It is understood that, in addition to bills S. 756 and S. 757, there is also a bill pending, S. 1034, in which there is a proposal similar to one which the Board heretofore has been called upon to consider. Accordingly, the Board's views on S. 1034 are included with its views on S. 756 and S. 757. The Board continues to believe that the enactment of any of these proposals would not be desirable in the public interest. The objectionable provisions of the above-mentioned bills to which the Board wishes to call attention are (1) the provision in S. 756 which would authorize the Secretary of the Treasury to purchase obligations of Federal home-loan banks and the Federal Savings and Loan Insurance Corporation, (2) the provision in S. 1034 which would reduce the insurance premium rate from one-eighth of 1 percent per annum to one-twelfth of 1 percent per annum, (3) the provision in S. 757 which would allow Federal savings and loan associations to invest their funds in any obligation which is insured under any provision of the National Housing Act "as heretofore, now, or hereafter in force,” and (4) the provision in S. 756 allowing Federal home-loan banks to make advances to their member associations on the security of any such obligations. The first of these provisions would make it possible for the Federal home-loan banks to obtain additional funds from the Treasury with which to meet the demands of their members. It would also make it possible for the Federal Savings and Loan Insurance Corporation likewise to obtain additional funds. Either operation would add liquidity to the obligations of insured savings and loan associations, the bulk of which are represented by shares. The Board knows of no reason why the Federal home-loan banks should not be able to meet the needs of their members so long as they operate within the scope of the principles on which they were created. The need to resort to the Treasury of the United States would seem to follow only if operations are broadened to the point that the market for the obligations would weaken or disappear. This would appear to be sufficient reason neither to broaden their operations nor to authorize the purchase of their obligations by the Secretary of the Treasury. S. 1034 would reduce the premiums or assessments due by insured members to the Federal Savings and Loan Insurance Corporation from the existing rate of one-eighth of 1 percent per annum to one-twelfth of 1 percent per annum. The purpose of such action apparently would be to place the premiums charged by the Federal Savings and Loan Insurance Corporation and those charged by the Federal Deposit Insurance Corporation upon a similar basis. In this connection, however, it should be remembered that the Federal Deposit Insurance Corporation insures only deposits and not the shareholders of its insured banks. The capital, surplus, undivided profits, and reserves of its insured banks stand between it and loss, and there is no comparable counterpart in the case of savings and loan associations. Moreover, the liabilities which it insures are offset by diversified assets, the greatest portion of which is short-term in character and a substantial portion of which is represented by cash and Government obligations. The institutions insured by the Federal Savings and Loan Insurance Corporation are largely mutual in character. The great bulk of their liabilities is to shareholders. These liabilities, as they should be, are offset almost wholly by long-term investments secured by real estate. An investment in such institutions should partake of the same character and should be for the purpose of acquiring and holding the investment. Insured banks pay no interest on demand deposits and only limited interest on time or savings deposits. Insured savings and loan associations pay dividends at greatly higher rates and upon all of their liability to shareholders. It follows that holders of their obligations should not expect such obligations to be as freely convertible into cash as bank deposits. By all of these standards the premium charged by the Federal Savings and Loan Insurance Corporation should be higher than that charged by the Federal Deposit Insurance Corporation. Federal savings and loan associations are now permitted to lend their funds only on the security of their shares or on the security of first liens upon homes within 50 miles of their office, with certain exceptions. The effect of the two provisions of the pending bills (S. 756 and S. 757) would, therefore, be to enlarge the field of their permissible operations and the sources from which they could attract funds by permitting them to invest (a) in modernization loans, (b) in home mortgages regardless of location, and (c) in large scale mortgages, such as those upon large apartment houses, if Federal Housing Administration insured, and to obtain advances from their Federal home-loan banks on the security of such investments. In addition, this expansion in the permissible field of operation would extend to any mortgage or obligation insured under any provision of the National Housing Act "as heretofore, now, or hereafter in force.' 