IX

BUILDING AND LOAN ASSOCIATIONS

A building and loan association - using the term to include all kindred associations is a private corporation organized for the purpose of accumulating the money of its members, by periodical payments into the treasury, to be invested in loans to the members upon real estate for building purposes. The borrowing members pay interest and a premium as a preference in order to secure loans over other members and in addition continue their fixed periodical installments. These payments and the payments made by non-borrowing members, in addition to fines, forfeitures, fees, and other revenues, go to make up a common fund which is accumulated until in payments and profits it equals the face value of all the shares in the association, when the assets, less expenses and losses, are pro rated among the members, which cancels the borrower's debt and gives the non-borrower an amount equal to the face value of his stock.

Every member of such an association must be a stockholder. The stock is paid for by the regular, usually monthly, payment of a stipulated minimum sum - the payments being continued until the aggregate of the money paid, increased by the profits, amounts to the maturing value of the stock, at which time the member is entitled to the full maturing value of the share and surrenders his share for the amount.

The amount of the capital of such an association is constantly increasing, and the success of the concern depends upon its ability to keep its money constantly employed in

profitable investment. The nature of the business and the safeguards surrounding it preclude the danger of a run upon the concern by stockholders. Such associations have had an important influence upon the financial condition of the State upon one or two occasions.338

Building and loan associations have been in existence in the United States since about 1840. They became numerous in Iowa about 1888 and 1889. The first legislation in the State relating to such concerns was enacted in 1872 when a measure entitled "An Act to Enable Co-operative and Mutual Loan Associations to raise Funds to be loaned among their Members for building Homesteads, and for other Purposes, to become a Body corporate" was passed.339 This law provided that five or more persons might incorporate under the general incorporation laws of the State to raise money for the purpose stated in the title of the act.

Companies so organized were authorized to raise money among their members by stated dues, fines, interest on loans advanced, and premiums bid by members for the right of precedence in taking loans; they were also authorized to deal in real estate and personal property. The dues, fines, and premiums paid by members were not to be considered usurious, and no member was permitted to hold more than twenty shares.

Similar associations organized prior to the passage of the law were given the same privileges as those organized subsequent to its passage. An amount not to exceed ten per cent of the earnings might be set aside for current expenses and necessary real estate. The residue of the earnings were to be transferred to the credit of the shareholders, and when the shares were fully paid, they were to be distributed ratably to the shareholders.

No further legislation was enacted on this subject until 1896 when an act "defining building and loan or savings and loan associations and providing for the organization,

regulation, examination and control, and providing a penalty for the violation of said regulations, and repealing acts and parts of acts inconsistent with this act" was passed.340 This law declared that corporations organized for the purpose of furnishing money to their members upon sufficient security should be known as building and loan or savings and loan associations. Three classes of associations were defined: domestic local associations whose business was confined to the city or county in which the association was located; domestic associations, whose business was not so restricted; and foreign associations, which were incorporated in other States.

Five residents might incorporate as a building and loan or savings and loan association under the general incorporation laws of the State and were authorized to commence business as soon as one hundred shares were subscribed. The law specified that such an association should be governed by a board of directors elected by the stockholders. The content of the articles of incorporation was prescribed and the articles were required to be approved by the Executive Council, certified by it, and filed in the office of the Auditor of State, who then issued a certificate of authority for the concern to transact business. The officers of such associations were also required to give bonds approved by the State Auditor. The law specifically prohibited any building and loan association from receiving deposits of money without issuing shares of stock or from doing any banking business.

Such associations were given power to issue stock to members to be paid for in single, stated, or monthly payments. The amount to be issued to any one person was limited to ten thousand dollars. They were allowed to collect dues, fees, fines, premiums, and interest upon loans in accordance with their articles of incorporation, and such collections were not to be considered as usurious. They

were permitted to buy and convey real and personal property and to make loans upon real estate and on securities, and other regulations were laid down for the investment of funds. Members were to be permitted to withdraw stock deposits at any time, in accordance with the articles of incorporation.

The expense account of such associations was limited to certain fixed proportions of the amount of stock. The profits were all to accrue to the benefit of the shareholders. The Auditor of State was empowered to cause such associations to be examined at least once a year and report the conditions to the Governor biennially. Provision was also made for the closing up of the affairs of any association that did any unsound or illegal business.

Foreign associations were placed under stringent regulations. They were required to file with the Executive Council a certified copy of articles of incorporation and by-laws, and a detailed financial statement. Before a certificate was issued authorizing such an association to transact business in the State, a deposit of $100,000 in securities was required as security for resident shareholders. The concern must also file a resolution agreeing to the serving of legal process in a certain manner. Moreover, foreign associations were discriminated against in the matter of fees.

All building and loan or savings and loan associations doing business in the State were required by law to file annually during January, with the State Auditor, a detailed report and financial statement of their business for the previous calendar year. Heavy penalties were prescribed for failure to report. The enforcement of the provisions of the law was placed in the hands of the State Auditor who was given authority to revoke the certificate of authority to do business in the State of any association that violated any of the provisions of the statute.

The law went into effect on July 4, 1896, and associations

doing business in the State prior to the enactment of the new law were required, within sixty days, to reincorporate or so amend their articles of incorporation and by-laws as to comply with the provisions of the new act. There were few changes made in the law as it appeared in the Code of 1897; and a legalizing act was passed in 1898 for the purpose of legalizing contracts made prior to the taking effect of the Code. Important additions and amendments were made by the Twenty-eighth General Assembly in 1900.341

This act of 1900, among other things, forbade the issue of preferred stock by building and loan associations. It prescribed a new schedule of rates, fixing the maximum percentage of the assets which an association would be permitted to use for salaries and current expenses. It fixed the maximum fines to be charged to stockholders whose payments were in arrears, and defined the terms of withdrawal. It limited the rate of premium and interest charged to members on loans to eight per cent, and defined the terms upon which non-borrowing members might withdraw from an association.

The law, moreover, defined the terms upon which mortgages might be foreclosed by associations. It prescribed the procedure in case of voluntary liquidation, as well as in case of consolidation with other companies. The rate of interest chargeable was limited to eight per cent; and discriminatory rates of interest among members were prohibited. The Executive Council was empowered to revoke the certificate of authority to transact business of any association doing an illegal business; and it was declared unlawful for any person to sell stock in any association not authorized to do business in the State. The Executive Council was given discretionary power in the matter of deciding whether the articles of foreign corporations complied with the laws of the State and whether they afforded equal security and protection to the members. In case they did