CONTENTS Divers, William K., Chairman, Home Loan Bank Board.. Ellingson, Carl H., chairman, committee on legislation, National Reckman, William A., president, the Western Bank & Trust Co., Cincinnati, Ohio, representing the American Bankers Association; accompanied by D. J. Needham, general counsel; J. R. Dunkerley, deputy manager; and Eugene M. Mortlock, assistant secretary, Wiggins, A. L. M., Under Secretary of the Treasury 61 Letters, statements, reports, etc., submitted for the record by- Cain, Harry P., a United States Senator from the State of Washington: History and explanation of S. 2417 and excerpts from speech of Federal Deposit Insurance Corporation, Maple T. Harl, Chairman, Federal Reserve System, Board of Governors: Letter of May 11, 1948, to Senator Tobey- Letter of May 21, 1948, to Senator Tobey enclosing resolution___ Foley, Raymond M., Administrator, Housing and Home Finance Agency, letter to Senator Tobey, containing suggested amendments General Accounting Office, Lindsay C. Warren, Comptroller General, FEDERAL HOME LOAN BANK AMENDMENTS WEDNESDAY, APRIL 28, 1948 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10 a. m., pursuant to call, in room 301, Senate Office Building, Senator Harry P. Cain presiding. Present: Senators Tobey (chairman) and Cain. Senator CAIN. May I call our hearing to order, please? First I should like to announce that Mr. Tobey, the chairman of the Banking and Currency Committee of the Senate, has suddenly been called away for a short time. For that reason, I will accept testimony this morning in his name. We gather this morning to receive the observations of responsible persons with respect to S. 2417 and H. R. 2799. (S. 2417 and H. R. 2799 are as follows:) [S. 2417, 80th Cong., 2d sess.] A BILL To adjust the premium charge of the Federal Savings and Loan Insurance Corporation Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That subsections (a) and (b) of section 404 of the National Housing Act, as amended, are hereby amended by striking out the word "one-eighth" wherever it appears therein and inserting in lieu thereof the word "one-twelfth". SEC. 2. Subsection (c) of section 404 of the National Housing Act, as amended, is hereby amended to read as follows: "(c) The one-twelfth of 1 per centum per annum insurance premium rate shall become effective as of July 1, 1948. If an insured institution has paid a premium at a rate in excess of one-twelfth of 1 per centum of the total amount of the accounts of its insured members and its creditor obligations for any period of time after June 30, 1948, it shall receive a credit upon its future premiums in an amount equal to the excess premium so paid for the period after June 30, 1948." [H. R. 2799, 80th Cong., 1st sess.] AN ACT To amend the Federal Home Loan Bank Act, title IV of the National Housing Act, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 6 of the Federal Home Loan Bank Act, as amended, is amended by the addition of a new subsection as follows: "(1) Within two years after the enactment of this amendment, each member of each Federal home-loan bank shall acquire and hold and thereafter maintain its stock holding in an amount equal to at least 2 per centum of the aggregate of the unpaid principal of such members' mortgage loans, home-purchase contracts, and similar obligations, but not less than $500. Such stock in excess of the amount required may be purchased from time to time by members and may be retired from time to time as heretofore. From time to time and at least annually after the enactment of this amendment, each Federal home-loan bank shall retire and pay off at par an amount of its stock held by the Reconstruction Finance 1 Corporation or assigns for the Government equivalent to the amount of its stock held by its members in excess of the amount required to be held by them immediately prior to the enactment of this amendment: Provided, That none of such Government capital shall at any time be retired so as to reduce the aggregate capital, reserves, surplus, and undivided profits of the Federal home-loan banks to less than $150,000,000. Upon a determination by the Board that the proper functioning of the Federal home-loan banks at any time requires additional capital, the Board shall request the Secretary of the Treasury to subscribe to the stock of the Federal home-loan banks as determined by the Board in an amount not in excess of the stock retired under this amendment and the Secretary of the Treasury, in his discretion, may subscribe for such stock and pay therefor from the funds in the Treasury as a result of this amendment." SEC. 2. Subsection (g) of section 11 of the Federal Home Loan Bank Act, as amended, is amended by inserting the words "one-half” before the words "the sums paid in on outstanding capital." SEC. 3. Subsection (b) of section 402 of the National Housing Act, is amended by the addition of the following: "After the effective date of this amendment the Corporation is authorized and directed to pay off and retire its capital stock in units of $1,000, from time to time, from its net assets which are in excess of $150,000,000. Such retirement and payment shall be to Home Owners' Loan Corporation or its successor and for the full amount paid for such stock less any amount paid as dividends thereon. Such payments shall be continued from time to time as such funds are available from net assets in excess of $150,000,000 until the entire capital stock is retired and the Corporation shall continue to operate with its insurance_reserve, undivided profits, and other funds. Whenever, in the judgment of the Board of Trustees of the Corporation, funds are required for insurance purposes, the Secretary of the Treasury is authorized and directed to purchase obligations of the Corporation in an amount equal to the amount of capital stock of the Corporation previously retired in accordance with the provisions of this paragraph, in addition to the amounts of such obligations which he is otherwise authorized to purchase." SEC. 4. (a) Subsections (a) and (b) of section 404 of the National Housing Act, as amended (U. S. C., 1940 edition, title 12, sec. 1727 (a) and (b)), are amended by striking out the word "one-eighth" wherever it appears therein and inserting in lieu thereof the word "one-twelfth". (b) Subsection (c) of section 404 of the National Housing Act, as amended (U. S. C.,1940 edition, title 12, sec. 1727 (c)), is amended to read as follows: "(c) If an insured institution has paid a premium at a rate in excess of onetwelfth of 1 per centum of the total amount of the accounts of its insured members and its creditor obligations for any period of time after June 30, 1946, it shall receive a credit upon its future premiums in an amount equal to the excess premiums so paid for the period beyond such date." SEC. 5. If any provision of this Act or the application of such provision to any person or circumstances shall be held invalid, the validity of the remainder of this Act, and the applicability of such provision to other persons or circumstances, shall not be affected thereby. Passed the House of Representatives June 2, 1947. JOHN ANDREWs, Clerk. Senator CAIN. A history and explanation of S. 2417 will be inserted in the record at this point. The purpose of S. 2417 is to reduce the rate of premium paid by savings and loan institutions to the Federal Savings and Loan Insurance Corporation to a more equitable rate in relation to the risk borne by the Insurance Corporation and the rates paid by banks to the Federal Deposit Insurance Corporation. HISTORY AND EXPLANATION The Seventy-ninth Congress unanimously passed a similar bill, H. R. 4428. This bill, however, was vetoed by the President. Two principal reasons for the veto were indicated. One was the fact that the Government still owns $100,000,000 of the capital stock of the Insurance Corporation. (On this particular point there is now under consideration by the Bureau of the Budget a proposal which has the backing of representatives of all segments of the savings and loan business as well as the support of the Home Loan Bank Board itself, which proposal provides for the orderly retirement of the stock of the Insurance Corporation by the application of at least 50 percent of its net income each year for that purpose.) The other reason indicated for the veto was that the Insurance Corporation's reserves do not as yet equal 5 percent of its insured liabilities. This reason seems to be based upon some misunderstanding of the present statute; title IV of the National Housing Act has two references to 5 percent reserves. First, section 404 (a) provides that when the Insurance Corporation's reserve equal 5 percent of its insured liabilities, no further premiums shall be collected from insured institutions until the Corporation's reserves fall below 5 percent. (At the close of the last fiscal year the reserves of the Federal Savings and Loan Insurance Corporation to its insured liabilities were 1.16 percent. On the same date, the reserves of the Federal Deposit Insurance Corporation to its insured liabilities were 1.15 percent.) Second, there is a requirement in section 404 (b) of the National Housing Act that each insured association shall make annual allocations to its insured account until the account equals "5 per centum of all insured accounts. * * Although the ratio of the aggregate Federal insurance reserve accounts of all insured institutions to their insured accounts is not available, insured associations' total reserves available for losses were more than 7 percent of their total liabilities at the end of 1947. ARGUMENTS IN FAVOR OF THIS BILL There are many reasons favoring a reduction in the rate of premiums paid by insured savings and loan associations to the Federal Savings and Loan Insurance Corporation. The present rate of one-eighth of 1 percent is 50 percent higher than the rate paid by banks to the Federal Deposit Insurance Corporation, yet no greater risk is indicated. Actually, practically all of the funds of insured savings and loan associations must be kept in first mortgage loans or Government bonds or cash. Losses of the Insurance Corporation have been moderate. Since the Corporation was established in 1934, its total losses through the year 1947 have aggregated only 11 percent of premium income and slightly more than 5 percent of gross income. Total estimated losses during the nearly 14 years of experience are less than the premium income earned during 1947 alone. The present statute gives the Insurance Corporation the authority to levy an additional premium up to the amount of the effective premium rate in any year if it is found that the effective premium rate is inadequate. EVIDENCE OF STABILITY OF SAVINGS AND LOAN SYSTEM On the very important question of the over-all soundness of the savings and loan business, a recent speech of the Honorable William K. Divers, Chairman of the Home Loan Bank Board, before the annual stockholders' meeting of the Federal Home Loan Bank of Boston is of interest and significance. Mr. Divers, who recently took office, said he caused a thorough study of savings and loan operations to be made for his information and he found good, sound financial conditions and sound lending practices in the savings and loan system. A survey of 4,489 examination reports sent in by Federal examiners showed that loans made over a period of 28 months ended February 29 this year averaged only 59 percent of purchase price and that the percent of loan to market price was the lowest in areas of highest prices. Mr. Divers said that the savings and loan system is well fortified against deflationary conditions and that the first line of defense is the good management which stands out in this field. In his study, Mr. Divers found that modern lending practices plus good management account for the fine conditions, and he recommended a continuance of extreme care and caution in mortgage financing. He found reserves and undivided profits of savings and loan associations to equal 71⁄2 percent of total resources. A highly important additional factor of strength of these associations to which Mr. Divers referred was the fact that 40 percent of their combined resources are in Government-insured or guaranteed loans, which, plus liquid assets, emphasizes the stability of the business of these institutions. There is attached herewith excerpts from Mr. Divers' speech. These pertinent remarks of Mr. Divers contain reassuring facts in regard to the stability of the savings and loan system of the country. FINAL ARGUMENT IN FAVOR OF THIS BILL There is still another argument in favor of the premium reduction which should be mentioned. Although the 2,536 insured associations had assets at the end of 1947 aggregating $8,547,000,000, these assets are only 72 percent of the resources of all operating associations. It is estimated that a very large percentage of the |