60232-44- -5 The Board is in sympathy with what it understands to have been the original objectives of the Federal Home Loan Bank System whereby Federal savings and loan associations and similar institutions would supply the need for local mutual thrift and home financing institutions, and Federal home-loan banks would act as reservoirs of funds for the accommodation of their member institutions. The Board believes that the enactment of these bills would represent a material departure from these objectives. On the one hand, high dividend rates to shareholders plus the insurance of their investment in such shares would tend to attract funds far beyond those incident to local mutual thrift and home financing programs. On the other hand, broadened powers would offer investment outlets for such funds equally beyond the scope of the original objectives. Thus, their enactment would constitute a step in the direction of establishing a separate and complete banking system with an opportunity to complete for ordinary banking deposits on favored terms. Federal savings and loan associations already enjoy an advantage in competing with banks for savings, because local taxing authorities are forbidden to impose any tax on them or their franchise, capital, reserves, surplus, loans, or income, greater than that imposed by such authority "on other similar local mutual or cooperative thrift and home-financing institutions," which usually are given favored treatment in the State and local tax laws. Furthermore, such associations are exempt from Federal income and excess-profits taxes, whereas national banks and State banks are not. Thus, these associations already enjoy substantial advantages over ordinary banks in the matter of taxation, and these advantages would be accentuated if the pending bills were enacted into law. Even if they are not enacted, the Board believes that consideration should be given to removing the existing tax advantage. For the foregoing reasons, the Board of Governors is of the opinion that the enactment of the bills would not be in the public interest. Very truly yours, M. S. ECCLES, Chairman. Senator RADCLIFFE. If those who are in favor of this legislation have any wishes in regard to the sequence, I should be very glad to follow your suggestions. STATEMENT OF MORTON BODFISH, EXECUTIVE VICE PRESIDENT, UNITED STATES SAVINGS AND LOAN LEAGUE Mr. BODFISH. Mr. Chairman, we want mainly to supplement the very excellent statement of Mr. Fahey, in an appropriate and brief way. Šenator RADCLIFFE. Kindly state your name. Mr. BODFISH. I am Mr. Morton Bodfish, executive vice president of the United States Savings and Loan League. I think we would rather have the hearing and witness program as far as the United States Savings and Loan League is concerned entirely in your hands. I notice the "face cards" of the great American Bankers Association are here today, and I wonder if we are going to have opposition testimony, or what your program is, so we can fit entirely to the preferences of the committee. Senator RADCLIFFE. In regard to the program, I have been trying to arrange for some time to have these hearings, but the other legislation has intervened, and when we planned about 3 weeks ago to have them on this particular day, the estimate then was that the O. P. A. would be out of the way and disposed of. Well, it is not: and tomorrow the O. P. A. goes on with its hearings in committee-not with its hearings, but in executive sessions; and for that reason I was particularly desirous that we could either dispose of this matter today or make as much progress as is possible; so, unless we have to go to the floor of the Senate, which seems a bit unlikely with some of us, at least, I am entirely willing to go on with these hearings all day long, if there is any occasion for it. Mr. BODFISH. I wonder if we could find out, Mr. Chairman, if there is to be opposition testimony. If there is no opposition testimony, we can do our whole job in 5 minutes. Mr. Irr is here, from Baltimore, one of our vice presidents, and myself. Senator RADCLIFFE. I know Mr. Irr very well. Well, is there a representative from the American Bankers Association here? If so, does he want to be heard? STATEMENT OF D. J. NEEDHAM, GENERAL COUNSEL, AMERICAN BANKERS ASSOCIATION Mr. NEEDHAM. I just want to explain. We have considered this. Senator RADCLIFFE. Please give your name and whom you represent, for the record. Mr. NEEDHAM. D. J. Needham, general counsel, American Bankers Association. I just want to explain, we are not ready, yet. We do not know whether we want to testify or not. We may not, but I will not know until probably this afternoon some time, and then we may possibly request the privilege of filing just a short statement. Senator RADCLIFFE. Thank you. Senator DANAHER. I wish, Mr. Chairman, to ask Mr. Needham to explain his stand on the 50-mile limit, in due course, if you will. Mr. NEEDHAM. Yes. Senator RADCLIFFE. Mr. Needham would like to do that later. Senator DANAHER. Yes, that is all right-and file a statement, so far as I am concerned. I would just like to hear your views on it at some time. (The following statement was later received from the witness:) STATEMENT OF AMERICAN BANKERS ASSOCIATION ON S. 756, S. 757, S. 1034, JUNE 7, 1944 Bills S. 756, S. 757, and S. 1034, which are now before a subcommittee of the