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BOARD OF GOVERNORS OF THE FEDERAL Office Correspondence Tn Chairman Eccles From Mr. Vest RESERVE SYSTEM Date May 29,1947. Subject; Guarantee of loans by Federal Reserve Banks In connection with your contemplated appearance before the House Banking and Currency Committee, I wish to call to your attention the differences between the Senate B i l l , S. 408, and the b i l l introduced by Representative Hays of Arkansas, H.R. 3268, and also a possible amendment which may be desirable and which has just been brought to my attention* Differences between the Two B i l l s . - There are three differences between S. 408 axxi H.R. 3268, introduced by Mr. Hays: (1) Whereas S. 408 refers to "chartered banking institution 11 i n two places, the House B i l l refers to " chartered bank" i n one of those places and to "financing institution" i n the other instance. (2) The Senate B i l l authorizes guarantees only when i t appears to the satisfaction of the Reserve Bask that the business enterprise is unable to obtain requisite financial assistance on a reasonable basis from the usual sourcesj while the House B i l l authorizes such guarantees only where the loan "could not be secured through ordinary banking channels at reasonable rates and terms". The provisions of the House B i l l seem to me to be slightly more restrictive on this point than is the language of the Senate B i l l which was suggested by the Federal Advisoiy Council and the Board. (3) The most important difference between the two b i l l s is that the Senate B i l l provides for the termination of the authority of the Reserve Banks after June 30, 1952, whereas the House B i l l contains no time limitation. Possible Amendment to the B i l l . - An attorney for a national bank has raised the question whether loans guaranteed by Federal Reserve Banks under the proposed new authority would be exempt from the restrictions on real estate loans made by national banks under section 24 of the Federal Reserve Act. These restrictions relate to such matters as f i r s t liens, improved real estate, 50 per cent of appraised value, etc. Loans guaranteed under existing 13b are exempt from such limitations, bat, since 13b would be repealed, i t is very questionable whether the exesqption would apply to loans guaranteed under the new authority. I t seems desirable that this exemption of the present law should be continued i n effect; and a one-sentence amendment to the b i l l would take care of the matter. I attach a brief statement which describes this problem and suggests an amendment. j<tt t / EXEMPTIONS OF LOAHS GOARAJTEID BY IWZ&AL RESERVE BANKS FBOM LIMITATION OK rKAL ESTATE LOAHS Section 24 of the Federal Reserrt Act imposes certain limitations upon the taking of r^al estate loans by national beaks. For example, auch loans may be made only on the security of first liens, only upon improved reel estate, only up to 50 per cent of the appraised value of the real estate, and only with maturities not exceed ing five years (except in the case of amortised loans which may have maturities up to 10 years). Loans to businesses made by a national bank with a commitment to purchase on the part of the Federal Reserve Bank under the present section 13b of the Federal Reserve Act «re expressly exempted from the above limitations on raal estate loans by a specific provision of existing statute. However, since that exemption refers specifically to Federal Be^erre Bank commitments under section 13b and not to commitaents aade under other provisions of law, there is sose question whether the exemption vould continue to apply to lotas made by a nati nal bank and guaranteed by a Federal Reserve S«ak under the new paragraph proposed to be added to section 13 of the Federal Reserve ActI t is important that this exemption fro*i real estate loan restrictions be continued in effect so that business loans guaranteed by Federal F.eserve Banks, when marie by national bauks on the security of real estate, will not necessarily have to be based upon first liens or upon improved real estate or subject to the other restrictions contained in section 24 of the Federal «eserre Hct. In order that there may be no question that the present exemption from real estate lean restrictions with respect to loans guaranteed under section 13b will be carried over to apply also to loans-guaranteed under the new authority contained in section 13, i t is recommended that the following additional sentence be added to the proposed new paragraph In section 13i "A loan made to a business enterprise, any part of which is subject to a guaranty or commitment under this paragraph, shall not be subject to the restrictions or limitations of section 24 of this Act upon loans accural lay real estate*" GBVxjc 5-29-47
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