The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
126
BOARD OF GOVERNORS
OF" THE
FEDERAL RESERVE SYSTEM
S-572.
WASHINGTON
ADDRESS OrriCIAL CORRESPONDENCE
TO THE BOARD
October 22, 1942.
•'
Dear Sir:
The Board has received frorri the War Department a memorandurn dated October 19, 1942, signed by Lieutenant Colonel
Paul Cleveland, relating to the inclusion in loan agreements of
provisions relating to the acceptance
o~
advance payments and
Government loa.ns by borrowers whose loans have been guaranteed;
and a copy of the War Department's memorandum is enclosed here-
•
with.
It will be noted that this memorandum supplements and
modifies the War Department's memorandum of September 7, 1942,
a copy of which was enclosed with the Board's letter of September 12, 1942.
Very truly· yours,
~~'~
L. P. Bethea,
Assistant Secretary.
Enclosure
TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS
..
:127
cc
..
p
y
S-572-a
>·&.T< LEPJ.i.RTi.v.E!.'iT
3i;F:V l CE.S J.., SUPI-'LY
.il-.Blil:l\J.'l'ON, L.. C•
hi.ADG,_~JiillT1· 1=\S,
SPB:rJ
....
October 19, 1942
;.;..E..-.Oh'JJ."'D~i.l:!:
SUNECT:
•
..
.i!·::.·om tte 1:,'•w .Je:part:·;ent to the Board of Governors of
the .E'ederal Reserv(-' ·system.
Revie;; of guert.ntee ~mel let'ln a.g:reemE>nts; -provisions
prohH.i ting the borro>"er rrom undertaking addi. ticnal
'ft!ar contracts, trcm consenting to the modificr-!ticn of'
~·.'ar O:!ontracts, and from e:.ceepting ad·:ance payments.
1. RefeJ·ence is l':ade to the '.ia::- f:E>partm~nt' 3 mer.;o. :r.·anclur.t of .Septel"l.ber 7, lS42 or! tho above subject.
2. !'arc.graph 4 ..,f the abov0
hereby chan€•ed to read as i'ollo~··s:
mention~=d
r:emorandum is
"4. As to aclvcmce pa:{ments, the foll01.'!ina. requireare prescribed by the {ar t•epartment, end tile Fed•.~ral
Reserve B::mks are rnc:u~sted to se.:> that all loa.n agrel!'>mE'::r.ts
a.nd othnr similar .Lnstrulllflnts b.eroa1'ter submitted to the War
Departl!l~nt arf! in contormi ty ~d th the8e :reqni!'8fi!Pllts:
~ents
against thP ac~eptance ·
loano in rc:.sp·'?ct of
1:,iar production cont·racts •vtll b:::- r- ccepta1ll<-· t.o thf., ~:ar
Departr,,ent only if' they nrP ;rord·"<.l su'bstantially as
follows:
"a.
F~estrictions
oi' advance payrr.ents or
•
..
..
•
~\OVornmc:•t
"' l. ·n.e borro·.·mr will not, t-;i th out
thP. prior •:rritton co'l.sf"n.t of th(' financin£ institution, accept r:.n:r edv(mce payments or governI:l·~·nt loans; provided, however, that vlithout such
<'onsAnt the bcrro'·'r·~r may acct':nt advance 'Payments
1"ro1;1 the gOVf)l".Cllllent or goverr.ment loans in respect
of Har nroduction contracts if (1) thA entirE\ credit
provided tor h~reunder is at the ti:r.-:8 boing used
anc' the financing institution bes not, a1't0r rMsonacJ.r-- cpportuni ty to do so, sup:11ied additiona.l D8C0Ssary c:rodi t to tb' borro~·.rer on substantially the
saw:> t~n!'ls and conditions as are provincd in thls
Agrc~ment ( othsr than chang0s l~it~dA necessary by tho
e.djustment -1f th" f>Prcr·ntage of guarantn<> as provided in Section 1~) { ) or thA guarantee agreem8nt) ,
•
128
-2and if, in addition, (2) such advance payments
or loans have been approved by a Financial
Contracting Officer assigned to the Servi cas of
Supply, \ 'ashington, D.c., as being necessary
under all the circumstances.'
