It was the intent of Congress when it established the Federal Savings and Loan Insurance Corporation that the Corporation would operate as a self-sustaining institution. Since its creation the Corporation has steadily grown until. today it has resources adequate to permit the initiation of an orderly plan to retire the capital which was provided through Government participation. Such retirement would be in line with the retirement of the capital stock of the Federal Deposit Insurance Corporation which was provided for by the legislation cited above.

The method set forth in the proposed amendment for retirement of stock, being related directly to the annual net income of the Corporation, presents an approach which will avoid any loss of confidence by the public or by the insured institutions. which might result if the Corporation's assets were drastically reduced by an immediate retirement. The future financial stability of the Corporation in times of stress is protected by the provision authorizing the Corporation to borrow funds from the Treasury when needed for insurance purposes.

SECTION 7. TERMINATION OF INSURANCE

Under existing law, when an institution insured by the Federal Savings and Loan Insurance Corporation voluntarily terminates insurance its accounts immediately cease to be insured, but it must pay premiums for 3 years thereafter; where termination is involuntary, payment of premiums and insurance of accounts. continue for 5 years. Section 7 of the proposed amendment changes the existing law so as to place voluntary and involuntary terminations of insurance on the same basis. În either type of termination the insurance of existing accounts, less any later withdrawals below the insured amounts, would continue for two years and the insured institution would be required to pay as a final premium an amount equal to twice the last annual premium paid by it.

The provisions of the existing law require an institution upon voluntary termination of insurance to continue payment of premiums for 3 years without any benefit to the institution. Furthermore, the continuance of insurance of existing accounts for 5 vears after the Corporation finds cause for withdrawal of insurance delavs the final termination of insurance in such cases for too long a time, and is detrimental to the best interests of the Corporation. Section 7 of the proposed amendment provides reciprocal and equitable provisions for termination of insurance.

SECTION 8. LEGAL INVESTMENTS

This section provides that shares, deposits, certificates, and accounts which are insured by the Federal Savings and Loan Insurance Corporation shall be lawful investments, and may be accepted as security, for fiduciary, trust, and public funds the investment or deposit of which is under the authority or control of the United States or of any officer, officers, agency, or agencies thereof.

The insurance which is provided by the Government through the Insurance Corporation, and the examinations of insured institutions and other safeguards. for which provision is made through title IV of the National Housing Act, make these investments safe and desirable securities for fiduciarv, trust and public funds, and their eligibility for this purpose would be an additional factor in the confidence of the public in such insurance.

SECTION 9. SEPARABILITY

This section is the usual separability provision.
APRIL 22, 1948.

Mr. FOLEY. You may recall that on these occasions there was not agreement within the savings and loan industry or between that industry and the Home Loan Bank Board with regard to these earlier legislative proposals. Moreover, there was not sufficient agreement within the executive agencies concerned, so that these earlier legislative proposals could be regarded as in accord with the program of the President.

It therefore gives me considerable pleasure to be able to inform your committee that the current proposed amendments to H. R. 2799 are in accord with the program of the President, and are satisfactory to the savings and loan industry.

We have worked closely with representatives of the industry. The Federal Savings and Loan Advisory Council created by section 8a of the Federal Home Loan Bank Act established a legislative coordinating committee consisting of representatives of the United States Savings and Loan League, the National Savings and Loan League, the presidents of the Federal Home Loan Banks, and the Advisory Council. The proposed amendments to H. R. 2799 have the endorsement of this legislative coordinating committee.

Our original draft of the proposed amendments to H. R. 2799 were referred by the Bureau of the Budget to the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the General Accounting Office. On the basis of their views and conferences between representatives of the Office of the Administrator, certain changes were recommended by the Bureau of the Budget. Such recommended changes have been incorporated in the proposed amendments to H. R. 2799, and the Director of the Bureau of the Budget has authorized me to state that the enactment thereof would be in accord with the program of the President.

In my judgment the development of the recommended amendments to H. R. 2799 represents an excellent illustration of the effective work which can be accomplished by the new coordinated housing agency. It has resulted in a sufficient reconciliation of views that the proposed amendments are in accord with the program of the President. It has enabled the Congress, for the first time, to consider their enactment in the full knowledge that the viewpoints of the industry and the administration have been reconciled.

There is one proposal which is not included in the pending amendment—a reduction in the premium rate charged insured savings and loan associations. Quite frankly, for reasons which Mr. Divers will explain in detail, we did not believe that such a reduction should be made at this time.

