as payment, on behalf of the mortgagor, [of part] on account of the contract price for the construction of a vessel contracted for by the mortgagor which has not yet been delivered, or (b) to the extent not so disbursed, shall be (i) deposited in a fund from which disbursements may be made only with the written approval of the Secretary of Commerce, or (ii) in the case of a mortgagor receiving operating-differential subsidy under the provisions of this Act, deposited in the mortgagor's capital reserve fund;" (10) New section 1107(8) as it appears in S. 1434 requires that the vessel on which a refinancing or standby mortgage is placed be "in as good condition as it would have been if it had been mortgaged immediately after delivery by the shipbuilder (and remained subject to such mortgage until the date of execution of this mortgage) and such mortgage had been insured by the Secretary of Commerce, and all requirements of the Secretary of Commerce with respect to a vessel on which he has insured the mortgage had been complied with." This language could be construed to impose the impossible require ment that the vessel be as good as new when the refinancing or standby mortgage is executed. We understand that its purpose, however, is to require the vessel to be in as good condition at the time of execution of the refinancing or standby mortgage as it would have been if the owner had from time of original delivery by the shipbuilder complied with the requirements imposed under title XI for maintenance and repair of vessels which were at delivery covered by insured mortgages. In the case of a refinancing mortgage, this requirement seems unnecessary and productive only of confusion. In the case of a standby mortgage, some requirement may be necessary, but this one is still confusing: the requirements for vessel maintenance and repair imposed by the Secretary under title XI are not embodied in the statute or the regulations, but are written into the financing documents for each insured mortgage transaction. Since there would have been no original insured mortgage in the usual case of a standby mortgage, this requires the Secretary to measure the condition of the vessel at the time of the standby transaction by the hypothetical requirements of a nonexisting prior insured mortgage. We believe that the Government would be better protected, and confusion would be avoided, if section 1107(8) were amended to read:

"(8) the mortgaged vessel is in as good condition, ordinary wear and tear excepted, as it [would have been in if it had been mortgaged] was immediately after delivery by the shipbuilder [(and remained subject to such mortgage until the date of execution of this mortgage) and such mortgage had been insured by the Secretary of Commerce, and all requirements of the Secretary of Commerce with respect to a vessel on which he has insured the mortgage had been complied with]."

(11) S. 1457 deals with one problem, apart from the standby mortgage situation, not dealt with by S. 1434. Section 1104 (a) (2) of title XI now provides that the principal amount of a mortgage to be insured shall not exceed 75 percent of the actual cost of the vessel. It contains a proviso, however, authorizing insurance of a mortgage whose principal amount does not exceed 87%1⁄2 percent of actual cost in the case of a vessel of the size and speed eligible for an 872 percent Government mortgage under section 509 of the Merchant Marine Act, 1936. As previously indicated, title XI authorizes insurance of mortgages not only to finance new construction, but also to finance reconstruction or reconditioning. And it is clear from section 1101 (f) that an 87% percent insured mortgage was intended to be available for reconstruction or reconditioning whenever it would be available for new construction. Since section 509 authorizes an 872 percent mortgage only for purposes of new construction, however, it is doubtful whether the language in the proviso of section 1104 (a) (2) is adequate to effectuate the intent of section 1101 (f). S. 1457 would correct this deficiency. We suggest a similar correction be embodied in an additional section 5 of S. 1434 reading as follows:

"(5) by revising the first clause of the proviso of section 1104 (a) (2) to read: "That in the case of a vessel, the size and speed of which are approved by the Secretary of Commerce, and which is, or in the case of a vessel to be reconstructed or reconditioned would have been, eligible for mortgage aid for construction under Section 509 of this Act and in respect of which the minimum down payment by the mortgagor required by that section would be 122 per centum of the cost of such vessel, the obligation may be in an amount which does not exceed 871⁄2 per centum of such actual cost;"'"

We also note one typographical error and three probably desirable changes in S. 1457:

(1) The typographical error occurs in clause (1) in the proviso to section 1101 (f) (2) of title XI as amended by section 1 of S. 1457. Clause (1) of the proviso should be amended to read:

"(1) as insurance on a loan, or on a mortgage to finance the construction, reconstruction, or reconditioning of the vessel mortgaged, the amount paid by or for the account of the [mortgaged, the amount paid by or for the account of the] mortgagor or borrower for the construction, reconstruction, or reconditioning (including designing, inspecting, outfitting, and equipping) of the vessel;"

(2) If, as indicated in paragraph (6) of our comments on S. 1434, the economic soundness test of section 1104 (c) of title XI is to apply, in the case of a standby mortgage, to the vessel mortgaged rather than to the vessel whose construction, reconstruction, or reconditioning is to be financed by the standby mortgage, section 1104 (c) as amended by section 5 of S. 1457 should be amended to read:

"(c) No commitment to insure a mortgage or loan shall be made by the Secretary of Commerce unless he finds, at or prior to the time such commitment is made, that the mortgaged vessel or the vessel whose construction, reconstruction or reconditioning [project] is being financed by the [mortgage or the] loan, or the project with respect to which such vessel is to be operated, will be, in his opinion, economically sound, and no mortgage or loan, unless made pursuant to a prior commitment, shall be insured unless the Secretary of Commerce finds, at or prior to the time the insurance becomes effective, that the mortgaged vessel or the vessel whose construction, reconstruction, or reconditioning [project] is being financed by the [mortgage or the loan, or the project with respect to which such vessel is to be operated, will be, in his opinion, economically sound."

(3) Section 305 of S. 1457 in its amendment of section 1104(a)(3) of title XI would require the Secretary to determine at the time the standby mortgage is executed 100 percent of the actual cost of the vessel or vessels whose construction is to be financed. In fact, no such determination can be made at that time and the requirement would produce administrative difficulties. In this respect we believe that S. 1434, which limits the amount of the standby mortgage to 75 percent (or 87% percent) of the depreciated actual cost of the vessel or vessels mortgaged, without regard to the actual cost of the vessel or vessels to be constructed, represents a preferable approach. Accordingly, we would amend section 1104(a) (3) as it appears in S. 1457 to read before the proviso as follows:

"(3) shall involve an obligation in a principal amount which in combination with other mortgages to finance the construction, reconstruction or reconditioning, does not exceed [the lesser of] 75 per centum of the actual cost of the vessel or vessels mortgaged [or 100 per centum of the actual cost of the vessel or vessels whose construction, reconstruction or reconditioning is financed under this title], such actual cost to be determined by the Secre tary of Commerce at or prior to the execution of the mortgage and such determination to be conclusive for the purposes of determining the principal amount of the mortgage:"

(4) As indicated in paragraph (9) of our comments on S. 1434, we do not believe any restriction upon the proceeds of a standby mortgage is necessary. If a restriction is to be imposed, however, or if the authority to deposit such proceeds in capital reserve funds is thought to require clarification, we would amend new section 1104 (a) (2) as added by section 2 of S. 1457 to read as follows:

"(2) shall (i) cover a vessel or vessels whose construction, reconstruction, or reconditioning is financed under this title; or shall (ii) cover any vessel or vessels owned by the mortgagor to aid in financing the construction, reconstruction, or reconditioning of another vessel or vessels by the mortgagor, in which event the proceeds of the mortgage, will either be (a) disbursed by the mortgagee to a shipyard as payment, on behalf of the mortgagor, on account of the contract price for the construction of a vessel contracted for by the mortgagor which has not yet been delivered, or (b) to the extent not so disbursed, shall be (i) deposited in a fund from which disbursements may be made only with the written approval of the Secretary of Commerce, or (ii) in the case of a mortgagor receiving operating-differential subsidy under the provisions of this Act, deposited in the mortgagor's capital reserve fund;"

[Committee print, S. 1434, 86th Cong., 1st sess.]

[Omit the part struck through and insert the part printed in italic]

A BILL To amend title XI of the Merchant Marine Act, 1936, as amended, with respect to insurance of ship mortgages, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That title XI of the Merchant Marine Act, 1936, as amended (46 U.S.C. 1271–1279), is amended

(1) by redesignating sections 1107, 1108, and 1109 as sections 1108, 1109, and 1110;

(2) by striking out of section 1102 the reference "section 1109" and inserting in lieu thereof the reference "section 1110";

(3) by striking out of section 1104(f) the reference "sections 1101-1109" and inserting in lieu thereof the reference "sections 1101-1110";

(4) by striking out of section 1106, before the dash, the word "except" and inserting in lieu thereof the words "except as provided in section 1107 or"; and

(5) by inserting after section 1106 a new section 1107 to read as follows: "SEC. 1107. The Secretary of Commerce is authorized, upon such terms as he may prescribe, to make a commitment to the prospective owner of a vessel who is a citizen of the United States, prior to the time when the keel of such vessel is laid under a contract which such prospective owner has made with the shipbuilder for the construction of the vessel (or if the keel of the vessel was laid under such contract prior to the enactment of this Act, and the vessel owner or prospective owner has an unexpired commitment from the Secretary of Commerce to insure a mortgage on the vessel, issued prior to enactment of this Act under the law then existing, then prior to the expiration of such commitment), to insure the interest on and the unpaid balance of the principal of a mortgage or mortgages which such prospective owner, as mortgagor, may at any time place on the vessel in order to finance the construction, reconstruction, or reconditioning of other vessels or both to refinance a mortgage insured by the Secretary of Commerce on the vessel and to finance the construction, reconstruction or reconditioning of other vessels, subject to the following conditions