Committee on Banking and Currency, represent legislative proposals which have been in other bills before Congress in recent years. During these years the American Bankers' Association through its appropriate committees has been giving very careful consideration to the basic intents and purposes of this legislation. These have been discussed with the officials of the Home Loan Bank System and the American Bankers Association has been represented in testimony before the committees of Congress considering these proposals. During this entire period representatives of the American Bankers Association have made a sincere effort to take a position which is believed to be fair and which in the public interest would lead to the development of a strong and sound system of local thrift and home financing institutions coordinated and supervised through the Federal Home Loan Bank System. We have opposed and shall continue to oppose any proposals which tend to change the character of member institutions of this System by taking them out of the field of long-term home financing and making them even little by little demand deposit institutions. S. 756 With respect to the provisions of S. 756, we wish to make the following observations: Section 1: "Any mortgage or obligation" insured under National Housing Act made eligible as security for advances by Federal home-loan banks to their members. Provisions of section 1 are intimately related to the provisions of S. 757, and comment on this section is reserved for later discussion on S. 757. Section 2: United States obligations, direct and guaranteed, owned by home loan banks made part of base for issuance of their consolidated debentures. We have no comments on this provision. Section 3: Acquisition of obligations of Federal home loan banks and Federal Savings and Loan Insurance Corporation by Secretary of the Treasury authorized. This is the most important section of the bill. When the proposal was originally made in 1939 that the Secretary of the Treasury be authorized to purchase debentures of the home loan banks with any unappropriated funds and to treat his transactions in these bonds as a public debt transaction, there was no limitation on the aggregate of such obligations which could be acquired by the Secretary. The American Bankers Association urged that some limitation should be placed on the proposal. In this recommendation the officials of the Home Loan Bank System concurred, and in Senate bill 4095 in the Seventy-seventh Congress the authorization was limited to three times the capital and surplus of the home loan banks. The American Bankers Association was represented in the hearings on this bill in June 1940, as unopposed to this authorization with these limitations. Today the public debt has risen to an unprecedented amount and Government fiscal policy has become one of the major concerns of banks and all other financial institutions as well as of the Government, and will remain a major problem both during the war and in the years succeeding victory. We urge that the Committee give careful consideration to this section of the bill. Any final determination regarding a proposal involving operations of the Treasury which affect the public debt should be reached only after careful analysis thereof by the Secretary of the Treasury and the Bureau of the Budget. With regards to the provision authorizing the Secretary to purchase the obligations of the Federal Savings and Loan Insurance Corporation, we have no objection to this provision, if the Committee deems such authority necessary or expedient giving due consideration to the general governmental fiscal policy. Section 4: Reduction in examinations of home loan banks by Federal Home Loan Bank Commissioner to one a year. On this section we have no comment. S. 757 Loan and investment powers of Federal savings and loan associations broadened with respect to (a) mortgages or obligations insured under the National Housing Act, particularly title I thereof, and (b) loans on improved real estate other than homes or combination homes and business property. This bill would give Federal savings and loan associations the power to invest in "any mortgage or obligation" insured by the Federal Housing Administration. We see no objection to Congress giving these associations the additional power to invest in such insured mortgages or obligations. Apparently this provision would remove all restrictions with respect to both geographical area and amounts of any loan which these associations could make or buy provided it were insured. When consideration is given to this additional power we believe Congress should give serious thought to what restrictions and limitations, if any, should be applicable thereto. The provisions of section 1 of S. 756 make the investments authorized in this bill eligible as collateral for loans from the Federal home-loan banks. The two provisions are thus so intimately tied together that they should be similarly disposed of. Another provision of this bill apparently has the purpose of clarifying what is meant by the term "on other improved real estate" in section 5 (c) of the Home Owners' Loan Act of 1933. Section 5 of the Home Owners' Loan Act of 1933 provides as follows: "(c) Such