&Ls to offer personal credit and checking accounts for the first time in 1980. Those that survived the savings and loan crisis offer more competitive interest rates for products more associated with banks like savings accounts and certificates of deposit.
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Savings and loan association (S&L) example
Mountaintop Savings Bank, an entirely fictional but completely plausible savings and loan association, survived the savings and loan crisis and continues to exist to this day. It offers regular checking accounts and a variety of savings products like CDs and retirement accounts in addition to the residential mortgages that all S&Ls have to offer members. Before the crisis, it was called Mountaintop Savings and Loan, but like many S&Ls that emerged from the mid-1990s, it removed “savings and loan” from its name to let customers know of its shifted focus.