Impending Changes in the S & L Industry Are Cause for Concern

Consumer groups are worried about how consumers will fare under the wave of changes reshaping the thrift industry, including mergers and bank conversions that promise the greatest upheaval since the 1980s savings and loan debacle.

Community lending advocates, meanwhile, worry that the changes will divert the former savings and loan industry from its historical task of providing mortgages to prospective homeowners and financing housing in poor and minority communities.

“We think S&Ls; play a special role in California . . . in terms of inner-city, low-income and minority homeownership in this state,� said Robert Gnaizda, policy director of the Greenlining Institute, a San Francisco-based advocacy group. “Mergers could imperil that lending.�

The jury’s still out, and the changes are just starting--mergers such as the takeover of American Savings Bank by Washington Mutual Inc., announced Monday, and conversions of thrifts to commercial banks, including that planned by Great Western Financial Corp.

Critics look to the recent spate of big bank mergers for some clues as to how consumers may be affected. Although some surveys find that consumers generally feel service has remained relatively good, other studies suggest that consolidation of financial institutions has led to fewer services at higher prices.

Analysts say thrifts, particularly in California, are ripe for mergers to increase efficiency, expand market coverage and consolidate management.

The thrifts are also eager to transform themselves into more bank-like institutions in order to reduce federal insurance premiums, offer a broader range of credit products and improve their profitability. Thrifts are now restricted to offering mainly residential mortgage loans with relatively low profit margins, a business facing increasing competition from non-thrift mortgage lenders such as Countrywide Credit.

Critics argue that the conversion trend will make it easier for thrifts to move away from their traditional commitment to low-income and community lending.

And consumer advocates are concerned that, as in recent bank mega-mergers, thrift takeovers will lead to branch closures and service cuts.

Developers of low-income housing wonder whether the number of places they can go for a loan will drop as the thrifts merge.

“Thrifts have traditionally been an important source of permanent lending for nonprofits that produce low-income housing,� said Gail Hillebrand, a lawyer in the Consumers Union’s San Francisco office.

Critics cite the recent move by Home Savings of America, the nation’s largest thrift, to drop its program of government-subsidized construction loans for low-income apartment buildings at the same time it is diversifying into consumer loans, insurance and investment products.

“Our concern with the direction of banking in general is that it’s becoming more focused on high-profit areas and [less on] . . . affordable-housing lending, which is relatively risk-free but doesn’t have high profits,� said Alan Fisher, executive director of the California Reinvestment Committee, which protested Home Savings’ decision.

For its part, Home Savings said it continues to offer other loans to build multifamily housing in low-income areas. “We felt we had to narrow the number of major initiatives the company was working on,� spokeswoman Mary Trigg said. “The multifamily subsidized-lending program . . . was not the best use of our time, money and resources . . . and it is better to do single-family lending in low-income areas.�

Indeed, it’s not clear that mergers necessarily mean a pullback from community lending. The mega-mergers of Bank of America with Security Pacific National Bank and of Wells Fargo & Co. with First Interstate Bank came with new, multibillion-dollar commitments to community and small-business lending, negotiated with consumer groups.

Reinvestment advocates say Bank of America has made good on most of its promises in this area; it’s too soon to say how Wells will fare.

As for customer satisfaction, according to a 1994 survey by the American Banker and the Gallup Organization of more than 1,000 banking customers, one in four said their bank had undergone a merger in the previous year. Of those, 58% saw no change in service quality; the rest were evenly split over whether service improved.

For depositors, a 1988 economic study by the Federal Reserve Board found that customers in areas with the most concentrated ownership of banks earned less on their money market deposit accounts than those in less concentrated areas.

It’s unclear whether thrift mergers or conversions to banks would mean lower returns on deposits, though banks have historically offered lower rates than thrifts. Indeed, even with the mergers, the thrift industry is likely to remain highly competitive for deposits, analysts argue.

It’s also doubtful that thrift mergers would result in branch closures to the degree that the merger of banks such as Wells and First Interstate have. The current thrift mergers contemplated--such as that speculated between California Federal Bank and First Nationwide Bank--make sense because their branch networks are complementary, not redundant.

In the case of American Savings Bank, the takeover by Washington Mutual strengthens that thrift’s competitive position in Southern California, giving consumers more choices for services, said Ken McEldowney, executive director of Consumer Action, an advocacy group. Whether the thrift industry consolidation is a boon or bad news for consumers remains up in the air.