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f December 21, 1950. . n iifi . I (J j\ * Governor E c c l e s : I a t t a c h a summary o f the proposed b i l l t o amend t h e l a v w i t h r e s p e c t t o the R e c o n s t r u c t i o n Finance Corporation, together w i t h a memorandum o f comments on some aspects o f t h e measure. These documents were prepared by M r . W a l t e r Young, an a t t o r n e y who j o i n e d o u r s t a f f s e v e r a l weeks ago a f t e r spending a number o f y e a r s as a member o f the s t a f f o f t h e RFC. I f y o u w o u l d l i k e t h e memorandum r e v i s e d o r changed i n any way, please l e t me know. Attachments December 21, 19t>0. Be?- r Senators I am e n c l o s i n g h e r e w i t h a summary o f the p r o posed R e c o n s t r u c t i o n Finance C o r p o r a t i o n A c t , t o g e t h e r w i t h om-sents on the proposed A c t . These documents were prepared by Mr. W a l t e r l o u n g under t h e d i r e c t i o n o f Mr. V e s t , t h e B o a r d s General Counsel. Mr. lo ng i s one o f our l a w y e r s and u= s a member of t h e s t a f f o f the HFC f o r a number o f y e a r s . 1 t t r o n ^ l y b e l i e v e t h a t the l e g i s l a t i v e proposal t o s u b s t i t u t e an a d m i n i s t r a t o r f o r Board o f D i r e c t o r s i s a v e r y d e s i r a b l e and p r a c t i c a l change under e x i s t i n g c i r c u m s t a n c e s . A f t e r I r e t u r n t o W s h i n g t o n i n January . I w i l l be very g l a d t o d i s c u s s w i t h y o u , a t y o u r convenience and i n case yon d e s i r e t o do so, t h e res sons v n i e h seem t o f a v o r t h e k i n d o f o r g a n i s a t i o n you propose. Sincerely yours, M. S. Hon. Vn. J . F u l b r i g h t , U n i t e d S t a t e s Senate, Washington, !). C. ixcles. conm:-NTS OH ? m r o The p r o t o ed plAce the o p e r a t i o n s of administration, p r o v i d e rsor* c t and, ssore c l e a r l y de u ^ t e Congress cco-anting - ifficult such * c h a n g e . withstand severe, single t h i s would depend e*i^ht -elected for ? ,v o u l d improve of operation, *d%inistr*tor Certainly the fact sf t i i r e c t o r s ) ore however, in caliber organith -t (which s t o the t o t a l l e a d i n g the e x t e n t p o s s i b l e - s f * e h major category be accomplished ua,«ss a l l sufficient to is reeostaendU sometimes tie of final the m n vho in isajs s h o u l d be r e q u i r e d t o o p e r a t e on s u s t ^ i n i n : basis n o t o n l y account, the over:;or. d i r e c t lending of public t^,ken i n t o or Tectiv^ly undoubtedly are upon t h e the ^ny Government ^jreroy w h i c h i s a u t h o r i s e d t o are cd (governor) responsibility & bo^rd sii|fet individual, ^ctirely fix % board .-s-^sures, whic analysis fiaid . ' ' u a f c s s n t * ! change i n esse o f On t h e o t h e r h a n d , Inevitable into lav, «ti-<1 controls* position tc i n the than could % s i n g l e be its of the Cor o r a t i o n . o u l d be i n b e t t e r frequently ubst 1 f enacted Peliaeate a board o f P i r e c t o r s r e p r e s e n t s structure CT t h e C o r . . - o r a t i o n 011 a sound b e s t s , The s u b s t i t u t i o n o f sational rc TV * c t r e p r e s e n t s , the p r e s e n t improvement o v « r w costs of operation, nd unless >sn i n t e r e s t r o v i ^ e f o r these ©oats, ts v e i l of rogrsm, loans. but This ia fixe^ j.so to cannot both i i r e c t a n d rste &eU» ic.!ir*ct, f o r l o xns s looses sustained on loans. The proposed b i l l recognises th«t i t would be neither feasible nor desirable t o f i x by statute a r i -rid interest r a t e . Bovever, the p r o v i s i o n requiring the Corporation to establish i n t e r e s t rate;* t o cover a l l expe&ses i s aost desirable. Obvi'.^sly, the Sovsrnttent should net l%.<nd jobo/ in tr ese area* where, o r uring such tiees as, &de u&te credit i s available fro? private sources, nor should toe So v a r m e n t provide c r e d i t a t i n t e r e s t rates lower than prevailing r * t e s . Section 4 ( a ) , v icri authorises loans only ,*fter s deteraiaction that "financial assistant* i s ?