1. Deposits Not Loaned On Personal Credit

Having described how deposits are received and paid, let us next inquire how a savings bank loans its funds. First of all, a savings bank can lend nothing on the mere faith or promise of an applicant for money. He might be worth millions, and offer indorsers as wealthy as himself, yet a savings bank, obeying the law in most states, would have no right to lend him anything. One of the cardinal features of savings bank investments is, there must be something besides personal security..

2. Securities That May Be Taken

Savings banks are permitted to purchase national, state, and municipal bonds; outside these three modes of investments they are restricted largely to real estate security. In some states they are required by law to invest at least fifty per cent of their deposits in the last-named manner. Compliance with the law is becoming more and more difficult from the lack of securities, and savings bank managers frequently ask for wider latitude from the legislatures of their respective states. In some of them they can invest in railroad bonds, but everywhere legislators hesitate to enlarge the field. They have a keen sense of the nature of savings bank deposits and the need of guarding them as safely as possible from every risk.

3. Loan Committees

Thus much in the way of describing the general field of investment. The trustees or directors of a savings brink are generally divided into two or more committees. One of these is the finance committee, whose duty consists in determining what securities shall be purchased in accordance with the laws and best interests of their bank. Three members usually serve on this committee.

Other trustees or directors serve on a committee to examine real estate, determine its value, and decide whether applications for loans ought to be granted. Their work often consumes much time, nevertheless men are found who accept such positions and serve faithfully.

4. Lending On Real Estate

Let us now describe the method of lending money on real estate security. A makes an application in writing for a loan, to the treasurer or secretary of a savings bank. He may do this by letter, or he may go to the bank and fill up a blank prepared for this purpose. He sets forth the amount desired, the nature and location of his land, and perhaps the Length of time he needs the money. Twice a week or oftener the trustees or directors meet to consider applications. Alter trading them they are referred to the real estate committee, whose duty consists in examining into their truthfulness. Two or more of their number make a personal examination of the security offered. From long experience they become expert in values. If they dare not rely on their own judgment, they make inquiry of others, and especially of real estate dealers. II the bank is located in a large city, it may prove more difficult to be well informed concerning the worth of real estate in every part, and the real estate committee may be divided into sec-tions; when this is done, to each section is assigned a particular part of the city.

Sometimes power is given to the committee to act on its own judgment. In other cases the committee reports to the full board, which grants, or declines to grant, the loan. In truth, both modes are essentially the same, for whether the loan is made or not depends on the determination of this committee. Its action is a finality.

a. Margin for Depreciation. In granting loans, a bank always leaves a large margin of value to insure safety in the event of a decline. Experience has shown that the value of real estate, like that of every other kind of wealth, is unstable. The present writer was told by the former president of a mortgage company, who had thus served many years and sought to lend its resources in the most conservative manner, that notwithstanding all the care and intelligence he and his board had bestowed in lending on real estate security, there had been many losses. This often happens when loans are made in rapidly growing villages and cities. The prospect is most favorable; suddenly the place is struck by an unwelcome blast, and the large margin of valuation between the amount of money actually loaned and the worth of the property at the time of lending is swept away.

Savings bank trustees or directors, understanding this, seek to leave a wide margin of value for possible shrinkage. The usual rule is to lend money for about half the value of the security offered. Thus, the real estate of an applicant who desired to borrow $2,500, ought to be worth about $5,000. Sometimes a loan committee will recommend that a loan be made, but not for the entire amount desired. Many an applicant seeks to borrow as much as possible on his real estate, and puts a higher valuation thereon than the loan committee, or higher than his neighbors would value it.

b. Borrower's Note. Let us suppose, however, that a favorable report has been made on A's application for a loan on his land and house. The next steps are to take his note, examine the title to his property, prepare a deed conveying it conditionally to the bank, and transferring the policy of insurance on his house, if there is one on the premises. Each of these matters may be briefly considered.

