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November 18, 1957

To:

Mr. Eccles

From:

J. Bi. Daiger

Subject:

PROPOSED HOUSING PROGRAM

I think it would be advisable if you were to have
Mr. Vest, who is more or less familiar with the National
Housing Act, draft an amendment to the Federal Reserve Act
that would facilitate the making of repair and modernization
loans by national banks. Repair and modernization constitute
an important source of construction activity and employment.
Accurate estimates on the relationship of repair and
modernization work to the total volume of construction are
difficult to obtain, but the proportion is rather generally put
as somewhere between 20 and 30 per cent of the total, depending
upon whether the volume of new construction at a given time is
relatively large or small. During the present year there has
been a definite holding off of repair and modernization work
because of the rapid increase in labor and material costs.
The operation of Title I of the National Housing Act
was an important factor in stimulating repair and modernization
work from the summer of 1954 to April 1 of this year, when
Title I expired t>y statutory limitation. As you know, the great




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bulk of the financing tinder this title was done by banks, and
their experience was such as to make it evident that this type
of business could be carried on at a reasonable profit, on the
terms authorized under Title I, even without benefit of insurance.
The most important factors of Title I, apart from the
insurance, were (l) the three-year period of amortization and
(2) the discount basis of 5 per cent on which repair and modernization loans were made. The three-year period of payment is in many
instances a practical necessity for the purposes of the borrower;
the 5 per cent discount basis is necessary for the purposes of
the institution in meeting the cost of servicing small monthlyamortized loans.
In the absence of the Federal and State legislation that
made the operation of Title I effective, most banks are precluded
from making three-year instalment loans on a 5 per cent discount
basis. Under the small-loan laws of a number of States, they can
make such loans variously from 12 months to 18 months on a discount
basis of 5 per cent, or even somewhat higher; but if the loan goes
beyond 12 months or 18 months, as the case may be, the usury laws
operate against the 5 per cent discount basis.
For the state banks, this is a local matter, and the
conditions of lending vary among the States. In a substantial
number of cases the state banks have been able to carry on the




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Title I type of business without interruption• The national
banks, on the other hand, are in all cases limited by the State
usury laws.
This is a matter that I discussed at some length early
this year with representatives of the American Bankers Association.

It was evident from that discussion that in this matter

the state banks would regard the enactment of Federal legislation,
affecting national banks, as facilitating the enactment of similar
legislation in those States where the finance companies have more
or less a monopoly of the instalment-financing business*
As a practical means of meeting this situation, and at
the same time making a contribution of some importance to the
stimulation of repair and modernization work, it would be helpful
if national banks were authorized to make three-year instalment
loans up to |2,000 on a 5 per cent discount basis.
The inclusion of such a proposal in the President new
housing program would meet a real need and at the same time dispose of the current agitation for the revival of Title I.