Section 16 of the bill relates to the admission fee which the Federal Savings and Loan Insurance Corporation is required to charge when an applicant institution is granted insurance of its accounts. Subsection (d) of section 403 of the National Housing Act provides that any applicant applying for such insurance after the first year of the operation of the insurance corporation shall pay an admission fee based upon the Corporation's reserve fund which, in the judgment of the Corporation, is an equitable contribution. The General Accounting Office, in its last two reports of its audits under the Government Corporation Control Act relating to the Insurance Corporation, has included a recommendation to the Congress that the statute be amended to eliminate the existing provision and to authorize the imposition of a fee on newly insured institutions commensurate with the direct and indirect cost of granting insurance coverage. In line with this recommendation, section 16 of the bill would repeal the existing provision and enact in lieu thereof a provision that any institution which applies for insurance after the effective date of the new legislation shall pay, in the event that its application is approved, an admission fee in such amount as the Corporation shall determine, taking into consideration the total cost of processing all insurance applications.

This completes the provisions of the bill which have particular application to the operations under the supervision of the Home Loan Bank Board. As stated in the beginning, the Board favors their enactment into law.

Mr. MCALLISTER. There are five amendments that have to do with our operation. One was mentioned by Mr. Cole, having to do with the reduction of the capital stock of the Federal home loan banks.

2. Authority to the Board to terminate membership in the bank system;

3. A provision for increasing the number of elective directors of the Federal home loan banks in districts that are large and which contain five or more States;

4. A clarification with regard to title I insurance; and

5. A clarification and definition with regard to the admission into the Federal Savings and Loan Insurance Corporation and the fee that would be charged.

First I will take up the qeustion with respect to the reduction in the bank stock. As Mr. Cole pointed out, in 1950 in an effort more quickly to retire the Government's capital in the bank system which had already been put at approximately $125 million, the savings and loan associations asked that their purchase of stock be increased from 1 percent to 2 percent of the unpaid balance of the home mortgages. That very quickly retired the Government's capital. Under present conditions frankly our banks are being over-capitalized, and we feel it would be desirable to give the Board the authority to control the amount of capital of the bank system from the minimum of 1 percent originally established to the present maximum of 2 percent.

Senator SPARKMAN. Is the amount of lending power in any way tied to the capitalization?

Mr. MCALLISTER. Yes, sir. The banks can issue debentures up to 10 times the amount of their outstanding capital. In round numbers their capital at present is $500 million.

Senator SPARKMAN. When you say they are becoming over-capitalized does that mean their capitalization is running ahead of the demands in the community for loans?

Mr. MCALLISTER. The system at the present time has outstanding only $141 million of debentures. The association members have been putting deposits into the banks and the banks have approximately $800 million of deposits of their members; and in turn some of the same members and other members in borrowing from the banks have

borrowed some $750 million. So that banks are really serving as an instrumentality in making funds available from one area where there is an excess of funds to another area of the country where there is a demand for funds.

We feel at the present time there is no need for increasing the capitalization of the banks. However, I do not want to reduce the $500 million. It will stand at its present figure and no member will be permitted to reduce its present amount of stock; but merely from here on out if the Board should set the regulation at 112 percent, for example, of the unpaid home mortgages, then when an institution's home mortgages had increased to 112 percent according to the present stock value there, then they would be required to purchase an additional amount of stock.

Senator SPARKMAN. All right.

Mr. MCALLISTER. The second one would provide for the removal of member institutions in the bank system. At the present time the Board has the right to remove a member if they fail to comply with the provisions of the Bank Act. That is the second amendment we are proposing, page 4, subsection 2 of section 14. The Board has the authority to remove members if they fail to comply with the provisions of the act or regulations of the Board, or if such member is insolvent. However, the condition required for membership in the bank system is that their basis of lending shall be one that will be approved. In other words, they are conducting their lending operations on a basis satisfactory to the Board. However, if after they are a member and they fail to continue their satisfactory progress, then we do not have that as a right for removal from membership. This is simply to give the Board the right to remove members if the character of its management or its home financing policy is inconsistent with home financing.

Of course, that would be done on the basis of a hearing.

