Thrift & Loans May Be Boon to Cautious Savers

Where might you earn higher interest than at banks or savings and loans, with the safety of federal deposit insurance?

In California, try a thrift and loan association. Thrift and loans, also called industrial loan companies, are different in many ways from their bank and S&L; counterparts. They usually don’t have extensive branch networks. They don’t offer such common conveniences as automated teller machines, credit cards, traveler’s checks and safe deposit boxes. Want a checking account? Forget it; most thrift and loans don’t offer them.

“We don’t have a lot of frills,” says Roger Duerksen, executive vice president for the California Assn. of Thrift and Loan Companies, the industry’s trade group. “We service customers well within the narrow range of services we provide. But we don’t attempt to be full-service financial institutions.”

Thrift and loans do offer passbook-type savings accounts and “fully paid investment certificates,” the formal name for their version of certificates of deposit. Sounds boring. But in part because thrift and loans keep costs down by not offering frills, they consistently pay higher interest--typically as much as a half percentage point more--than the average for banks and S&Ls;, says Douglas Kirkpatrick, special administrator for thrift and loans at the state Department of Corporations, which regulates the institutions..

Santa Barbara-based California Thrift & Loan, for example, this year has regularly appeared on the lists of top-yielding CDs in the six-month, one-year, 2 1/2-year and five-year categories, as tracked by 100 Highest Yields, a North Palm Beach, Fla., newsletter. Its 2 1/2-year certificate, yielding 8.89%, placed it third in that category in the current rankings, says Robert K. Heady, publisher of 100 Highest Yields.

Another reason thrift and loans can pay higher rates is that they typically charge higher rates for loans. Thrift and loans, similar to consumer finance companies, usually make loans to borrowers who can’t get loans from banks and S&Ls.; They also make short-term, high-interest consumer loans for automobiles, boats and other assets.

As of June 30, all thrift and loans accepting deposits must have coverage by the Federal Deposit Insurance Corp., the federal agency that insures deposits up to $100,000 per category of account at banks and S&Ls.; At press time, about 48 of the state’s 56 thrift and loan firms offer FDIC insurance.

It remains to be seen whether thrift and loans are less inclined to offer higher rates now that they can offer FDIC insurance. That may depend in part on how aggressively they seek deposits.

If their attractive rates persist, thrift and loan associations may be a good, safe “second” institution for the money you don’t need quick access to through ATMs and checking accounts.

“Except for their reduced convenience, thrift and loans are an option consumers should consider,” says Ken McEldowney, executive director of Consumer Action, a San Francisco group that rates bank and S&L; services.

But what about safety? Don’t thrift and loans fail just like banks and S&Ls;?

Well, yes. At least four have failed since 1985, says Kirkpatrick of the state Department of Corporations.

One noteworthy failure in 1984, that of Western Community Money Center in Walnut Creek, Calif., spurred the legislation requiring thrift and loans to get FDIC coverage by the end of this month. Previously, they were insured by the Thrift Guaranty Corp., a private company created by the state without the rock-solid safety reputation of the FDIC.

The threat of more thrift and loan failures still exists. But FDIC coverage means your money at insured institutions is safe, as long as it falls within the insurance limits.

Also, failures of FDIC-insured thrift and loans are handled the same as bank and S&L; failures--meaning you’ll get your money promptly if the institution is shut down (although in most cases, regulators avoid costly closures by instead transferring the failed institution’s deposits to another, stronger institution).

Another plus for thrift and loans: As a condition of FDIC coverage, they must maintain the same standards for capital--the financial cushion against losses--as banks. Some have even stronger capital levels than banks, in part because they can’t use some of the accounting gimmicks used by banks and S&Ls; to artificially boost capital.

How should you choose a thrift and loan?

Shop around. Call and compare rates. Insist on FDIC insurance; the agency’s logo should be displayed on the firm’s window or on its literature. To make sure, call the FDIC’s western regional office in San Francisco.

Ask for the company’s financial statements; by law they are required to provide them, Fitzpatrick says. Look for a track record of earnings and make sure that the firm’s capital and reserves are at least 6% to 8% of its assets, Fitzpatrick suggests.

To see if the institution has any pending regulatory actions against it, call the state Department of Corporations in Los Angeles or the FDIC in San Francisco.