"(1) the commitment shall not be assignable either separately or in conjunction with a transfer of the vessel without the prior written approval of the Secretary of Commerce;

"(2) the vessel is not, at the time of insuring the mortgage pursuant to the committee, subject to a mortgage which has not been insured by the Secretary of Commerce;

"(3) within a reasonable period prior to, or at the time of, insuring the mortgage pursuant to the commitment, the Secretary of Commerce makes the finding required by section 1104 (c) of this Act (which requires a finding that the mortgaged vessel or the project with respect to which the mortgaged vessel is to be operated will be, in the opinion of the Secretary of Commerce, economically sound);

"(4) the mortgage involves a principal obligation which when added to the unpaid balance of the principal obligations of prior mortgages on the vessel will result in a sum which will not, (a) if the vessel was not built with aid of construction differential subsidy and complies with the requirements of section 509 of this Act, exceed 87%1⁄2 per centum of actual cost of such vessel depreciated at the rate of 5 per centum per annum from the date such vessel is delivered by the shipbuilder to the date such mortgage is executed, and (b) if the mortgaged vessel was built with the aid of construction differential subsidy or does not comply with the requirements of section 509 of this Aet, exceed 75 per centum of such amount;

"(4) the mortgage involves a principal obligation which when added to the unpaid balance of the principal obligations of prior mortgages on the vessel (other than mortgages that are being refinanced by this mortgage) will result in a sum which will not, (a) if the vessel was not built with the aid of constructiondifferential subsidy and complies with the requirements of section 509 of this Act exceed (A) if the vessel has not been reconstructed or reconditioned before such mortgage is executed, 871⁄2 per centum of all amounts the mortgagor has paid or is obligated to pay for the construction (including designing, inspecting, outfilling, or equipping) of the vessel, depreciated at the rate of 5 per centum per annum from the date the vessel was delivered by the shipbuilder to the date such mortgage is executed, or (B) if the vessel has been reconstructed or reconditioned before such

mortgage is executed, 871⁄2 per centum of all amounts the mortgagor has paid or is obligated to pay for the construction (including designing, inspecting, outfitting, and equipping) of the vessel, depreciated at the rate of 5 per centum per annum from the date the vessel was delivered by the shipbuilder to the date of such reconstruction or reconditioning, and depreciated, from the date of such reconstruction or reconditioning to the date such mortgage is executed, on a straight-line basis and on the basis of a useful life of the vessel determined jointly by the Secretary of Commerce and the Secretary of the Treasury, plus 872 per centum of all amounts the mortgagor has paid or is obligated to pay for the reconstruction or reconditioning of the vessel (if such reconstruction or reconditioning was done without aid of construction subsidy and the vessel complies with the requirements of section 509 of this Act; otherwise, 75 per centum of such amount), depreciated, from the date of such reconstruction or reconditioning to the date such mortgage is executed, on a straight-line basis and on the basis of a useful life of the vessel determined jointly by the Secretary of Commerce and the Secretary of the Treasury, and (b) if the vessel was built with the aid of construction-differential subsidy, or does not comply with the requirements of section 509 of this Act, exceed the amount computed under (a) above except that, where (a) above provides for 871⁄2 per centum of the construction cost of the vessel, the percentage shall be 75 per centum:

(5) the mortgage has maturity dates which do not exceed the remaining years of a useful life of the mortgaged vessel of twenty years computed from the date the vessel was delivered by the shipbuilder;

"(5) the mortgage has maturity dates which, if the vessel has not been reconstructed or reconditioned, do not exceed the remaining years of a useful life of the mortgaged vessel of twenty years computed from the date the vessel was delivered by the shipbuilder or, if the vessel has been reconstructed or reconditioned, do not exceed the remaining years of a useful life of the vessel determined jointly by the Secretary of the Treasury and the Secretary of Commerce.