<ot otherwise a v a i l a b l e nt prevailing r a t e s * , should be adequate t o >ro- v i d e res s u a b l e «ssuranee that l e n d i n g by the Cor- o r a t i o n w i l * be confined t o a sphere o u t r i d e that i n vnich private i n s t i t u t i o n s o p e r a t e . I n t h i s connection, . j w v e r , c r;sidersition aiight. be the a d d i t i o n o f * o m c l a r i f y i n g : language. iver< t o Does the phrase " p r e v a i l i n g r a t e i * rsean the average r a t e i n the geographical >rea o r the m t e the type o f Xo&n re< ue&te^? i n g ^ate t o be ^eterained? I n other for o r i s , j e s t how i s the p r e v a i l - The additicast 1 recuirer*ent i n section t h a t vfaea c r e d i t i s extended a f i n d i n g Pe m&de ^o the e f f e c t t h a t * • s u b s t a n t i a l p u b l i c i n t e r e s t would be f r r v e d " , j i v e s d e s i r a b l e ^^phasls t o the isportsnce o f c o o r d i n a t i n g the Cor o r a t i o n 1 s lending w i t h the a c t i v i t i e s o f those agencies o f the Governaent which have i t t p o r t a & t fircal responsibilities. The liin^uage i n the . roposed Act r e l a t i n g t o s e c u r i t y i d e n t i c a l v i t a t h a t c o i t n i n e d i n f i e present i s * . is The requirement is -3- that «11 a e c u r i t i * * and obligations *nd a l l loan* except catastrophe loans " s h a l l ha of such sound value or assure retire;aent or ropsyaent". secured as reasonably to The RFC f o r h nuaber o f years has construed t h i s rrovision rather l i b e r a l l y . Tho Board has aensidero* tfe*t i f there are reasonable grounds to believe t h a t the losn w i l l bo r e t i r e d ( 1 ) from * a m i n e s , (3) by "balloon* paysaant, (3) by * refinancing arrange/sent, (4) by l i q u i d a t i o n of c o l l s t a r s i , or (5) combination of the foregoing, then the statutory requirement has been s a t . The proposed Act, while r e t * i n i r * t ' e old security p r o v i s i o n , also requires t h a t there xust he reasonable cause to t e l l e - * * t h e t business loans w i l l be r e t i r e d from • araings w i t h i n ten rs. This has the desirable e f f e c t o f tightening up the present security *e«:uirowints as interpreted ov«r a period of y«ar». I t i s noted t h a t the b i l l i,rovi:ies an appropriation as the source of funds v i c h t t « Corporation i s t o eaploy i n i t s operation*, rather than, nt present, borrowing of the United States. fund. <n i t s own notes froa t r e Treasury The appropriation i s to be u^ed a a revolving There would be no objection to t h i s p r o v i d i n g the Corporation, as a r e s u l t , vould not be subject to tha Budget %nd &cco -ntlnf A c t . I t i s * uestionable whether a business operation can function e f f i c i e n t l y i f I t i s tubject to the ?aso pre-audit as the usnal fovomassntal o peration. I t sooas c l e a r , however, t h a t such a p r e - a u d i t i s not required since section 3, which authorises the governor to d o t f r a i n e th» necessity f o r ind the character and aaount of the Cor o r a t i o n ' s -4- o b l i g a t i o n s and expenditures and the w s a i r in which they shall be incurred, s l i c ed, paid aad accouated Tor, aakes such determination f i n a l upon a l l o f f i c e r s of tha Government. £s a preliminary to actual operations und*»r the now 4ct, i t is proposed that the present capital stock of th* Corporation hold by the Trossury fee r e t i r e d and that tha funds which tha Cor oration i a now uaing i n t e r e s t f r e e , representing iccusmi ted p r o f i t s , sr.%11 to paid into siccell&neous receipts of V e Treasury. Presuaably the purpose of these two -tsps i s to ?uake i t possible properly to evaluate results i n U-ras of p r o f i t or loss to the Jroveraaeat is * whole. Certainly there i s no neceesity for a wholly owned Oovernoeat corporat i o n to h>*ve c a p i t a l took outstanding, snd the scciwulated p r o f i t s which the Cor or tior. now uses i n t e r e s t free a r t i n f a c t funds belongin? to the Oovernosent of the United s t a t e s . Once tht-se p r e l i a i n a r y steps * r e taken the Corporation could draw on i t s appropriation, paying f o r the use thereof an «j»ount to be calculated on the basic of current average rate pfiid by the Treasury on i t s saarket^fcle obligations. These provisions establish .1 ha s i s by which results nay be accurately "s^eased. The lecouatlag control* under vhiol the Cor oration would ooerate pursuant to the proposed Act ^pp^ar to be Adequate. Onder i-eetion 1(b) i t vo-JLd be required to a a i a t a i n i t * f i n a n c i a l records in ccordance with anerally accepted accounting principles spylisv ble to eeaaeroial corporate transactions which would of ade-u^te cost accounting records. nclurle the maintenance Th«te would forai the basis of -5the 9ruau -1 reports red to be amde to the Con^re&s. The Cor ora- t i o n would a l s o be subject to the 3overo»ent C o r p o r a t i o n C o n t r o l A c t . These ooi t r o l e , together with the reorganisation of the f i n a n c i a l struct\are r e f e r r e d to