savings and loan association

a cooperative savings institution, chartered and regulated by a state or the federal government, that receives deposits in exchange for shares of ownership and invests its funds chiefly in loans secured by first mortgages on homes. Also called building and loan association, cooperative bank; Brit., building society.

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Financial institution that accepts savings from depositors and uses those funds primarily to make loans to home buyers.

Savings and loan associations (S&Ls) originated with 18th-century British building societies, in which workmen banded together to finance the building of their homes. The first U.S. savings and loan was established in Philadelphia in 1831. S&Ls were initially cooperative institutions in which savers were shareholders in the association and received dividends in proportion to profits, but today are mutual organizations that offer a variety of savings plans. They are not obliged to rely on individual deposits for funds but are permitted to borrow from other financial institutions and to market mortgage-backed securities, money-market certificates, and stock. Because high inflation and rising interest rates in the 1970s made fixed-rate mortgages unprofitable, regulations were altered to permit S&Ls to renegotiate mortgages. In the late 1980s, a growing number of S&Ls failed because inadequate regulation had allowed risky investments and fraud to flourish. The government was obliged to cover vast losses in excess of $200 billion, and the Federal Savings and Loan Insurance Corp. (FSLIC) became insolvent in 1989. Its insurance functions were taken over by a new organization supervised by the Federal Deposit Insurance Corp., and the Resolution Trust Corp. was established to handle the bailout of the failed S&Ls.

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▪ financial institution

      a savings and home-financing institution that makes loans for the purchase of private housing, home improvements, and new construction. Formerly cooperative institutions in which savers were shareholders in the association and received dividends in proportion to the organization's profits, savings and loan associations are mutual organizations that now offer a variety of savings plans. Many offer the same services as do other savings institutions, such as tax-deferred annuities, direct deposit of Social Security checks, automatic deductions from accounts for mortgage payments and insurance premiums, and passbook loans.

      Under a ruling of the Federal Home Loan Bank Board, which regulates federally chartered savings and loan associations, associations need not rely only on individual deposits for funds. They can borrow from other financial institutions and market mortgage-backed securities, money market certificates, and stock.

      The savings and loan association plan for loan repayment, the direct-reduction loan plan, was the prototype of present-day loan-amortization plans requiring the home buyer to make a fixed payment each month; part of the payment is applied to the principal and part to interest, the former increasing each month as the latter decreases. Because high inflation rates have made such fixed-rate mortgages unprofitable, savings and loan associations in the United States are now allowed to renegotiate mortgages.

      Savings and loan associations originated with the building societies of Great Britain in the late 1700s. They consisted of groups of workmen who financed the building of their homes by paying fixed sums of money at regular intervals to the societies. When all members had homes, the societies disbanded. The societies began to borrow money from people who did not want to buy homes themselves and became permanent institutions. Building societies spread from Great Britain to other European countries and the United States. They are also found in parts of Central and South America.

      The Oxford Provident Building Association of Philadelphia, which began operating in 1831 with 40 members, was the first savings and loan association in the United States. By 1890 they had spread to all states and territories.

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