associations. Obscure and inconvenient meeting places for the "pay night" or office combinations with other businesses have given way to modern independent offices in ground-floor locations situated in business centers of the community. While many of the smaller associations, particularly in small localities, have still preserved their traditional pattern, the more progressive and larger institutions have definitely set the pace, and stimulated by their success, the industry as a whole shows much evidence that it will soon follow their example. Along with these changes has come the realization of the fact that many existing associations are too small to be efficiently operated. Size is not an objective in itself, but to obtain the benefits of full-time management and independent offices, a minimum size is required which, in many cases, is above the present size of home-financing institutions. To maintain and strengthen the position of savings and loan associations in the home-financing field, further progress in this direction through merger and other means would appear to be desirable, particularly in the larger communities.

Exhibit 33 shows the number and asset distribution of member savings and loan associations of the Federal Home Loan Bank System, by size groups. On June 30, 1939, almost 33 percent of all member associations had assets of less than $250,000, but these small institutions held only 4.6 percent of the total assets of all member associations. More than one-half of the member savings and loan associations were in the asset groups below $500,000, with aggregate assets equal to 12.7 percent of the total assets of all member associations. The remainder of 87.3 percent was held by the member associations having assets in excess of $500,000, although these institutions represented only 44.4 percent of the total number of member savings and loan associations.

Improvements in Plans of Operation

Other changes in operations of savings and loan associations are marked by the gradual disappearance of "serial" associations which issue series of shares at stated intervals. The "permanent" plan of operation under which shares are issued at any time desired has become the standard plan under which the most progressive associations operate today. All Federal savings and loan associations are required to operate under this plan, and when insurance of accounts is granted to State-chartered associations by the Federal Savings and Loan Insurance Corporation, these associations are also urged to adopt the permanent plan.

Together with this change in operations, a clearer separation has evolved between the lending activity of savings and loan associations, on the one hand, and their function as custodians of savings, on the other. In the early days of the savings and loan associations, when the urge to build a home was dominant among their members, investors and borrowers were more or less an identical group. In many cases investors who were not prospective borrowers were not accepted, and vice versa. Today, with a more complex structure of society, with millions of members who want to save for an undefined purpose, and millions of other members who need funds to buy or build a home, conditions are entirely different. In consequence, a large number of savings and loan associations have revised their plans of operation so that they may receive savings from individuals who have excess funds, and lend such funds to other individuals who need loans upon mortgage security. In savings and loan associations operating under Federal charter, the borrowers are not required to be investors or vice versa, and many State-chartered associations have adopted a similar practice.

Loan plans of savings and loan associations have also changed considerably. In the past, the majority of savings and loan associations have operated under two loan plans, the share-account sinkingfund plan and the cancel-and-endorse plan. Under the share-account sinking-fund plan, the borrower subscribes to shares, paid for in monthly installments, which will mature and cancel his loan. Interest is paid on the full amount of the loan until the value of the entire share subscription, plus earnings credited to the account, equals the amount of the loan. The cancel-and-endorse plan is similar except that as regular payments accrue to the value of one share, that share is canceled and the principal outstanding is reduced by a like amount. Under either of these plans, the term of the loan depends on the time required to mature the shares.

In the last few years, chiefly under the influence of the Federal Home Loan Bank Board, these plans have gradually been abandoned and the "direct-reduction plan" has become the standard loan plan under which an increasingly large number of associations operate. Under the direct-reduction plan, the borrower does not subscribe to any shares. His monthly payments are immediately applied to a reduction of the loan and interest is charged only on the diminishing balance of the loan. This type of loan plan is not only less expensive to the borrower, but is also more simple and easily understood. The amortization period is not dependent on factors over which the borrower has no control, such as the maturity of shares and the profits the association is able to make.

The adoption of the direct-reduction plan has greatly assisted savings and loan associations in meeting the increased competition of other home-mortgage lenders during the last few years.

By their charter, all Federal savings and loan associations are required to operate under the direct-reduction plan of amortization, with the exception of straight loans permitted up to 15 percent of assets. An increasing number of State-chartered insured associations are adopting this plan for their new lending operations, and in many cases their existing mortgage loans are being recast to conform to the plan. Likewise, State-chartered noninsured associations are changing from their old loan plans, which are no longer competitive, to a direct-reduction schedule. It is roughly estimated that twothirds of all mortgage loans currently made by savings and loan associations are direct-reduction loans.7

In recent years, a number of savings and loan associations have also adopted the variable-interest-rate plan. Under this plan, the rate charged on each loan is determined on the basis of the risk involved in such loan, the risk being measured by the location of the property, the type of construction, its age and desirability, the income and credit rating of the borrower, the ratio of loan to the appraised property value, the amortization period, and similar factors. By charging variable interest rates, associations are in a position to attract borrowers with the highest type of security in competition with other mortgage-lending institutions, and can at the same time serve worthy borrowers who have good but less desirable security.

