Savings and loan association
By law, thrifts can have no more than 20 percent of their lending in commercial loans—their focus on mortgage and consumer loans makes them particularly vulnerable to housing downturns such as the deep one the U.S. experienced in 2007.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.For S&Ls, this deregulation of one side of the balance sheet essentially led to more inherent interest rate risk inasmuch as they were funding long-term, fixed-rate mortgage loans with volatile shorter-term deposits.In 1982, the Garn-St. Germain Depository Institutions Act[2] 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, corporate, business, or agricultural loans until January 1, 1984, when this percentage increased to 10 percent.[7] The following is a detailed summary of the major causes for losses that hurt the S&L business in the 1980s according to the United States League of Savings Associations:[8] While not specifically identified above, a related specific factor was that S&Ls and their lending management were often inexperienced with the complexities and risks associated with commercial and more complex loans as distinguished from their roots with "simple" home mortgage loans.As a result, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) dramatically changed the savings and loan industry and its federal regulation.Here are the highlights of this legislation, signed into law on August 9, 1989:[9] The Tax Reform Act of 1986 had also eliminated the ability for investors to reduce regular wage income by so-called "passive" losses incurred from real estate investments, e.g., depreciation and interest deductions.[citation needed] The rules were loosened so that savings banks could offer automobile loans, credit cards, and actual checking accounts.
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