Building and Loan Association

Building and loan associations were mutually held financial institutions that greatly increased the accessibility of home loans from the 1830s to the 1930s. Guided by a spirit of “mutual self-help,” participants pooled their money—generally within small, regional B&Ls—and in turn became eligible to receive dividends and take out a mortgage. From the mid-1930s onward, B&Ls began morphing into federal savings and loan institutions, which had a charter from the U.S. government and relied on federal deposit insurance.

A building and loan association, also known as a thrift, got its start when a pool of individuals agreed to pay a membership fee and subscribed to a certain number of shares that had a predetermined maturity value. The members were then obliged to pay a certain amount each month until the maturity value of their shares had been reached.

If an individual took out five shares, each with a maturity value of $600, they would be able to take out a loan for up to $3,000. Because of limitations in the amount of capital these associations held, members would generally have to take turns—or, more specifically, outbid the other members—in order to take out a home loan. If they still owed money on the shares, they would continue to pay them off until the note was canceled.

The first building and loan associations were structured as “terminating,” or closed-ended, plans that expired when all of the loans it made were repaid. However, by the mid-1800s so-called “serial plans” came into existence, which periodically issued new shares that had their own termination date. Eventually, these gave way to “permanent plans,” where members could join whenever they wished.

Building and loans were influenced by the British building societies that became prevalent in the United Kingdom during the Industrial Revolution. The large down payments and short repayment periods—often five years or less—required by depository banks proved a significant hurdle to middle-class homeownership. The building societies circumvented the traditional banking system by allowing members to buy shares and borrow against their value when they purchased a home.

Two English-born factory workers formed the first American building and loan association in Philadelphia in 1831. Soon these local cooperatives would spring up throughout the Northeast and Mid-Atlantic. By the 1870s, building and loans had popped up in the majority of states.

The growth of B&Ls was fueled by the rising income of skilled laborers around this time. While they typically couldn’t afford the hefty down payment needed for a bank loan, their increased earnings made it possible to buy real estate though this alternate source of funds.

The use of building and loan associations reached its apex in 1927, when 12,804 of them were scattered across the country, serving more than 11 million members. Within a decade, however, that influence would be greatly diminished.

In response to the Great Depression and the resulting deterioration of B&L balance sheets, the government began offering charters for a new type of lender: federal savings and loan institutions. While the industry was reluctant to accept federal regulation at first, the benefits eventually became apparent.

For one, cash-strapped S&Ls could borrow from the Federal Home Loan Bank Board, established in 1932 by the Federal Home Loan Bank Act, in order to shore up their capital. In addition, the Federal Savings and Loan Insurance Corporation, or FSLIC, aimed to stabilize thrifts by guaranteeing deposits made by its members.