The history of formal lending in the United States, as opposed to other sorts, is deeply entwined with the rise of home ownership in the lower socioeconomic classes. In fact, it has been safeguarding the continuing opportunity for popular home ownership that has been the source of many of the regulatory changes in the industry.
Formal lending, in terms of institutional lending, has long been the means by which many have been able to buy their own home. Before institutionalized lending that was accessible to those who were not wealthy, people relied on private loans or small, regional networks, serving a particular ethnic or professional group, such as a group of immigrants from a particular country or craftsmen setting up an organization or guild amongst themselves. These types of lending situations, however, did not nurture and support homeownership in the same ways, for as great of a percentage of people, as does formal lending or institutional lending today.
The early types of formal mortgages were extended by insurance companies. The terms of these mortgages, however, were often quite risky for the borrower, with the balance of power distinctly tipped towards the lender, in ways that would be deemed unfair and even predatory by today’s standards. The balloon payment, a large lump sum due at the end of the repayment schedule, was a feature of the typical lending terms. That often led to foreclosure, as the loans were often made to people who were much more vulnerable to the ups and downs of the overall economic cycles of the nation than those with a cushion of wealth and connections to fall back on.
The early 1800s ushered in a new era in lending, one meant to be more equitable and available to average and lower income Americans, with the opening of Philadelphia Savings Fund Society. This was what came to be called a savings and loan association, the first of many that were to spring up throughout the nation, for the specific purpose of serving the average American as a place to save and a resource for loans, increasing the ability for homeownership, the founding of small businesses, and other situations and purchases that tended to require more capital or cash than the average person had.
The government also stepped in to help with the creation of the Federal Home Loan Bank, which ushered into being the typical mortgage or loan of today, one paid back over time, instead of the short term loans typical of the pre-savings and loan association era, in payments that were divided to avoid the potentially devastating balloon payment. The purpose of the federal Home Loan bank was to help local financial institutions provide fair home loans and mortgages, thus increasing opportunities for the average and lower income people.
Savings and loan associations continued to evolve, though they remained separate from traditional banks, which could offer checking accounts and other services, until the 1970’s, when banking regulations changed. Once those regulations changed, savings and loans associations became almost indistinguishable from the typical bank of today, but their loan practices became the universal standard among many of today’s financial institutions, continuously shaped through the years by regulations meant to be sure that minorities and women were able to have equal access to fair lending.
The results of this lending evolution have been positive for many. Small businesses, thanks to the ability of those who need a loan to get started having access to fair lending, flourish throughout the nation. More Americans own homes today than have since we made to shift from and agrarian culture to an industrialized society. Formal lending has done a great deal to shape the United States that we see today.