AMENDMENT OF THE NATIONAL HOUSING ACT

Remarks of Hon. Brent Spence, of Kentucky, in the House of Representatives

Monday, May 3, 1943

Mr. SPENCE. Mr. Speaker, the insurance of share accounts in savings and loan institutions has been available through the Federal Savings and Loan Insurance Corporation for the past 81⁄2 years and the program is no longer in the experimental stage. I have watched the course of the share insurance plan closely from its start in 1934, believing that we in the Congress had provided a most valuable device for safeguarding the savings of millions of American people. After a year it was easily apparent to those of us who had studied it that the premium charge of one-fourth of 1 percent of insured liabilities per annum was excessive. Legislation enacted May 28, 1935, lowered the premium charged a savings and loan institution for insurance of its accounts to one-eight of 1 percent. Thus the first overestimate of the needed income of the Federal Savings and Loan Insurance Corporation was corrected in part.

One-twelfth of 1 percent per annum was considered a sufficient premium for commercial banks to pay for insurance coverage by the Federal Deposit Insurance Corporation, when the permanent program for insurance of bank deposits went into effect June 30, 1935. This precedent and the further experience of the Federal Savings and Loan Insurance Corporation, with its infinitesimal losses, indicated to some of us that a premium of only one-twelfth of 1 percent per annum was justified likewise in the insurance of savings and loan accounts. Accordingly, on May 10, 1937, I introduced in the House of Representatives of the Seventy-fifth Congress a bill (H. R. 6929) to amend the statute-title IV of the National Housing Act-so that the premium charged the savings and loan associations for insurance of their accounts should be just one-twelfth of 1 percent. A measure containing a similar provision passed the House of Representatives of the Seventy-sixth Congress on May 31, 1940, but failed of consideration by the Senate of that Congress. Again, on October 2, 1941, I introduced in the House of Representatives of the Seventy-seventh Congress a bill (H. R. 5742) to provide for this reduction, but the pressure of war legislation made it impossible to bring the bill out of committee.

Thus, 6 years after the need first became readily apparent for a reduction in the rate of premium charged savings and loan associations for insuring either accounts, there are 2,400 associations paying an excessive premium for a protection which this Government instrumentality could afford to give them for much less. These savings and loan associations are encouraging people to save money. Ever since I have had any knowledge of them-for a period of more than 35 years— they have been encouraging people not to spend all they make. They are an important factor today in the great fight on the home front against inflation. They should be put in a position where they can give greater encouragement to savings and thrift. They should not have to pay out of the earnings which would accrue on the savers' money an exorbitant fee for the insurance of accounts.

I present some statistical data to demonstrate that the reduction in premiums is justified. Supporting data, consisting of exhibits A and B, are attached.

First. The income of the Federal Savings and Loan Insurance Corporation from 1934 to 1942, inclusive, was over $42,000,000. This income was derived from premiums, admission fees, and earnings on capital. Losses were only $3,200,000 during that period and operating expenses were kept at approximately $1,700,000. Thus the Corporation had total expenses and losses of less than $5,000,000 during this 8-year period. They amounted to 11.5 percent of income, leaving 88.5 percent of income in reserves and surplus of the Corporation. From this it is evident that the premium is unnecessarily high.

Second. The earned income from insurance premiums and admission fees alone was approximately $16,000,000 in this first period of 8 years. Expenses totaling $1,700,000 as pointed out in the last paragraph were thus only about 10 percent of earned income from premiums and fees, and the losses, $3,200,000 pointed out above, were only about 20 percent of income from premiums and fees. Thus the ratio of combined losses and expenses of the Corporation to date has been only 30 percent of income from premiums and fees alone. Upon this basis, which is aside from any earnings upon any Government capital or accumulation in the Corporation, it is apparent to me that the premiums charged are unnecessarily high. Third. A study of the record indicates that the Insurance Corporation has put into reserves and surplus an average of 88.5 percent of its gross income, and that the amount transferred to reserves and surplus has in no year fallen below 70.9

percent. From these figures, it is evident that the one-eighth of 1 percent premium now charged and the one-eighth of 1 percent asssesment now chargeable are too high.

Fourth. Private casualty insurance companies and fire insurance companies customarily charge and collect premiums which are about twice their losses and only slightly in excess of their losses plus expenses. This Government Insurance Corporation has charged and collected premiums and fees which are more than 13 times its losses and which are over 8 times its losses plus expenses. I submit that this comparison with the practice of well-managed private insurance companies leads to the conclusion that the premium charged by the Federal Savings and Loan Insurance Corporation should be reduced.

