Legal Definitions - building and loan association

A building and loan association was a type of financial organization that existed primarily in the United States before the mid-20th century. These associations were essentially cooperative societies designed to help their members purchase homes. Individuals, often from the same community or economic background, would pool their savings by making regular payments into a common fund. Members purchased shares in the association, which entitled them to apply for a home loan when sufficient funds became available, or to receive dividends on their investment.

Because these organizations were funded by their members' contributions and often had limited capital, they typically employed specific systems, such as waitlists or bidding processes, to determine which members received loans as funds accumulated. Building and loan associations played a vital role in enabling homeownership for many Americans during an era when modern mortgage products and government-backed financial institutions were not widely available. They were largely replaced by government-insured savings and loan institutions after the Great Depression.

• Example 1: Community Homeownership in the Early 20th Century

  In a bustling industrial town in 1915, a group of factory workers and local shopkeepers formed the "Harmony Home Builders Association." Each month, members contributed a portion of their wages to the association's fund. After several years of consistent contributions, Mr. Henderson, a long-time member, was granted a loan from the association to purchase his first modest home, a dream he couldn't have realized through traditional banks at the time. This illustrates how a building and loan association allowed a community to collectively save and provide home loans to its members, facilitating homeownership for those with limited access to conventional financing.

• Example 2: Saving for Future Generations with Dividends

  Mrs. Rodriguez, a widow in the 1920s, wanted to ensure her children would have a secure future. She regularly invested in shares of the "Neighborhood Thrift & Home Association," a local building and loan association. While she never took out a loan herself, her consistent payments earned her annual dividends, providing a small but steady return on her investment. This demonstrates that membership in a building and loan association offered not only the potential for a home loan but also the opportunity for members to earn dividends on their savings, acting as a form of community-based investment.

• Example 3: Allocating Limited Funds Through a System

  By the 1900s, the "Metropolitan Building Society" in a rapidly growing city had more members eager for home loans than it had available funds. To manage demand, the society implemented a system where members who had contributed for a certain period could enter a monthly "loan auction." The member willing to accept the loan with the lowest interest rate or shortest repayment period, effectively bidding for the funds, would receive the loan. This highlights how building and loan associations, due to their limited, member-funded capital, often devised specific mechanisms to fairly allocate loans among their members as funds became available.