What Is a Building and Loan Association?

A building and loan association was a unique type of financial institution that emerged to address a specific need in American history. These associations played a significant role in making homeownership more accessible for many individuals, particularly before the widespread availability of traditional mortgage financing. They operated on a community-centric model, fostering mutual support among their members.

Core Purpose and Definition

A building and loan association was a financial institution designed to pool the savings of its members to provide mortgage loans, primarily for the purpose of building or purchasing homes. Unlike traditional commercial banks, which were often shareholder-owned, these associations were typically mutually held, meaning they were owned by their members. This cooperative structure allowed members to be both depositors and potential borrowers, often sharing in any profits generated. Commercial banks at the time often required large down payments and offered short-term, non-amortized loans, making homeownership difficult for many. Building and loan associations circumvented these hurdles by offering a more accessible path to home financing through collective effort and mutual self-help.

How They Operated

Members of a building and loan association contributed funds by purchasing shares or making regular deposits. These pooled funds were then used to issue mortgage loans to other members. Early associations often operated on a “terminating plan,” where the association would dissolve once all members had received a loan and repaid it, or when all shares matured.

Later models, such as “serial plans” and “permanent plans,” allowed for continuous operation and the admission of new members over time. New members could join without back-paying large sums, as new series of shares were periodically issued. The determination of which member received a loan next was sometimes decided by an auction among the membership. Loan repayments and new deposits created a cyclical flow of funds, allowing the association to continue issuing new mortgages.

These institutions were generally small and local, fostering trust and direct engagement among members. Members often had borrowing privileges tied to their shares and could receive dividends. While commercial banks offered immediate deposit withdrawals, most building and loan associations had waiting periods, typically 30 to 60 days, for withdrawals, which contributed to their stability during economic fluctuations.

Evolution and Modern Relevance

Building and loan associations underwent transformations following the Great Depression. Many were affected by widespread bank failures of the 1930s, as they often relied on short-term lending from banks to fund their long-term mortgages. New regulations led many to convert into federally chartered “savings and loan associations.” This conversion provided access to federal deposit insurance and expanded their services to include checking and savings accounts, making them more comparable to commercial banks. However, they were still required to dedicate most of their lending to residential properties, honoring their original purpose.

The savings and loan industry faced challenges in the late 20th century, leading to many failures, mergers, or acquisitions by commercial banks. Despite these changes, the foundational principles of building and loan associations persist in modern financial institutions. The cooperative, member-owned model can be observed in credit unions, which focus on serving their members and communities. Community banks also embody a similar local focus, supporting regional development and providing accessible financial services.