Fifth. Premiums and fees which would have been collected if the premium had been one-third less would have amounted to $11,000,000. The cumulative actual losses of $3,200,000 would have been less than 30 percent of premiums and fees, under such conditions, and the expenses of $1,700,000 would have been less than 15 percent of premiums and fees. On this supposed reduced premium charge, the total of losses and expenses would still have been less than 45 percent of premiums and fees only. Again, it is evident that the premium now being charged is too high.

Sixth. Gross income of the Corporation has already been cited as over $42,000,000 in the period since the insurance of accounts in savings and loan associations was started. Had the premium been reduced by one-third, the $3,200,000 losses during that period would have been less than 10 percent of gross income, and the $1,700,000 of expenses would have been only about 5 percent of gross income. On such a reduced premium basis, the combined losses and expenses would thus have constituted only about 15 percent of gross income. One must draw from this the conclusion that the premium rate now being charged is too high.

Seventh. I submit the record of the share-insurance fund of the Cooperative Central Bank of Massachusetts to demonstrate that the ultimate risks involved in carrying on such an insurance operation do not require the high premium today being charged. The cooperative banks in Massachusetts are the counterpart institutions of savings and loan and building and loan associations in other States. I submit this record because doubtless the question is going to be raised as to whether or not our 8 years' experience with the Federal Savings and Loan Insurance Corporation is sufficient to measure the ultimate risks. Early in the recent depression the State of Massachusetts established its share-insurance fund requiring all of the more than 200 cooperative banks in that State, with assets totaling more than half a billion dollars, to pay assessments to the fund to cover losses. Thus this fund assumed all predepression and depression losses upon every cooperative bank in the State. good and bad. Their record appears to indicate that this fund has absorbed and paid substantially all of the losses of the last depression. Those losses for a 9-year period covering predepression, depression, and post-depression losses in institutions, good and bad, have been only approximately one-third of 1 percent of share capital of all the banks for the cumulative period. This means that assuming all of the losses in all of the banks, good and bad, has averaged a cost of only about one twenty-fifth of 1 percent per annum to the insured banks. From these facts it seems clear to me that the one-eighth of 1 percent being charged by the Federal Savings and Loan Insurance Corporation, insuring only selected risks, is too high, and that even the onetwelfth of 1 percent which we suggest is conservatively high.

Eighth. It may be called to our attention that the losses of the Federal Savings and Loan Insurance Corporation were substantially greater in 1942 than in any other year. Such contention, however, seems to me to be completely answered by the fact that the major portion of the 1942 losses of the Corporation were depression losses of insured associations not charged off until that year, having been overlooked when insurance was granted. Furthermore, it still should be borne in mind that even in this year of its greatest payment of losses the Corporation added over 70 percent of its gross income to its reserve and surplus. Ninth. The Government is interested not only in stabilizing a thrift and savings program in the United States at this time, when financial confidence and the encouragement of thrift are so imperative, but also in encouraging home ownership with minimum interest rates. This insurance premium, which is paid in full by the insured institutions in cash annually, is necessarily an element of the interest rate which they charge home borrowers. Therefore, it seems clear to me that the Government is interested in a reduction of the insurance premium charge if it can safely be made, and I have presented the facts on which I base my own conviction that the reduction can be safely made.

In addition to the reduction of the insurance premium to one-twelfth of 1 percent per annum, I feel that there is another inequity in the statute creating and governing the Federal Savings and Loan Insurance Corporation, and this measure attempts to correct that. The statute-title IV of the National Housing Act-provides for a cumulative dividend of 3 percent per annum on the $100,000,000 capital stock subscribed by the Home Owners' Loan Corporation when the Insurance Corporation was set up. This dividend ought to be waived and its requirement discontinued for two reasons:

First. The Federal Savings and Loan Insurance Corporation ought not to be required to pay a cumulative dividend when other similar Government instrumentalities do not pay dividends for government capital used by them. The statute creating the Federal Deposit Insurance Corporation, allotting it $150,000,000 out of the Treasury for capital, provides:

Section 264 (d) of the National Banking Act as amended:

"Such stock shall have no vote and shall not be entitled to the payment of dividends."

The Government provided the original capital for the Federal Housing Administration and no dividends are required. The Government has contributed to the surplus of the Federal Land Banks from time to time upon a basis requiring no dividends, and in addition has, from year to year, absorbed the losses of the land banks.

Second. The stock of the Federal Savings and Loan Insurance Corporation is owned and held for the Government and the earnings, whether paid out in dividends or not, belong to the Government and should remain in the fund to provide fully adequate capital as the number of savers and investors using this form of insurance steadily increases.

I am hopeful that sometime during the present session of Congress the Banking and Currency Committee will have time to consider the question and recommend favorable action to my colleagues in the House. After all our local thrift institutions are the finest instrumentalities we have for promoting the basic American virtues of saving money and home ownership and we should never be unmindful of those things which make for their progress and better ability to serve their communities.

This figure is the 1941 assessment.