Land development activities by many service corporations of savings and loan associations have been conducted in an "unsound, inept and often naive manner" and should be more strictly regulated, the General Accounting Office said in a recent report.
Service corporations, many of which are wholly-owned and managed by the S & Ls with which they are affiliated, were originally authorized by Congress to provide thrift institutions with ways of increasing revenues and profits from investments related to housing.
They perform such functions as data processing, credit information and currency exchange. Land development activity, including development of raw land and property management, has become the most popular area into which service corporations have expanded.
The GAO report noted that in some cases this expansion had led to exceptional profit opportunities and in others, exceptional problems. It observed that, in 1976, the service corporations of at least 32 S & Ls had serious land development problems.
Their projects suffered from "passive association management, lack of land development experience, minimal planning and lack of effective cost and time controls," the investigative agency said.
GAO proposed that the Federal Home Loan Bank Board, which regulates thrift institutions either outlaw land development projects by service corporations or require prior FHLBB approval before purchase.
But the board declined to go this far, instead recommending educational campaigns and notification within 30 days after purchase of projects. It also contended that many of the land development problems had been resolved by the recovery of the housing market in general.
The GAO disagreed, saying that "opportunities for spectacular successes and spectacular failures still remain." Consequently it has recommended to Congress that FHLBB prior approval of land purchases be required.
Reporting requirements should be established to spot associations that have low net worth in relation to the project size or lack experience, the agency said in its report.