A General Accounting office report has accused officials of the savings and loan industry of engaging insider dealings for personal gain, tax manipulation and some "spectacular" land development failures, all through the misuse of service corporations.
The new study also said that the Federal Home Loan Bank Board has been unable to regulate the S&L subsidiaries effectively. The GAO concluded that Congress should not only strenghten regulation but also review whether the activities of service corporations go beyond the original plans for such related firms.
Originally authorized in 1964 to permit thrift institutions to increase profits through related operations, service corporations now have such varied functions as data processing, acquistion of unimproved land for development, insurance brokering, collection agency, and acquisition and operation of nursing homes. Most service corporations are wholly owned by thrifts. In 1976, 1,628 associations with $277 billion in assets owned 1,954 service corporations with $2.4 billion in assets.
For an increasing number of troubled savings and loan associations, service corporations contribute to the their problems, the investigators concluded. The FHLBB is also conducting an in-depth study of service corporations.
Many alleged practices uncovered by the GAO resemble those the proposed Safe Banking Bill is intended to correct, although the bill would not deal with service corporation abuses directly.
From a sample of 106 savings and loan associations with service corporations, GAO found a very high percentage of interlocking directorates. Nine out of 10 service corporation presidents and treasurers also held positions with their parent thrift associations. Instances involving insider dealings and tax manipulation were uncovered in 14 percent of the associations studied.
Neither the thrifts nor the corporations were identified by name in the report, which gave these examples of alleged abuses:
An S&L president, also the service corporation president, involved the corporation in TV and magazine publishing. When these ventures lost $3 million, the losses were absorbed by the S&L.
One official used the service corporation to provide "excessive salaries and expense accounts and payments to himself for automobiles, clothing, jewelry, loan payments and an investment in a company owned by his wife."
A third used corporation funds to invest in resort ranch and then subcontracted the ranch's management to a company owned by himself. The service corporation began losing money but while negotiations for its sale went on for over two years, the president's private company continued to receive management fees.
The report also questioned the shifting of expenses to the service corporation which does not enjoy the same tax advantages as its parent association, to keep payments at a minimum for both. It also cited management fees paid by the corporation to the association for bookkeeping. Compensation and related expenses, including management fees, exceeded 20 percent of service corporation expenses in 1975 and 1976.
One association president, also head of the corporation, received all of his salary ($50,000 plus) as well as a luxury car for his personal use from the corporation. He received no salary from the association.