STEPHEN W. PROUGH : S&L; Industry’s New Look : Trade Group Sees Less Influence, New Challenges

California’s savings and loans dominate the nation’s thrift industry. Nine of the 10 largest S&Ls; are based in the Golden State, and the state’s 151 thrifts hold more than 25% of the industry’s thrift deposits.

It is little wonder, then, that the California League of Savings Institutions, an industry trade group, would wield a lot of influence in the state and the nation. Indeed, Cal League leaders have been major players both in housing issues and in political arenas, where their testimony fueled the “American dream” of home ownership.

But much of the state league’s influence, along with the clout of its national counterpart, has been severely weakened by the continuing national thrift debacle, which regulators estimate will cost more than $500 billion over the next 30 years.

Once familiar faces in the back rooms of Congress, thrift executives now can hardly get inside the doors of their congressional representatives, though they still testify at committee hearings. And the industry they represent--restructured by a federal law last year--may some day be absorbed into the banking industry.

But Stephen W. Prough, who took over as league vice chairman last month, thinks the trade group’s past power and influence may be more myth than fact. And he thinks S&Ls; still need to let their lawmakers know where they stand on issues affecting thrifts and the economy.

If the league follows its normal procedure, Prough, president of Westcorp and its primary subsidiary, Western Financial Savings Bank in Irvine, will probably become the trade group’s president next year.

All thrifts in the state are members of the Cal League, but membership is down 30% from a few years ago. And its numbers may shrink further next year as some thrifts are sold and other failed institutions are taken over by the government.

Prough, 45, recently discussed the league’s past and future with Times staff writer James S. Granelli.

Q. The U.S. League of Savings Institutions was a powerful and influential trade group in Washington, and the California League held sway in Sacramento as well as in Washington. What are the prospects for the state group’s continued existence?

A. Our members provide 50% of the home loans in California. Nobody else is going to do that. So there’s a real need for a group like this to help institutions that want to be involved in home finance. And as I see it, that will continue, regardless of what we see for current trends. We’re not looking at a specific point in time, but over the long term. There is a tremendous need for this type of an organization.

Q. Over the long term, there’s also the likelihood that savings and loans will cease to exist as separate entities. How will the California League handle that?

A. I think that’s up for debate. I strongly feel that there really needs to be an institution to handle the home finances of the California family. You can call them what you want to call them, but there will be institutions that specialize in this type of financing. And what the California League does is support those type of institutions.

Q. Are you saying that the Cal League may open itself up to other institutions besides savings and loans?

A. That discussion hasn’t really taken place at this point. I think the California League is set up to handle companies that specialize in home finance. And right now, the savings and loans are really the only group on a long-term basis that do that.

Q. Aren’t community banks especially loading up on mortgage loans?

A. Yes, they are. But you’re looking at one point in history. If you take a look over the long term, banks have got into the business, then they get out of the business. And basically what happens is that somebody in a bank’s corporate office realizes that it’s more profitable to make loans overseas or some other area, so they end up doing that instead of making loans to California family home owners.

Q. But aren’t depositors and borrowers squeamish about going to an S&L;?

A. All we hear about in the news are the bad guys. I understand that because that’s newsworthy. But we hear about the same guy day after day. You rarely hear about the people who are doing the right thing. This is a very easy, simple business. And I think people have lost track of what the concept is. The concept is, we take the deposits of, say, eight families and we bundle them together to make another family a homeowner. That’s what this business is all about. And we have to get that message out to explain to people that there’s a critical need for this industry in California. We have an affordability crisis taking place in California. As you drive more companies out of business, then the price to the California homeowner is going to go up.

Q. As vice chairman this year and, most likely, as chairman next year, what plans do you have for the Cal League?

A. Well, Dean Cannon is president and he’s the professional who runs the league. He has a plan that does not really need to be tinkered with. What I see that needs to be done is to continue to work on our image, to let people know that there’s an awful lot of companies out there doing the right thing, that have always done the right thing. At the last convention of the Cal League, we celebrated its 100th anniversary. So this league has been doing the same thing day in and day out, providing home finance for the California family for a long period of time. And I think the message is that we want to continue to let people know that we’re still doing that business.

Q. How is the league going to be able to get that kind of message across?

A. Obviously, it’s difficult because we’re in the middle of an election, and there are a lot of political issues instead of economic issues that are being discussed. I think that once this election year is behind us, then it’s going to be a lot easier for us to focus on some of the real issues, on what’s happened to the industry. When you look at Oklahoma, where every savings and loan in the entire state--all 41 of them--failed, then you’ve got to say that there’s something more going on than the stuff you’re reading about in the paper today. I mean there are some areas in the country that have a downright real estate depression. Fortunately, in California, we’ve avoided that. And so I think the message we want to get across is just to continue to let people know that we’re doing the right thing.

Q. The U.S. League was once one of the most influential trade groups in Washington, and the Cal League wielded a lot of power within the national group. Now an S&L; executive can hardly get a congressman on the telephone. How can you push your political agenda?

A. At least from my view, I don’t think the Cal League really was all that powerful. What you see is the fact that 30% of the industry’s assets are in California. So just by size, a large percentage of the members of the U.S. League do come from California.

Q. Are members of the Cal League testifying in the State Legislature and in Congress as much as they used to?

A. I believe so. I don’t think there’s been any slowdown or reluctance to do so. I think you’ll find that most of the members are getting very fed up with what they read about on the front page. Professionals in this business are downright sick and tired of having the American public get the wrong message, because this is a very good business. It’s just unfortunate that some people did some things that they shouldn’t have been doing.

Q. During the months before the federal thrift restructuring law was passed last year, the trade groups were all but ignored. Is it any easier today to get through to a lawmaker?