above, should be s u f f i c i e n t . I t i s noted that two l o a n * p r e s e n t l y outstanding by the Corporation, neaely, the l o a n to the Steep Foe*. I r o n Mines, L t d . , nd the loac to the United Kingdom of Grant 8 r i t i « n and Northern I r e l a n d , as v e i l as the ^crt^a jfefi which originated und*r the sutfiority of The RFC Mortgage Company are proposed to he transferred to the Export-Import Bank i n Washington, to the Secretary o f t e Treasury and to the Housing a ad Horse Finance Administration, -e»p«ctiv«>ly, and the Cor o m t l o a l a to be reimbursed f o r a l l unpaid balance* of the loans plus accrued Interest* These loan* *«re »ade and the ^osrt^a^es were • urcnased under authority vfcish the FFC does not pro osed A c t , category ou have and would not hvn under the Their s d a i n i s t r a t i o n i s not, therefore, i n the same s vfeat itdght be tensed the nora*l operations o f the HFC, Substantial aaounte of ;acney re involved and the annus! i n t e r e s t payments ©re favorably r e f l e c t e d on tno annual f i n a n c i a l statement of the Corporation* The p r o f i t derived therefrox undoubtedly enables the Corporation to curry other programs vhieh, i f considered ?~*par-itely, perhaps would ehov substantial losses, Tt e only ua^tioa involved i s a t r a n s f e r of these three items to other agencies vould ...:ee* to be whether they could be better administered elsewhere. If I t i s bo -6detftra'ned then they should be transferred, otherwise they should remain with the RFC. I n ease of the l a t t e r , separate accounts could be maintained for thee* tfereo items so t h a t , f o r 'tccounting pur. ones, the normal operation* of the Corporation would not to effected thereby. A oompletely new provision is Inclu-'ed i n the pro.osod Act which would require the Corporation to maintain dockets for public inspection of sacfe application and of each loan mad*. The docket would contain a l l pertinent information including the na>u*0 of p* rsons who ( l ) have represented the applicant, (2) h-v® interceded f o r him., or (3) »«ve attempted to influence the Corporation f o r or against ai>«. This provision, o f course, represents a uepurture froia the policies folloved no rami l y by private f i n a n c i a l i n s t i t u t i o n * . I t is c l e a r l y apparent t h a t the purpose of the provision i s to surround the lending of public fundw with -very possible s fogu&nl sgain*t improper i n fluence, While norwally the r e l a t i o n between the lender and the borrower 1* c o n f i d e n t i a l , nevertheless vhen public fum.'•* re involved i t soem* j u s t i f i a b l e t h a t a f u l l Hsclosure be aade of a l l facts surrounding the making or the declining of a l o t a * p p l i e * t i o o . While i t may vork a hardship in c e r t a i n iSOIntod cases the o v e r - s l l net benefit end protection - h i c h the public receives f a r outweighs t h i s consideration. I n a d d i t i o n , there i s .aore l i k e l i h o o d t ist the highest public confidcnoe i n th* operations of the Corporation can be isaiutained by a uch a r e quire aent. Also of importance i n so f a r as maintaining public confidence 1* concurred i s section 4(b)7 which prohibits borrowers, for two years -7a f t o r s borrowing froa the Corporation, from employing o f f i c e r s or e t h e r persons i n the saploy o f the Corporation who hove exercised d i s c r e t i o n i n the granting of loans* ffhile perhaps t h i s aay hare occurred only i n f r e q u e n t l y i n recent years the practice i s c e r t a i n l y one to be discouraged. There hare been instances only recently whore the p u b l i c i t y attendant on such employment by HFC borrowers has rsisod serious doubts i n ths public sdLnd ss to the propriety of the a c t i o n . Section 4(b)7 is a reasonable provision and should hare a salufcory a f f e c t on public confidence i n ths Corporation. Further, and of a t l e a s t equal importance» ths provision w i l l reduce the danger of publls o f f i c i a l s a c t u a l l y osing t h e i r positions f o r s e l f i s h or personal advantage* WHY » e l h 12/21/50 s ' . m a i OF w PWPQ&H) ^USTHUCTIOB FDJAKCF- OWOUATiai ACT »d*,tq1,str«Uon* The Heard of I irectors i s abolished and thops is substituted a governor who i s authorised to appoint two deputy governors. cations f o r loans of $100,000 Appli- or aore aay bo approved only by the governor and i f such action i s taken agains I the reooassendation of the Corporation^ highest reviewing a j t h o r i t y , reasons f o r the governor's action aust ba aado a matter of record* Lending (new provision) powers. Ihe Corporation is authorised to aake loans d i r e c t l y or i n p a r t i c i p a t i o n with osnks i n four broad categoriesi 1* Easiness e n t e r p r i s e s . 