I should like to call the particular attention of the committee to section 3 of the proposed amendments to H. R. 2799. This provision would authorize the Treasury, in case of emergency need, to purchase the obligations of the Federal Home Loan Bank System in amounts not exceeding $1,000,000,000 outstanding at any one time. In my opinion this is the most important single proposal in the legislation.

At the present time there is no provision in law which would authorize Treasury support of the Federal Home Loan Bank System in case of emergency. For many years the Government has provided such support for the commercial banking and farm credit systems, and in our judgment it is essential that similar support be made available to the Federal Home Loan Bank System.

Senator CAIN. Mr. Foley, may I ask you a question?

Would you like to say anything at this time in support of the sum of a billion dollars?

Mr. FOLEY. I think Mr. Divers has covered that pretty thoroughly,. Senator, and that would save your time perhaps.

Senator CAIN. Go right ahead, sir.

Mr. FOLEY. Up to the present time the obligations of the Federal home loan banks have been readily accepted on favorable terms by the private market. Unforeseen contingencies might arise, however, when it would be difficult or undesirable in terms of our over-all fiscal policy to go into the private market. If such a situation should occur,

there should be provision in law which would authorize the Treasury to come to the support of the Federal Home Loan Bank System. This need was amply illustrated last December when the Treasury utilized the Federal home loan banks as public depositories at a time when funds were needed but when changes in governmental fiscal policy made it inadvisable for the banks to go into the private market. Legislation to give the Secretary of the Treasury discretionary authority to purchase obligations of the Federal home loan banks has been considered on a number of occasions over the last several years. To date no action has been taken on such proposals, primarily, I understand, because views of the affected executive agencies were not reconciled. It was my position, when I was first confronted with this problem, that Treasury support of the Home Loan Bank System was of paramount importance and that we should devote our full efforts toward developing a proposal which would have the concurrence of the Treasury and be regarded as fully in accord with the program of the President. This whole matter was therefore discussed at considerable length with representatives of the Bureau of the Budget; at the conclusion there was sufficient general agreement to enable the Director of the Bureau to assure me that section 3 of the proposed amendments to H. R. 2799 would be in accord with the President's program.

Since agreement to this extent has now been reached on the need for legislation of this type and more particularly on the specific proposal now before you, I am glad to recommend it wholeheartedly to the committee. The proposal will go far toward strengthening the Federal Home Loan Bank System and putting it in position to meet emergency conditions which may arise at some future time in the home financing field.

The second major proposal of the pending amendments relates to the financing and capital stock of the Federal Savings and Loan Insurance Corporation. With regard to financing, the Corporation would be authorized to borrow from the Treasury in amounts which do not exceed in the aggregate $750,000,000 outstanding at any one time.

Up to the present time the Federal Savings and Loan Insurance Corporation has not found it necessary to borrow funds for insurance purposes. It is quite possible, however, that occasions may arise in the future when such borrowing will be necessary, and title IV of the National Housing Act therefore specifically empowers the Corporation to borrow money. That authority does not now extend, however, to borrowing from the Treasury. The proposed amendment, in line with the current general policy that wholly owned Government corporations should be restricted in their borrowing activities to the United States Treasury, would require that in the future all necessary borrowing be from that source. Such a provision has the dual advantage of coordinating the financial operations of the Insurance Corporation with the over-all fiscal and credit policies of the Government and would assure, as in the case of the Federal home loan banks, that in the event of unforseen contingencies the Corporation would have an adequate source of borrowed funds.

When the Insurance Corporation was established in 1934, Congress provided that its capital stock of $100,000,000 should be subscribed by the Home Owners' Loan Corporation. The HOLC was directed

to pay for the stock by issuing $100,000,000 of its bonds to the Insurance Corporation. The Congress obviously intended that the Insurance Corporation would be an entirely self-supporting agency, since provision was made for the payment of dividends to the HOLC at a rate equal to the cost of the bonds given in exchange for stock. The Insurance Corporation, in view of its statutory obligation to build up adequate insurance reserves and in the interest of prudent management, has not declared any dividends since June 30, 1935.

The proposed amendment would make certain necessary and desirable changes in this stock set-up. First, because of the imminent liquidation of HOLC, the stock would be transferred to the Treasury. In payment of the stock, the Treasury would cancel $100,000,000 of the HOLC notes it now holds. The Treasury would also cancel an additional amount of HOLC notes equal to the cost borne by HOLC in carrying the stock since July 1, 1935.