A. We’re in the middle of an election. I think with all that’s being written about the industry and everything that’s taken place, it causes congressmen to be nervous about dealing with the industry right now. I think that right now political issues are outweighing economic issues when you deal with financial institutions.

Q. So do you think maybe a week after the election you might be able to call up your representative?

A. No, I think we’re at a point in time when the pendulum swings. Right now we’re focusing on one particular issue, but fortunately history has a way of finally correcting itself. I’m not too concerned, when the final chapter is written, about what took place during this period of time. Personally, I see the people on the Hill that I know, and they know who I am and the company I represent. I haven’t had any problem dealing with any politician. I’m a constituent, and they want that input from a constituent. Will they listen to me? It’s hard to say.

Q. In hindsight, should the trade groups have exercised their influence differently?

A. Well, I don’t think so. If you look back, you’ll find various members within the Cal League making very strong statements to Congress asking for more regulators, asking to strengthen regulation of the business. If there had been a willingness on Congress’ part to spend the money early on, I think that a lot of what happened would not have happened. One of the interesting things is the way the budget process works. League members, really all S&Ls;, pay for the toll costs of running the federal bank system, the Office of Thrift Supervision and the California Department of Savings & Loan. The entire cost of that portion of government is paid for by the institutions involved. So here you have the institutions involved telling Congress to spend the money, and Congress didn’t want to spend the money because it would make the budget look higher than it was. Yet it’s a non-budget item. And you can go back to 1982 and see statements from industry leaders telling Congress that it was making a horrible mistake. We (the industry) were willing to spend the money in order to give regulators the tools to make sure that all these bad actors did not get into the business.

Q. With so many S&Ls; being seized--we’ve had 19 in Orange County alone in the last five years--have Cal League meetings and conventions suffered?

A. Yes, obviously we have (fewer) members, and I think that members are sending fewer delegates. We’ve also cut down on the length of the conference. This year, the annual convention was two days instead of three.

Q. What’s ahead for the Cal League?

A. I think that we’re still in a period of transition. We’re going through a consolidation, and as we take a look at what happens to the industry over the next couple of years, I think there will obviously be more consolidations in California. I view that as as a healthy transition, a very healthy transition. And I think the institutions that are the healthiest institutions now will be in a much better financial position to compete in the future than they were four or five years ago.

Q. We have about 160 thrifts in the state, down from a high of nearly 220, and there are predictions that we’ll have fewer than 100 in five years or so. Will that have a dramatic impact on the Cal League?

A. Obviously, as the number of members declines, then the Cal League is going to have to take a look at its own budget and make the adjustments that are appropriate with its own budget. But no, I don’t see that fewer members are going to have a real dramatic effect on the Cal League.

Q. Do you see changes that need to be made in the federal thrift restructuring law that was passed last year? Will the league be trying to get some changes made?

A. This law was a 450-page bill that was passed in a very short period of time. I think it’s reasonable to assume that there are at least a few paragraphs or sentences that we can improve. I think that what you’re going to see is some fine-tuning to the bill.

Q. What areas do you think need the most work? What’s the biggest problem with the law?

A. I think there’s going to be some fine-tuning needed with regard to the qualified thrift lender’s test (which requires that thrifts maintain 70% of their assets in home financing). The concept’s fine, but I think that they overshot the mark.

Q. In what way?

A. It’s a little too restrictive. We’re not saying we want new powers. What we’re saying is that to be in the business we’re in, there needs to be some fine-tuning with regards to what assets constitute home financing. I think that there also is going to be some issues regarding the Federal Home Loan Bank system (a U.S. credit facility for thrifts), making sure that the system remains as a strong, viable unit servicing the needs of the member institutions for each one of the 12 district banks.

Q. Are there any other areas that need to be changed?

A. I think that there needs to be parity with regard to the premiums charged for the insurance of deposit accounts. (S&Ls; are charged more than banks for federal deposit insurance.) And there are some other issues in the law giving various institutions more or less benefits. I just think there needs to be more parity within the law to give everybody a level playing field.

Q. Would parity on a variety of issues mean that banks and S&Ls; are going to become the same kind of institutions?

A. No. I think it’s a question of direction. You know there are certain financial institutions that do an excellent job at home finance. And there are other institutions that do an excellent job of providing loans to dictators. And I think it’s just a question of what each institution wants to do.

Q. Then you don’t see Western Financial Savings Bank eventually joining the American Bankers Assn., the bankers’ trade group.

A. I don’t see us doing that. Even though we look like a bank, because of our consumer lending--our auto loans--we are a thrift. We do more consumer financing than the typical thrift in California, yet we say our market is the California family homeowner, and what we’re servicing is the California family homeowner. Every house we finance has a garage, and we’re just making sure that we put something in that garage, as well as any other products that that family needs.

Q. Do you see a recession soon?

A. It depends on who you listen to. Some economic forecasts are already saying that we’re in one. I don’t know. I think we’re very close to one. I think a lot of it has to do with what’s going to happen in the Mideast. Obviously, that’s on the front page and focuses everybody’s attention.

Q. What would a serious recession do to the industry?

A. Well, if you take a look at it, it’s no different from what we’ve had in the past. I do not see that what we’re going to go through is as bad a period as 1981 or 1982. And we certainly all survived 1974, 1971 and 1966. So if you take a look, it’s a cyclical business. It’s just a question of being prepared. And I think that most institutions are now prepared for it. There’s been enough jawboning by regulators telling everyone to set up larger loan loss reserves.

Q. What about California’s classic resilience to recession?

A. It’s the fifth-largest economic unit in the world, and a lot’s been said about that in the past. But I think it gives us the ability to to deal with recession a lot better than a lot of other places in the country. I’m not trying to kid ourselves and say all is rosy out there, but I think we’re in a lot better position.