What is a construction and loan association (B&L)?
The construction and loan associations (B&L) were mutual financial institutions (FIs) which greatly increased the accessibility of home loans from the 1830s to the 1930s. Guided by a spirit of “mutual aid”, participants pooled their money, usually in small regional B&L, and became their own. round eligible to receive dividends. and take out a mortgage.
Beginning in the mid-1930s, the B&L began to transform into Federal Savings and Loans (S&L) institutions, chartered by the US government and backed by federal deposit insurance.
Key points to remember
- Construction and Loan Associations (B&L) were mutual financial institutions (FIs) that dramatically increased the accessibility of home loans from the 1830s to the 1930s.
- Participants pooled their money and in turn became eligible to receive dividends and take out a mortgage.
- The Great Depression hit many B&L hard because they put the interests of their members before making a profit.
- B&L became federally regulated after the Great Depression, evolving into the Federal Savings and Loans (S&L) associations we know today.
Understanding a construction and loan association (B&L)
A B&L, also known as savings, begins when a group of individuals agree to pay a membership fee and subscribe to a number of stocks with a predetermined maturity value. Members are then obligated to pay a certain amount each month until the maturity value of their shares is reached.
If a person took five shares, each with a maturity value of $ 600, they could take out a loan of up to $ 3,000. Due to the limits of the capital held by these associations, members generally had to take turns – or more precisely, outbid other members – to contract a mortgage. If they still owed money on the shares, they would continue to pay them back until the ticket was canceled.
B&L relied heavily on a stock accumulation model, whereby members agreed to buy shares of the association and subsequently had the right to borrow against the value of those shares in order to to buy a house.
Early B&L were structured as “termination” or indefinite plans that expired when all loans made were repaid. However, in the mid-1800s, “serial plans” emerged, which periodically issued new shares with their own termination date. Eventually, these gave way to “permanent plans”, which members could adhere to when they wished.
History of construction and loan associations (B&L)
B&L were influenced by the British construction companies that spread to the UK during the Industrial Revolution. The large down payments and short repayment periods (often five years or less) required by custodian banks have proven to be a significant barrier to middle-class home ownership. Building societies bypassed the traditional banking system by allowing members to buy stocks and borrow against their value when they bought a house.
Two England-born factory workers formed the first American B&L in Philadelphia in 1831. Soon these local co-operatives expanded throughout the Northeast and Mid Atlantic. By the 1870s, B&L had appeared in most states.
The growth of B&L was fueled by rising incomes of skilled workers during this time. While they usually couldn’t afford the big down payment required for a bank loan, their increased income made it possible to purchase real estate through this alternative source of funds.
The use of B&L reached its peak in 1927 when 12,804 of them were scattered across the country, serving over 11 million members. In a decade, however, that influence would be greatly diminished.
Construction and Loans (B&L) vs. Savings and Loans (S&L)
In response to the Great Depression and the resulting deterioration in B&L balance sheets, the government began proposing charters for a new type of lender: S&L federal institutions. While the industry was reluctant to accept federal regulation at first, the benefits eventually became evident.
For one, short of money S&L could borrow from the Federal Home Loan Bank Board, created in 1932 by the Federal Home Loan Bank Act, in order to consolidate their capital. In addition, the Federal Savings and Loan Insurance Corporation (FSLIC) aimed to stabilize savings banks by guaranteeing deposits made by its members.