associations shall lend their funds only on the security of their shares or on the security of first liens upon homes or combination of homes and business property within fifty miles of their home office: Provided, That not more than $20,000 shall be loaned on the security of a first lien upon any one such property; except that not exceeding 15 per centum of the assets of such association may be loaned on other improved real estate without regard to said $20,000 limitation, and without regard to said fifty-mile limit, but secured by first lien thereon: And provided further, That any portion of the assets of such associations may be invested in obligations of the United States or the stock or bonds of a Federal Home Loan Bank." [Italics supplied.] It will be noted that the above provision authorizes such associations to loan "on other improved real estate" up to an amount not exceeding 15 percent of their assets and without regard to the $20,000 limitation and the 50-mile limit. This association is of the opinion that this exception was enacted by Congress for the sole and express purpose of giving some flexibility to the operations of these associations which would permit them to loan "on other improved real estate" which would be of the type and character other than "homes or combination of homes and business property." It is noted that only 15 percent of their assets could be so loaned and the limit of $20,000 is lifted. We think that the lifting of the limit of the loans in the existing law is quite significant, indicating that loans "on other improved real estate" would be of the type and character of industrial properties, hotels, large apartments, and the like. It should be noted that numerous proposals have been before Congress in earlier legislation seeking to enlarge this exception and to clarify it. None of these proposals, however, have ever been accepted by Congress. It is believed that, if Congress deems it desirable to clarify this provision of the law, there should be written into the law in specific terms what type or types of improved real estate can be loaned upon by an association outside the 50-mile limit. FIFTY-MILE LIMIT At the time the committee considered these bills, one Senator, a member of the committee, inquired if this association would discuss the provision of the law referred to as the "50-mile limit." These bills do not make any change in the law regarding the 50-mile limit insofar as it relates to the normal loaning powers of these associations. When savings and loan associations were authorized, Congress placed a 50-mile limit on their normal operations. This was for the purpose of keeping them as local thrift associations. This was and is a sound policy and we believe the original intent of Congress should prevail. No change or enlargement of this trade area is now necessary in addition to that already authorized in respect of the 15 percent of assets which may be loaned beyond this limit "on other improved real estate." S. 1034 The proposals contained in this bill involve questions of fiscal policy of the Government, and the advice of the Treasury should be carefully weighed by the committee before taking action. Section 1: Future dividends on capital stock of Federal Savings and Loan Insurance Corporation held by Home Owners' Loan Corporation are waived and Insurance Corporation is allowed to retain all accumulated dividends. At a time when the debt of the United States Government is at an all-time peak, Congress should carefully consider any action which would tend to shift the burden of that debt from any group to the general taxpayers. The effect of this bill would be to give to the Federal Savings and Loan Insurance Corporation $25,500,000 of accrued dividends and to waive further dividends on the $100,000,000 of stock owned by the Home Owners' Loan Corporation. The result will be to deprive the Home Owners' Loan Corporation of income in like amount which will be needed to reduce anticipated loss on the eventual liquidation of that Corporation, which loss will ultimately fall on all taxpayers. We feel it the duty of all citizens as such, or in association, to make every effort to facilitate the minimization of this debt. In this connection, we take this opportunity to call attention to the position of the Secretary of the Treasury expressed in the recommendation contained in his report to the President of the Senate on February 10, 1940 (S. Doc. No. 172, 76th Cong., 3d sess., p. ix), in which it was suggested that consideration be given by the Senate to "the adoption of a uniform policy with respect to the payment of dividends or otherwise reimbursing the Federal Treasury for the use of public money." We believe this position is sound and should be considered by the committee in its deliberations on this bill. Section 2: Premium rate paid Federal Savings and Loan Insurance Corporation by insured institutions reduced from one-eighth of 1 percent to one-twelfth of 1 percent. The proposal to reduce the premium rate for insurance is a part of the larger question of the proper disposition of the capital and segregated earnings of the Insurance Corporation. Respectfully submitted. FRANCIS G. ADDISON, Jr., Chairman of Committee on Federal Legislation. |