"b. When the above clause is used in loan
agreements the-Federal Reserve Banks shall, if requested
by the Financing Institution, insert a special condition
in the Gu arontee Agreement reading substantially as follows:
.,
•
-·
II
••
.:·
"' If at any time the entire aggregate
principal amount of the borrower's indebtedness incurred for moneys borrowed (includine funded debt
but excluding moneys advanced on Defense Plant Corporo.tion leases or borrowod upon Erlorguncy Plant
Facilities Contro.cts), plus advance payments and
loans, if any, from tho United States, shall excoed 0
, then upon written request of
the Finnn cing Institution from time to tire 1 the
porc<mto.ge of lof'..n specifiud in Section 1 will be
adjusted to such percentage us the Guarantor and
tho Finuncing Institution mutually consider fair
and equitable under tho circumsto.ncos, and if the
Guarn.ntor o.r-1d the Financing Insti tut~.on cunnot
agree upon such pyrcont~go within thirty (30) days
after each such ~equost, and such ~ggrocate ~mount
of indebtedness and advance payments and loans shall
exceed $
1 then such percentage of guc.ranteo
shr:..ll be
%~ and, if such n.ggr0 gc. to amount sha 11
excood $ - - ,
such porce11tago of gu.arontee shall
be
%, and i f su oh aggrogn.te E·.mount shall exceed
$
, such porcontugo of guo.rc.ntoo shc.ll be 100%.
Any such higher porcontuge of guG.runteo shall continue
in effect notwi thsto.nding any subsequent reduction in
the u.ggrogn.to amount of such indebtrJdness o.nd advo.nce
payments Md loans; n.nd in thd event of a prior adjustment, pursuant to section 5, of tho porcontugo of loan
specified in section 1, tho !lbove percentages shr~ll be
increased proportionr,toly to rofloot such adju~tmont •
.
129
-3-
••
•·
"'Unless otherwise agreed by the Guarentor
and the F'ine.ncing Institution, the rercentage of guarantee fee to be paid b:,r the Financing Institution in case
of an adjustment under this subsection shall be 3Q; of
the loan interest rate on the portion of the loan which
the War Departr1ent is obligated to purchase if the percentage of the Guarantee is in excess of 90,~ and less
than 95;~; 35/s of the loan interest rate on the portion
of the loan which the Har Department is oblir;ated to
purchase if the percentage of the Luarantee is 95;~ and
less than 100)~. and 4o;; of the loan interest rate if
the guarantee is increased to 100~-~.
"'For the purpose of increasing the protection of the financing institution under this subsection the proceeds of e.ny security or of any right
or priority (from whatever source realized) accruing
in respect of any advance payments or loans by the
United States shall be shared by the United Stutes
ratably with the loan guaranteed hereunder; except that
the foregoing shall not apply to any pledge, purchase
money mortgage, or lien taken by the Uni t6d States
upon the bulanco of such advance payments or loan, and
upon specifie materials, work in proct:ss, finished
goods or facilities upon which such advance payments
or loans have b<',en expended."
11 c.
H.estrictions against incurring additional
indebtedness-should always contain an upJ:-'ropriat•.:: exception
in favor of advance paymf:nts or governmLnt lo~::.ns in respect
of wa.r production contracts.
·
-·
•
nd. Restrictions against encumbrances of the
borrower's nss<:;ts should always contnin an appropriate exception
in favor of liens or encumbrru1ccs arising in connection with
advance payments or gov~rruncnt loans in respect of wnr production
contracts.
"e, Th~ r:ar Departine:nt has no objection to
a loan agreement provision restricting the acceptance by
the borrowE;r of nd\ro.ncE; po.ymonts on subcontracts.-"
~
'
.
130
-4-
..
• ·1
3. l:'or the bf'ormation of thf-' Federal Reserve Banks
and financing institutions, it may be pointf'd out t:r.at at th•·
present time there nre only £'our Einancial Contracting Of':ticsrs,
one of wbom L; the Dlr<'ctor of the .fi'tsca.l Division, Services of
Supply, Washington, D.C. , 8nd th0 oth:'r tl'.re·? of whom ar'' assigned
to the Advance Payment and Loan Branch, Fiscr;.l Division, Services ·
o:f' Supply, Washington, D. c.
4.
Federal
:Res~rv2
K~indly
tra.nSJni t the foregoing to all of tl1e
Banl::s.
V;:Ar Departmnnt of the United States
By:
(Signed)
PE>.ul C1Pvelanc1.
Paul Cleveland
Lt. Colon~l, A. U. S.
Chief, Loan Section
AdvancP Paym"'nt and Loan Branch
-·
....
•
@FedFRASER