2* Financial i n s t i t u t i o n s and i n the case of insurance companies to subscribe f o r or aake loans upon non-assessable pref e r r e d stock* 3* Public agencies. 4* Catastrophe loans* Ho express l i m i t a t i o n la fixed f o r the amount outstanding a t any one time i n the case of business loans* However, i n the case of catastrophe loans a l i m i t a t i o n of 140 a i l l i o n i s f i x e d , f o r public agencies $200 m i l l i o n , and insurance companies £15 m i l l i o n . I n a l l but catastrophe loans there i s a r e t i r e m e n t t h a t c r e d i t must not bo otherwise a v a i l a b l e a t " p r e v a i l i n g rates* ( e x i s t i n g law uses the phrase "on reasonable terms' 1 ) and a l l s e c u r i t i e s and obligations purchased and loans made aust be of such sound valus or so secured as -2reaaonaoly to assure retirement or repayment. I n the case of business loans there must be reasonable csuss to believe t h s t they may be r e t i r e d from earnings w i t h i n tan years, (new provision) Fzospt i n c e r t a i n l i m i t e d areas, maturities on business loans s h a l l be no more than 10 years. I n the case of public loans, the anxious maturity i s f i x e d s t 40 years. I n the case of deferred p a r t i c i p a t i o n s , the Corporation is H a l t e d to 70 per cent of the loan where the e n t i r e amount i s 1100,000 or l a s s , and 60 par cent where over 100,000. Ko s p e c i f i c i n t e r e s t rate i s fixed on loans made by the corporation. I t is provided, however, that the general policy of the Corporation s h a l l be to establish i n t e r e s t rates that w i l l cover a l l expenses of ths Corporation as w e l l as providing f o r losses on loans, sottrfi? (now provision) of the present a u t h o r i t y of the Corporation to borrow on i t s own notes from the Treasury i s t e m i n a t o d . Funds are to be supplied through an appropriation ( t h s amount not yet dote rained) which i s to be used aa a revolving fund. Out of t h i s appropriation also tho Corporation i s r e - quired to pay a l l e x i s t i n g indebtedness t o the Treasury and r e t i r e the c a p i t a l stock presently held by tho 'reaeury and the funds which tho Corporation is now using i n t e r e s t f r e e , representing accumulated p r o f i t s , are to be paid i n t o aiscellaneoue receipts of the Treasury. Annual p a y ments by the Corporation are required to cover costs incurred by ths Government I n supplying funds. The amount i s to be calculated on the basis o f the current average rata paid by the Treasury on i t s Marketable -3obligations. reports to Congress* the Corporation is required to make an annual report t o tbe Congress which i s to include a statement of income and expense f o r major classes of loans and an analysis of accumulated net income. In order t h a t necessary data may be a v a i l a b l e f o r such reports, the Corporat i o n is required to maintain adequate cost accounting records* PybUc i n s g o c t ^ n of jPoqkefrs* ftie Corporation i s required t o m a i n t a i n f o r public inspection a docket of each application and of each loan made and the docket i s to contain a l l pertinent information including the names of persons who ( 1 ) have represented the applicants ( 2 ) have interceded f o r himj o r ( 3 ) have attempted t o influence the Corporation f o r or against him. Transfer of Certain Presently Outstanding loans to other Governmental SHHBu To the * xport-Import «tnk of Washington the loan to the Republic or the Philippines and the loan to the Steep Sock Iron Mines, Ltd* To the Secretary of tbe Treasury the loan to the United Kingdom of Great B r i t a i n and Northern Ireland* To the housing and Home Finance Administrator a l l mortgages which originated under a u t h o r i t y of Jho ^FC Mortgage Company* I n each o f the above instances, the Corporation i s to be reimbursed oy the receiving agency f o r s l l accrued i n t e r e s t * ^d balances of the loans plus Ianc tlons of Federal osenrf. Ilia federal roserve tanks are directed t o set as custodians and f i s c a l agents f o r the Corporation, and the Federal and the Federal reserve ! eserve joard anks, together with other agencies of the Government, are d i r e c t e d , under such conditions as they may prescribe, to aake a v a i l a b l e t o the Corporation such information as they may have r e l a t i n g to applicants and borrowers. WHYielh 12/21/50