In the past, many savings and loan associations were accustomed to levy a number of charges on both investors and borrowers. Investors were charged membership fees, fines, and forfeitures for late payments, and fees for the withdrawal of accounts. Originally designed to encourage regular savings, these charges not only were a burden on savers, but complicated procedures and caused confusion and misunderstandings. Borrowers were charged premiums, discounts, and commissions in addition to regular interest payments. All these charges resulted in a considerable step-up of effective interest rates above nominal rates and are no longer competitive today.

In the last few years these practices have been revised to an increasing extent. Charges to borrowers and investors have either been eliminated or reduced. Federal savings and loan associations are not permitted to charge fees and fines for late payments by their savers,

'This estimate is based on the fact that Federal savings and loan associations and State-chartered insured associations account for 55 percent of the total amount of mortgage loans currently made by savings and loan associations, and that a portion of the new mortgage loans made by State-chartered noninsured associations are also direct-reduction loans.

and they must not penalize borrowers who are behind in their contractual payments except by a proper charge for interest on the unpaid balance of the loan. They are not allowed to charge excessive premiums or any withdrawal fees. Similarly, the Federal Savings and Loan Insurance Corporation requires that where such charges exist, they must not exceed equitable amounts if insurance of accounts is to be granted.

More Adequate Reserves

Another vital improvement in the operations of savings and loan associations is the greater emphasis given to adequate reserves. In the early days of the industry, reserves were neither required by State laws nor regarded as necessary by the industry itself. Under the conception that savings and loan associations were cooperative organizations designed to provide each member with a mortgage loan, profits were not distributed periodically, and any losses were charged against the common fund. Later, when the savings and loan associations developed into a permanent type of institution, most State laws still failed to recognize the vital importance of reserves. In consequence, many associations bad inadequate reserves at their command when they suffered severe losses during the depression, and in some States, they were forced to recapture accumulated profits.

This experience, together with more progressive legislation in a number of States and Federal regulation in recent years, has completely changed the attitude of the industry toward reserves. Today it is generally recognized that savings and loan associations, like any other type of financial institution, should have sufficient reserves to provide a cushion against losses and contingencies, and many savings and loan associations have built up reserves substantially in excess of the minimum required by Federal or State regulation.

By the revised Federal charter, Federal savings and loan associations are required at each dividend date to set aside at least 5 percent of net earnings before dividends are distributed, until they build up aggregate reserves equal to 10 percent of total share capital. Legislation authorizing insurance of savings and loan accounts provides that all insured associations, whether operating under Federal or State charter, shall build reserves equivalent to 5 percent of all insured accounts within a reasonable period, not exceeding twenty years. Under regulation of the Federal Savings and Loan Insurance Corporation, insured associations must transfer each year to a reserve for losses at least threetenths of 1 percent of the aggregate of the insured accounts standing on the books of the association at the beginning of the fiscal year until such reserve equals 5 percent of all insured accounts, which ratio must be maintained thereafter.

With respect to State legislation, it is significant that during the twenty-year period, 1919 to 1938, 218 States and the Territory of Hawaii established mandatory reserve requirements for the first time. Of those measures, 12 were initiated from 1919 to 1929 and 10 during the period from 1931 to 1938. During the latter period, 14 States strengthened their reserve requirements. Prior to the 1939 legislative sessions, 39 States and the Territory of Hawaii had established mandatory reserve requirements, while 9 States and the District of Columbia, Alaska, and Puerto Rico still lacked such requirements. At the 1939 legislative sessions, and prior to the end of the fiscal year, Iowa and Vermont adopted mandatory requirements, while Colorado, Michigan, Texas, and Hawaii strengthened the provisions of their laws, and Pennsylvania increased the maximum limits of reserves permitted without special approval by the Department of Banking.

Among the State statutes, there is a growing uniformity in reserve requirements. A large and increasing number of jurisdictions require that a minimum of 5 percent of net earnings be transferred periodically to reserves. More than half the States set a minimum measure for the accumulation of ultimate reserves at 5 percent or more of assets or share capital, with a recent trend toward a 10 percent requirement."

Greater Emphasis on Liquidity

Finally, present operations of savings and loan associations give more attention to the maintenance of liquidity. During the early development of savings and loan associations, liquidity was not considered important. As the assets of such associations were invested in longterm mortgage loans, members were required to wait until funds were available to meet withdrawal requests, and penalties were imposed when savers desired to withdraw before the shares matured. Later these penalties were reduced and particularly during the easy-money period of the Twenties, the practice of paying on demand was more widely adopted. The depression, however, brought such unusually heavy withdrawals that many institutions were compelled to place withdrawals on a restricted basis and to withhold the payment of matured shares. With the exception of a few States where savings and loan associations still have pent-up maturities and withdrawals, such unpaid claims have been reduced to negligible amounts in the last few years.

This figure includes two States (Tennessee and West Virginia) whose statutes, though mandatory in nature, do not set a minimum measure, and one (Georgia) in which the reserve requirements are set forth in regulations promulgated by the Secretary of State pursuant to statutory authority.

For detailed information on statutory reserve requirements and reserve policies of savings and loan associations, see Federal Home Loan Bank Review, September 1938, November 1938, Deceinber 1938, and May 1939.