The rule laid down by the Supreme Court of the United States for interpreting the national banking laws is, that "the intent, not the letter of the statute, constitutes the law." The same court has also held that "while Section 5136, United States Revised Statutes, does not in plain terms prohibit a loan on real estate, the implication to that effect is clear, and what is implied is as effectual as if it were expressed."
It cannot be disputed that the intent of the National Bank Act of 18(54 was to prohibit loans being made upon the security of real estate mortgages, and as the courts have declared that what a bank is prohibited from doing directly it cannot lawfully do indirectly, it follows that when real estate loans were made indirectly in a form to evade or circumvent the restrictions of the statute, they were as much in contravention of law as if made directly, and no administrative ruling or distorted interpretation of the law can legalize an unlawful transaction.
The question of good faith enters largely into all transactions involving loans indirectly secured by liens on realty, and the facts, not the form of the transactions, determine their legality or illegality.
Examinations of national banks and supervision by the Comptroller of the Currency should be as practical as possible, and practical experience as to the numerous subterfuges resorted to by banks to circumvent the law in respect to real estate loans, is a safer guide for the examiner and Comptroller to follow in determining the good faith of a transaction than legal theorizing, which, while usually following the letter of the statute, generally loses sight of its intent or spirit.
Especially is this true in the light of the fact that it has been impossible to obtain a unanimous opinion of an Appellate Court upon any question involving an interpretation of the old provision of the national banking law in regard to real estate loans even by so eminent a body of jurists as composes the Supreme Court of the United States, which upon this very question rendered a divided opinion.
Until the position of the Comptroller's office on this subject was amended in later years to conform to the views of bankers who desired to make real estate loans, it was held, and very properly so, that it was unlawful for a bank to purchase or discount a real estate mortgage note, even though the mortgage did not run directly to the bank and the endorser or assignor of the note was alleged to be financially responsible for the loan without recourse to the mortgage.
In other words, a note in this form was held to be simply two-name paper secured by collateral, the collateral being the real estate mortgage. The owner of the note, in the event of nonpayment by the maker at maturity, could proceed to collect the loan from the endorser, or convert the security by foreclosure. In many cases of this kind the latter course was necessary, as the endorser of the note was frequently financially irresponsible, and the bank knew it at the time the loan was made and would not have made it but for the mortgage security back of the note.
While this question never has been directly before the courts, there is sufficient authority in support of the position that the assignment of a mortgage note carries with it an assignment of the mortgage, to be found in the dictum of the courts. In the case of the First National Bank of Mankato v. Pope et al, the Supreme Court of Minnesota held that where a promissory note secured by a mortgage on real estate is endorsed and transferred to a purchaser without formal assignment of the morgage, the security follows the note as an incident thereto, and the purchaser becomes the equitable owner of the mortgage, acquiring an interest which enables him to deal with it for all purposes.