First, is the note which the applicant must sign. In this is stated, among other things, the amount, the rate of interest, and the time of paying it, usually semiannually in advance, and the repayment of the loan.

c. Deed to secure Note. Second, is the deed given to secure the note. As a preliminary to giving the mortgage, there must be a careful examination of the title of the property to ascertain whether there are any defects or incumbrances of any kind thereon; for a bank will not take any security unless the title can pass the most rigid scrutiny. A bank will never take a second mortgage unless it holds the first. This is sometimes done when the security is ample. The work of examining the title is done by a person especially employed for that purpose, - an attorney. In some large banks this is quite all the business he can perform. There are various ways of making this examination. For small banks the attorney may make the examination himself ; for the larger ones this work is often intrusted to others who bring him certificates describing the result of their examination. Thus, suppose a savings bank attorney is directed to examine into the title of a piece of land in a city. Several examinations must be made. First, an examination of all sales; second, of all mortgages thereon, third, of all attachments and levies that may have been made fourth, he must satisfy himself that no liens exist for Unpaid taxes, or assessments for Improving the streets, or other state or local charges. The nature of these differs somewhat in different places. In all the large cities there are men who specialize the work of examinations: one examines transfers or sales, another mortgages, another attachments, another tax and assessment liens, and so on. It is much easier and cheaper nowadays to solicit their assistance than it is for one to do the work directly. Lastly may be mentioned the modern land title companies, whose sole business is to examine titles and make deeds; besides doing better work and at lower rates than was done before, they guarantee titles and possess a capital adequate to make good any loss growing out of mistakes in doing their work. In obtaining conveyances, therefore, savings banks sometimes avail themselves of these companies.

The nature of this deed may be briefly explained. The borrower conveys his land and house, if there is one thereon, to the bank, as a security for the money loaned. He, however, retains possession, so long as he pays the interest, or the principal, if it is required. But when he does not pay the interest at maturity, or the principal when it is demanded, then the bank can take possession after a short legal process that will soon be explained. This is known as a mortgage deed. In some states the borrower gives a bond instead of a note, and also a mortgage, and then the conveyance is known as a bond and mortgage, but this is essentially the same kind of conveyance as the other.

d. Insurance. If there is a house on the lot, the bank usually insists on a transfer of the policy of insurance in order to increase its security. Of course, it is important that the transfer should be made, or at least that notice of the mortgage be given to the insurance company; for were this not done, and the house was destroyed by fire, nothing could be collected from the company. Nor is this an unreasonable requirement, for an insurance company has a strong interest in knowing who are the owners and occupiers of the buildings it insures, for their care and preservation depend so largely on the character of their occupiers. A bank, therefore, has the policy transferred, and this is signified to the insurance company and accepted; furthermore, the bank carefully looks after every policy and the payment of the premium in order to preserve its vitality.

c. Action of Bank if Loan is not paid. Such are the various steps in lending money by a savings bank on the security of real estate. Suppose a borrower does not pay his interest, what happens? If the security is ample, the bank may suffer the interest to accumulate. There are depressions in business when borrowers can not always pay. Thousands of savings bank borrowers are workingmen, who use the money borrowed to build their houses. Hard times come on, and they are discharged, or their wages are reduced, and it is difficult for them to pay the interest on their mortgage. If they can not pay, and the bank tears the security may not be ample, then it takes the final steps to perfect its title to the land. This is done by a legal process called a foreclosure.

The bank files a petition or complaint to the proper court describing the loan, the security pledged, the failure of the borrower to pay his interest as he had promised, and asking the court to fix a day after which, it the borrower does not pay the loan and interest due, the title to the land shall pass absolutely to the bank. There is a hearing be fore the court and should the facts above stated be proved (and they are rarely disputed), the court fixes a day, usually two or three months, rarely more than six, in advance, for the mortgagor or borrower to pay the bank, and further decrees that, if he does not pay at the end of the prescribed period, the absolute title of the land shall pass to the bank, and the borrower's control over it be forever cut off. Henceforth, if he does not pay within the time fixed by the court, the bank becomes the owner as absolutely as though it had bought the land and paid an agreed price therefor.

f. Sale of Land by Bank. - What does the bank do with the land? It seeks to find a customer. Perhaps none can be immediately found, and in this case the land is rented. The bank may be obliged to hold the property several years before it can find a purchaser; just as soon, however, as one comes along who is willing to pay the original loan, and the unpaid interest, etc., in short, make the bank whole, it disposes of the property. Most of the older banks own more or less real estate that has been acquired in this manner; on the other hand, after a few years, at the longest, they succeed in disposing of their undesired possessions.