Senator BUSH. How do you remove them, speaking of the members of the bank system?

Mr. MCALLISTER. It would be done by notice, and there would be given provision for a hearing.

Senator BUSH. Supposing that is effective, what happens to that institution? They have a lot of obligations to the public. What happens to them? Do they become a State institution, or what? They have to have some sort of license to operate.

Mr. MCALLISTER. Yes, sir. Membership in the bank consists of Federal savings and loan associations, which would be Federally chartered, and they must be members of the bank system.

Senator BUSH. That is what we are talking about.

Mr. MCALLISTER. No. We are talking about State chartered associations, chartered by the respective States, which may be members of the bank system if they meet our requirements; but once they are a member of the system we cannot enforce their continued compliance with the recommendations that were in evidence for them to become members.

Senator BUSH. So this action does not apply to Federal savings and loan asssociations?

Mr. MCALLISTER. No, sir.

Senator BUSH. But only to State savings and loan?
Mr. MCALLISTER. Yes.

Senator BUSH. Who are affiliated with you.

Mr. MCALLISTER. That is right.

Senator LEHMAN. I am not quite certain of what your amendment does. It seems to me the language of your amendment is very similar at least in part with the existing law.

Mr. MCALLISTER. Yes, sir.

Senator LEHMAN. What does it do in addition to the rights that are given to the bank under existing law?

Mr. MCALLISTER. That appears in the third paragraph on page 4: But, although the act provides that no institution shall be eligible to become a member if the character of its management or its home-financing policy is inconsistent with sound and economical home financing or with the purposes of the act, there is no provision by which the Board may terminate a member's membership if such conditions arise and exist after the member is admitted to membership.

In other words, it is merely giving the Board the authority to require continued compliance with the conditions that were necessary for initial membership into the system.

Senator BUSH. In other words, what the additional authority does is see that the character of these institutions remains the same. Mr. MCALLISTER. That is correct.

Senator SPARKMAN. I did not catch this, although you may have given it a moment ago. How do you discipline a Federal savings and Ioan association? This is the method of disciplining a State organization that becomes affiliated with your organization, but how do you discipline a federally licensed savings and loan association under this same proposition?

Mr. MCALLISTER. We would have the authority to issue them notice of their failure to comply with the rules and regulations or compliance with the law. Then they would be privileged to have a hearing before the Board. If they objected to having a hearing before the Board, they would have a right to go into the district court in their district and demand a hearing and an explanation of the Board's charges; and those charges would have to be proven before the court. Senator SPARKMAN. What would happen?

Mr. MCALLISTER. Frankly, if a Federal association were failing to comply with the law, we would step in and either make such changes in the directorate as were necessary, or such changes in the management as were necessary.

Senator SPARKMAN. And you have the authority to do that?
Mr. MCALLISTER. Yes, sir. We have it now.

Senator SPARKMAN. But you would not have that power in the State associations?

Mr. MCALLISTER. Yes, sir.

Senator SPARKMAN. And this would be an alternative?

Mr. MCALLISTER. Yes, sir.

Senator SPARKMAN. In other words, you can simply say we cannot reorganize you.

Mr. MCALLISTER. Yes, sir.

Senator SPARKMAN. But we can deny you membership in the Federal organization.

Mr. MCALLISTER. In the bank system. That is correct.
Senator SPARKMAN. You think that is comparable?

Mr. MCALLISTER. Yes, sir.

Senator SPARKMAN. About as nearly comparable treatment as you can devise for the two systems?

Mr. MCALLISTER. Yes, sir. We have fixed it so that they will be provided with an opportunity for a hearing. It cannot be an arbitrary action.

Senator SPARKMAN. They are entitled to a hearing?

Mr. MCALLISTER. Yes, sir. The same procedure will be applied that is applied to the Federals.

Senator SPARKMAN. All right.

Mr. MCALLISTER. Then there is one little technical change.

Senator LEHMAN. Supposing you felt that the bank was not solvent? Has the Board any power to compel that particular bank to build up its capital structure so that it would again become solvent without danger of going into bankruptcy?

Mr. MCALLISTER. You have reference to a particular savings and loan association?

