Building and Loan Association - Explained
What is a Building and Loan Association?
Written by J. Mance Gordon
Updated at April 18th, 2022
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Table of Contents
What is a Building and Loan Association?How Does a Building and Loan Association Work?Federal Savings vs. Loan AssociationsWhat is a Building and Loan Association?
Building and loan association is a state-chartered financial organization that makes use of customer subscriptions and deposits to invest in the members residential mortgage loans. They do this to ensure that they increase homeownership in the building and loan association.
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How Does a Building and Loan Association Work?
This plan has been there between the 1830s to the early 1930s. People guided by the spirit of mutual self-help put their money together within a small or regional building and loan associations. Participants were required to pay a membership fee and then subscribe to a given number of shares that consisted of a predetermined value of maturity. The members were then required to pay a given amount of money on a monthly basis until their shares reached maturity value. This plan qualified them to access dividends as well as taking out mortgages. However, because of limitations in the amount of money available, members were forced to take turns in accessing dividends and mortgage loans. For those that owed money on their shares, they were supposed to continue paying them off until the cancelation of the note.
Federal Savings vs. Loan Associations
In the mid-1930s, moving forward, building and loan association underwent federal regulation following the Great Depression. It, therefore, changed to become what we refer to today as federal savings and loan associations. It has a charter from the United States government and relies on federal deposit insurance for its operations. Federally chartered banks are mandated to take in customer deposits for checking and savings accounts as well as offering home mortgages. Savings and loan associations are smaller than other banks, and they focus more on offering services to local communities. Because savings and loan associations have a better understanding of the local market, acquiring a loan with them is sometimes much easier, though not always. They get most of their funds from the savings accounts of their customers. They also have easy access to Federal Home Mortgage Banks loans. Another name for savings and loan associations is thrifts, and they operate under the Office of Thrift Supervision.