What is usage of this proverb? When would be its proper usage?
Wo man singt, da laß dich ruhig nieder; böse Menschen haben keine Lieder.
Is it used nowadays as well?
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This proverb has a Wiktionary entry.
 Dieses Sprichwort zielt auf den Sachverhalt ab, dass man normalerweise singend nie einen bösen Gedanken oder eine böse Absicht hegt oder formuliert. Singen ist von seinem Ursprung her auf das soziale Miteinander angelegt.
Meaning: This proverb aims at the fact that you usually do not have or articulate evil/bad thoughts or intentions when singing. Singing itself is aiming at socialising.
Es handelt sich hier um die erste und die letzte Zeile aus Johann Gottfried Seumes Gedicht/Volkslied „Die Gesänge“: „Wo man singet, laß dich ruhig nieder, / Ohne Furcht, was man im Lande glaubt; / Wo man singet, wird kein Mensch beraubt; / Bösewichter haben keine Lieder.“
Origin: It is the first and last line from Johann Gottfied Seume's poem "Die Gesänge".
This proverb is still used in modern time - often questioning its message in the context of bad, singing people. Examples are blog entry that discusses the usage of discriminating songs in the youth scouts organisation or this facebook post advertising this satirical TV show about singing presidents
Contrary to the answer by Marzipanherz, the common usage of this quote is not to say something about people, but to express an opinion about songs.
You will usually here the quotation in something like music shows, when the host wants to emphasize that singing and listening to songs is beneficial and uplifting. That is, the phrase expresses the special quality of music. That is also its meaning in the original poem, which is an ode to song (not a poem about the goodness of people).
I have never heard the quotation used as a way to suggest that singing people are "good", except in an ironic way.