"(6) the loan agreement for the making of the loan secured by the mortgage, or the mortgage, provides that the loan, except such portion thereof as it has been agreed will be used to refinance an existing mortgage on the vessel which has been insured by the Secretary of Commerce, will be disbursed by the mortgagee to a shipbuilder in payment, on behalf of the mortgagor, of part of the contract price for the construction of a vessel contracted for by the mortgagor which has not yet been delivered;

"(6) the loan agreement for the making of the loan secured by the mortgage, or the mortgage, provides that the underwriter or mortgagee will disburse the loan for one or more of the following purposes: (a) to pay one of the components of actual cost of the vessels to be constructed, reconstructed, or reconditioned and, if any such payment is to reimburse the operator for payments made from his capital reserve fund, to deposit such payment in his capital reserve fund, or (b) to pay part of the loan to discharge an existing mortgage which is insured by the Secretary of Commerce on the vessel that is subject to the mortgage which is to be insured, or (c) to deposit part or all of the loan in the operator's capital reserve fund, if he is a subsidized operator, and in a construction reserve fund, if he is an unsubsidized operator: if any deposit is made in a capital reserve fund, or construction reserve fund under (c) hereof, such deposit may be withdrawn only to pay one of the components of actual cost of the vessels that are to be constructed, reconstructed, or reconditioned, or if for any reason such payments do not exhaust the deposit, then to pay off the loan secured by the mortgage that is to be insured.

"(7) the mortgage complies with all of the requirements of section 1101(a) of this Act (which defines an eligible mortgage) except subdivision 2 thereof (which specifies the maximum principal amount of the mortgage), subdivision 3 thereof (which specifies the maximum duration of the mortgage), and subdivision 8 thereof (which specifies the purpose of the loan secured by the mortgage);

(8) the mortgaged vessel is in as good condition as it would have been in if it had been mortgaged immediately after delivery by the shipbuilder (and remained subject to such mortgage until the date of execution of this mortgage) and such mortgage had been insured by the Secretary of Commerce, and all requirements of the Secretary of Commerce with respect to a vessel on which he has insured the mortgage had been complied with."

“(8) the mortgaged vessel shall be in class A-1, American Bureau of Shipping, with all required certificates, including but not limited to marine inspection certificates of the United States Coast Guard, with all outstanding requirements and recommendations necessary for retention of class accomplished, unless the Secre

tary of Commerce permits a deferment of such repairs, and shall be tight, stanch, strong and well and sufficiently tackled, appareled, furnished and equipped, and in every respect seaworthy and in good running condition and repair and in all respects fit for service.'

SEC. 2. Section 1104(a) (2) of the Merchant Marine Act, 1936, as amended, is amended by striking out of the proviso the words: "That in the case of a vessel, the size and speed of which are approved by the Secretary of Commerce, which is eligible for mortgage aid" and inserting in lieu thereof the words: "That in the case of a vessel, the size and speed of which are approved by the Secretary of Commerce, and which is, or in the case of a vessel to be reconstructed or reconditioned would have been, eligible for mortgage aid for construction".

(Following are the reports of the Government departments on S. 1434 :)

Hon. WARREN G. MAGNUSON,

DEPARTMENT OF JUSTICE, Washington, D.C., March 26, 1959.

Chairman, Committee on Interstate and Foreign Commerce,
U.S. Senate, Washington, D.C.

DEAR SENATOR: This is in response to your request for the views of the Department of Justice concerning the bill (S. 1434) to amend title XI of the Merchant Marine Act, 1936, as amended, with respect to insurance of ship mortgages, and for other purposes.

The bill has been examined, but since the subject matter thereof does not directly affect the activities of the Department of Justice, we would prefer not to offer any comment concerning it.

Sincerely yours,

LAWRENCE E. WALSH,
Deputy Attorney General..

B-115403

Hon. WARREN G. MAGNUSON,

COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, March 24, 1959..

Chairman, Committee on Interstate and Foreign Commerce, U.S. Senate. DEAR MR. CHAIRMAN: Further reference is made to your letter of March 17, 1959, acknowledged on March 18, requesting the comments of the General Accounting Office concerning S. 1434, 86th Congress, 1st session, entitled “A bill to amend title XI of the Merchant Marine Act, 1936, as amended, with respect to insurance of ship mortgages, and for other purposes."

The bill would enable a prospective owner to use his own resources for financing a new vessel without losing the benefit of mortgage insurance later during the 20-year life of the vessel, if the mortgage proceeds are to be used to finance the construction of other new vessels. This arrangement would delay borrowings until needed, and could result in a saving in interest and mortgage insurance costs, a reduction in the life of the insured mortgage, a better utilization of reserve funds by subsidized operators, and greater flexibility in the financing of new ship construction. Furthermore, the conditions under which the insurance commitment must be exercised appear adequate to safeguard the interests of the Government.

In view of the foregoing, and while we recognize the amendment to be a matter of policy for determination by the Congress, we believe it is worthy of consideration.

Sincerely yours,

JOSEPH CAMPBELL, Comptroller General of the United States.