Frequent efforts were made to secure an amendment of the national banking laws to permit loans to be made upon the security of real estate. Bills of this nature were introduced from time to time and passed the House of Representatives, but failed of favorable action in the Senate.
The original Bank Act, approved February 25, 1863, conferred authority upon national associations to loan money "on real and personal security." The Act of June 3, 1864, contained the same provision when the bill was reported to the House and Senate, but during the debate on the bill the words "real and" were eliminated, and the provision as finally adopted read "by loaning money on personal security."
When an amendment was offered to the bill to strike out the words "real and," Mr. Brooks, a representative from New York, said that the banks in the State of New York for a considerable time discounted notes and loaned money on the security of real estate mortgages. Experience, however, he said, soon taught the bankers that this was a dangerous system of banking, and the western states which copied the original banking law of New York suffered greatly thereby. New York bankers, he said, were also taught that the use of real estate in commercial banking was unsafe.
Mr. Brooks stated further that the principle of commercial banking requires two immediately available securities: First, the drawer of the note; second, the endorser. If a mortgage on real estate, he said, is given as security, the mortgage has to be foreclosed and all the laws in relation to the transfer of the realty have to be gone through with before the real estate can be made available for the purpose of converting the security on the market.
Mr. Washburne, of Illinois, stated that the provision authorizing commercial banks to loan money on realty was a vicious system of banking, and one which he could not sanction.
Mr. Boutwell, afterward Secretary of the Treasury, said that he had supposed that commercial banks empowered to loan money on real estate had almost ceased to exist in the commercial world.
Mr. Hooper, of Massachusetts, who was in charge of the bill, stated that he was perfectly willing to accept an amendment to strike out the objectionable provision, and upon his motion the words "real and" were stricken out of the bill and the section amended to read "by loaning money on personal security." This amendment was adopted without division and remained the law up to the passage of the Federal Reserve Act, December 23, 1913, which provides as follows:
Any national banking association not situated in a central reserve city may make loans secured by improved and unencumbered farm land, situated within its Federal reserve district, but no such loan shall be made for a longer time than five years, nor for an amount exceeding fifty per centum of the actual value of the property offered as security. Any such bank may make such loans in an aggregate sum equal to twenty-five per centum of its capital and surplus or to one-third of its time deposits and such banks may continue hereafter as heretofore to receive time deposits and to pay interest on the same.
The Federal Reserve Board shall have power from time to time to add to the list of cities in which national banks shall not be permitted to make loans secured upon real estate in the manner described in this section.
There is no doubt that the elimination from the National Bank Act of 1864 of the power to make loans upon the security of real estate removed a dangerous principle from the banking laws, and contributed largely to the safety and success of the national banking system.
The subsequent pressure from time to time for the privilege •of making real estate loans came largely, if not wholly, from banks of the smaller capital class, or what were known as fifteen per cent. reserve or country banks. Since the passage of the Act of March 14, 1900, authorizing the organization of banks with a capital of twenty-five thousand dollars, a considerable number of banks of this class have been organized and many of them were converted State institutions, or reorganized State or private banks. Before their admission to the national system, many of them had been accustomed to making loans upon the security of real estate, and when they became national associations they naturally felt the restraint of the law prohibiting such loans. They were induced to nationalize in the first place because of the greater advantages which they thought the national system afforded over state and private banks. At the same time, while reaping whatever benefits were to be derived from incorporation under national authority, they desired to continue the business of making loans on mortgage security and to exercise other powers not permitted by the national banking laws.
Many national bankers do not regard real estate mortgage loans with favor, and will not avail themselves of the privilege of making such loans, now that they are permitted by law to a limited extent. The demand for such a privilege did not, therefore, come from this class of bankers.
Of all the banks in the national system, it is most essential that the very banks that were most clamorous for the privilege of making real estate loans should keep their assets in a quickly convertible form.
Under the national banking laws banks have been permitted to take real estate mortgages to prevent loss on debts previously contracted in good faith, and to acquire title to the property, if necessary, in satisfaction of debts, but the statute requires that realty so acquired shall be disposed of within five years. Banks have found it very difficult in the past to dispose of real estate within the limit of time prescribed by the statute without incurring considerable loss. The result is that more or less realty of an unproductive character accumulates on their hands.
If, therefore, under the limited privileges above referred to, banks have accumulated so much real estate during the course of their existence and have found it so difficult to realize on mortgage loans, or to dispose of either the realty or the mortgages, is there not great danger that in permitting loans to be made directly upon real estate security the amount invested in such loans, and the realty that will be taken in addition thereto as security for or in satisfaction of bad debts, will absorb and tie up such a large proportion of deposits in this inconvertible form as to bring about a similar condition of affairs in many banks as existed in the Freedman's Savings and Trust Company, and with like results.
Notwithstanding the experiences of the past, many national bankers who favor real estate loans claim that real estate mortgages are the very best security to be obtained in their respective localities, and are eminently better than stocks, bonds or commercial paper. In some sections of the country this may be, and no doubt is true, provided such loans are limited to a safe percentage of the actual value of the real estate mortgaged, and restricted in the total amount of such loans. But in other localities the reverse would be the case. In sections of the country where the actual value of farm lands is unsettled and more or less speculative, mortgage loans will be the very worst kind of an investment for banks to make.
The persistent pressure upon the Comptroller's office before the passage of the Federal Reserve Act for a more liberal interpretation of the law in respect to real estate loans, also had its effect in later years, and through liberal administrative rulings based upon strained interpretation of the statutes many loans were permitted to be made upon real estate mortgages by indirect methods which formerly were held to be unlawful.