For several years there have been conflictng views as to whether the Insurance Corporation should be required to pay this latter item from its reserve funds. Again, this is a matter on which there was no agreement on the legislative proposals advanced in prior years. We think the proposed amendment offers a solution to this problem which will prove satisfactory to all concerned. Under this scheme, the Insurance Corporation would issue additional stock to the Treasury equal in amount to the cost borne by HOLC in carrying the stock of the Insurance Corporation since July 1, 1935.

Once this transfer arrangement is effected, the Insurance Corporation will be required to pay a return on its stock to the Treasury at a rate comparable to the going cost of money to the Treasury. The Corporation will also begin to retire its stock in an orderly manner, using up to 50 percent of its annual net income for this purpose. This arrangement has the following advantages:

1. It transfers ownership.of stock from a liquidating agency to the Treasury.

2. The HOLC is fully reimbursed for the cost of carrying the stock of the Insurance Corporation.

3. The Treasury will receive stock equal to the entire amount repaid to HOLC.

4. The Treasury will henceforth receive a return on stock equal to the cost of money.

5. The Insurance Corporation will be fully self-supporting but will not have to suffer a substantial reduction of its capital accounts immediately a suggestion which we have discarded as potentially dangerous at this time in view of the Corporation's very substantial insured liability.

6. The Corporation will be able to start an orderly retirement of its Government-owned stock, paying for such retirement out of net earnings.

The proposed amendment to H. R. 2799 would also accomplish 'a number of other very desirable but less basic changes in the legislation governing the operations of the Home Loan Bank Board. I strongly recommend their favorable consideration by your committee.

Senator CAIN. Your position, Mr. Foley, is obviously very clear, and we are extremely appreciative of that statement.

I wonder, sir, if you would care to comment on S. 2417. That is the one affecting the insurance-premium charges.

Mr. FOLEY. I will comment on that briefly, although I happen to know that Mr. Divers has gone into detail in his prepared statement. Our position is that presently, in view of the broad situation with respect to the whole system, we feel it is not now wise.

Senator CAIN. Thank you, sir.

Mr. FOLEY. Thank you, Senator.

Senator CAIN. We should now like to have, as our next witness, Mr. William Divers, Chairman of the Home Loan Bank Board. Mr. Divers, good morning.

STATEMENT OF WILLIAM K. DIVERS, CHAIRMAN, HOME LOAN BANK BOARD, WASHINGTON, D. C.

Mr. DIVERS. Good morning, Senator Cain.

Senator CAIN. If we can understand this statement in its entirety, it would seem that we could well send these other gentlemen about their personal and official business.

Mr. DIVERS. In connection with your question, there, Senator, you understand that S. 2417, for the reduction of the insurance premium, is in substantially the same condition as section 4 of H. R. 2799, so that comments on one will automatically cover the other.

Senator CAIN. As far as that provision is concerned; yes, sir.

Mr. DIVERS. It is my privilege to appear before you today on a bill, H. R. 2799, which has a direct and vital bearing on the operations of the Home Loan Bank Board, of which I am Chairman.

The Home Loan Bank Board wishes to submit its views on the proposed amendment to H. R. 2799, now under consideration by your committee. If it is agreeable to the committee, I will briefly discuss the several sections of the proposed amendment, and will note in each case the more substantive difference between the proposed amendment and the bill as passed by the House.

The first section of the proposed amendment would provide for retirement of the Government-owned capital stock in the Federal home loan banks. As you know, the capital stock of these banks is owned partly by the Government and partly by the member institutions, which are required to hold such stock equal to at least 1 percent of the unpaid principal of their home mortgage loans, with a minimum of $500. On December 31, 1947, the Government stock totaled $122,672,200, and members' stock totaled $103,077,575.

Section 1 of the proposed amendment would increase the members' stock holdings by requiring each member, within 1 year, to hold such stock equal to at least 2 percent of the unpaid principal of such member's home mortgage loans, home-purchase contracts, and similar obligations, retaining the present $500 minimum.

Upon the taking effect of this requirement each Federal home loan bank would be required to retire an amount of its Government-owned stock equal to the amount by which the stock then held by members exceeded the amount required under the old law. Annually thereafter each Federal home loan bank would be required to retire Government stock equal to 50 percent of the net increase in members' stock since the last previous retirement. The existing Government capital could not at any time be retired under the new provision if such retirement would reduce the aggregate capital stock, reserves, surplus, and undivided profits of all the banks below $200,000,000. That amount was $249,873,233 at December 31, 1947.