Senator LEHMAN. Yes.

Mr. MCALLISTER. No. We would have no authority. If it was a State-chartered association that was a member of the bank system it could or could not be insured, as it elects. In other words, if the management of that institution would like to have insurance of their shares they could make application to the Insurance Corporation, and if they complied with the Insurance Corporation's requirements then their members' investments would be insured. They would then be subject to the rules and regulations of the Insurance Corporation, which, in turn, are more strict than those of the bank system. If that institution would then become insolvent, then the Insurance Corporation, upon that determination by the State supervisory authority, would step in and pay the shareholders their claims in accordance with their amount of insurance and the amount of their investment.

Senator SPARKMAN. Is an individual State association entitled to the insurance without it belonging to the Federal association?

Mr. MCALLISTER. No, sir. It can belong to the bank system without being insured, but it cannot be insured without belonging to the bank system.

Senator SPARKMAN. All right.

Mr. MCALLISTER. There was one slight correction that was being made. That is in the last paragraph at the bottom of page 5. We find that Federal savings and loan associations at the present time have a question as to whether or not they might be permitted voluntarily to terminate their membership in the bank system. This clause will prevent a Federal from voluntarily withdrawing from the bank system, which is what had always been understood, but we wanted to clarify that.

Then, in the middle of page 6, the third change we are recommending is the authority to the Board to increase the number of elective directors of the home loan banks. As you know, we have 11 Federal home loan banks. For instance, the San Francisco Bank has 9 western States. They have only 8 elective directors. As we have always tried to arrange it, it works out so that each State should have at least 1 elective director to represent them, but we are in a position of having to combine 2 States as 1, and they alternate in the election of directors. The Greensboro Bank, which serves the southeastern por

tion of the United States, has 7 States, and the District of Columbia. The western San Francisco Bank I failed to add also serves Alaska, Hawaii, and Guam.

This amendment is simply to authorize the Board to increase the number of elective directors. We have 8 now and 4 appointed by the Board. This authorization is to increase the number of elective directors not to exceed 2 for each State in the bank district.

Senator BUSH. That would give you a pretty big Board, If you took full advantage of it.

Mr. MCALLISTER. It is not our intention to provide for that many, Senator.

Senator BUSH. Why would you not be satisfied to have a limitation that would provide for one from each constituent, such as a State or Territory, or something like that?

Mr. MCALLISTER. All right, sir. The State of California has approximately 60 percent of the membership of the San Francisco bank, and approximately 75 percent of the assets of the San Francisco bank. It has at the present time only one elective director. Frankly, we feel that this is an unfair representation.

it.

Senator BUSH. I agree with you. I think that is a good reason for

Mr. MCALLISTER. We divide the membership into three classes, A, B, and C, according to the size, C being the smaller associations, B the middle class, and A the largest associations. The 8 elective directors consist of 2 from each of those classes, and 2 at large. Frankly, we feel, or I will say I feel, that California should have one elective director from each of the classes.

Senator BUSH. Yes. I see your amendment better now. I think it is a very sound idea.

Mr. MCALLISTER. Yes, sir.

Senator BUSH. You are trying to get authority to give representative weight where the business comes from.

Mr. MCALLISTER. Yes, sir. But at the same time under no circumstances would we give one State

Senator BUSH. Sixty percent of the Board.

Mr. MCALLISTER. That is corect. No. We would never do that, but we do feel they are entitled to more than one elective director. Senator BUSH. And this amendment you propose now will give you the necessary leeway?

Mr. MCALLISTER. Yes, sir.

Senator BUSH. Just to repeat once more, what is the amendment? How many additional?

Mr. MCALLISTER. We may not have more than two elective directors for each of the States within the district.

Senator BUSH. So that in this case you could give California 2, and that is all, although they do have 60 percent of the business?

Mr. MCALLISTER. No. It would mean if there were 9 States in the district we could, under this regulation, have as many as 18 elective directors, and 4 appointed directors, which would mean a total board of 22; but that would not be our intention, to have that many. However, we do feel every one of the States in that district should have a minimum of one elective director, and we feel in any district where any one State has a very heavy predominance they should be entitled to more than one elective director.