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FEDERAL RESERVE BANK
OF NEW YORK
T Circular N o. 3 8 0 1 "I
L December 27, 1951 J
.

REAL ESTATE LOANS

Amendment No. 8 to Regulation X, Real Estate Credit, of the Board of Governors
of the Federal Reserve System, Effective December 3 , 1951
1
Revised Paragraph 5 of Bulletin No. 4 Loans on Real E t t ,
,
sae
of National Voluntary Credit Restraint Committee
To all Persons E ngaged in the Business o f E xtend in g Heal E sta te Credit
in the Second Federal Reserve D istrict:

Amendment No. 8 to Regulation X
The B oard o f G overnors o f the F ederal R eserve System has adopted Am endment No. 8 to
R egulation X , effective Decem ber 31, 1951. F ollow in g is the text o f a statement announcing
the amendment, released b y the B oa rd fo r publication D ecem ber 28,1951:
The Board of Governors of the Federal Reserve System announced today an amendment to Regula­
tion X , Real Estate Credit, to exempt extensions of credit in connection with the leasing of nonresidential
properties from the down payment and maturity requirements of the regulation. Concurrently, the
National Voluntary Credit Restraint Committee issued a revision of its Bulletin No. 4 concerning loans
on real estate to include a paragraph relating to such leasing arrangements where they are used as sub­
stitutes for mortgage financing. Leases on new residential construction are not affected by either the
amendment to Regulation X or the revision in the Voluntary Credit Restraint bulletin.
In exempting nonresidential leases on new construction from Regulation X , the Board of Governors
gave consideration to the fact that transactions of this particular kind tend to be specialized in character
and to represent but a relatively small portion o f aggregate financing. It is believed that such leasing
arrangements, particularly sale-lease-back arrangements, may be effectively restricted through the
Voluntary Credit Restraint Program, which will call for a screening as to the purpose of any such
contemplated credit extensions. I f subsequently it becomes evident that an excessive increase in new
nonresidential construction has occurred through abnormal employment of nonresidential leasing
arrangements o f the above type, consideration would be given to restoring nonresidential leases to
coverage by Regulation X .
Credit extended in connection with certain types of nonresidential leases continues to be affected
by the regulation. This is described in a footnote to the nonresidential leasing amendment and includes
cases where there is borrowing to finance nonresidential construction on leased land and cases where
nonresidential leases are used as collateral for loans.
In connection with new residential construction, lenders and builders should note the statutory
provisions regulating certain kinds o f leasing arrangements. In this respect, the Defense Production
Act, as amended, defines “ credit” as including, among other things, “ any rental-purchase contract, or
any contract for the bailment, leasing, or other use of property under which the bailee, lessee, or user
has the option o f becoming the owner thereof, obligates himself to pay as compensation a sum substan­
tially equivalent to or in excess o f the value thereof, or has the right to have all or part of the payments
required by such contract applied to the purchase price of such property or similar property; any
option, demand, lien, pledge, or similar claim against, or for the delivery of, property or money; any
purchase, discount, or other acquisition of, or any credit under the security of, any obligation or claim




arising out o f any o f the foregoing; and any transaction or series of transactions having a similar
purpose or effect.” This definition o f credit also has been incorporated in Regulation X .

A cop y o f Am endm ent No. 8 to R egulation X is enclosed.

Revised Paragraph 5 o f Bulletin No. 4
F ollow in g is the text o f the revised pa ra gra p h (5 ) o f Bulletin No. 4 o f the National
V olu n tary Credit R estraint Committee re fe rre d to in the above statement o f the B oa rd o f
G overnors :
5.
Leasing arrangements.— The Committee also urges financing institutions to recognize that leasing
arrangements sometimes are used as substitutes for mortgage financing and therefore come within the
Program and should be screened as to purpose. This principle should apply to existing construction of
all types and should also apply to new construction of commercial or industrial property, since leasing
arrangements involving commercial or industrial property are no longer subject to Regulation X . Some
examples o f leasing arrangements which may be used as substitutes for mortgage credit and where,
if this is the ease, the above principle (i.e., screening as to purpose) should apply are sale-lease-back
arrangements, long-term leases which may be renewed for a nominal rental, and leases in which the
lessee has the right to have rental payments applied to the purchase price in a subsequent exercise of
an option to buy the leased property.

F o r you r convenience, we have reprinted on the follow in g page the text o f Bulletin No. 4,
as revised, which includes the new paragraph 5.
A dd ition al copies o f this circular and o f Amendment No. 8 to R egulation X w ill be
furnished upon request.




A

llan

S

proul,

President.

BULLETIN NO. 4 (REVISED DECEMBER 3 , 1951) OF NATIONAL
1
VOL UNTARY CREDIT RESTRAINT COMMITTEE
LOANS O N REAL ESTATE
Real estate credit transactions governed by Regulation X , which covers the permanent financing
of most new construction and major additions or improvements to existing structures, are not within
the area of influence of this voluntary Program. Neither does the Program apply to F H A or V A loans
or to other loans guaranteed or insured or authorized as to purpose by an agency of the United States
Government. The Program does apply, however, to all other real estate credit transactions. Financing
institutions extending sucli credit are urged to observe the principles and the spirit of the Program.
1. Loans on residential property (1 to 4 family units).— The Committee has been informed that
most financing institutions are following conservative lending policies on existing residential properties
(1 to 4 family units). The Committee urges all financing institutions to follow such policies and in no
case to make a loan on existing property in an amount which would cause the total amount o f credit
outstanding (primary and all other credit combined) with respect to the property or with respect to the
transaction to exceed the limit which Regulation X imposes as to new construction or a limit of 667^
per cent of the fair value1 o f the property, whichever of such limits is the greater.2
2. Loans on agricultural property.— While the Committee recognizes that in some instances a loan
on agricultural property may be in effect a loan on residential property, the Committee feels that
normally such a loan falls in the category of a loan on commercial property (see section 3 below), and
the lender should be guided by the recommendations of that section as to over-all credit limits and
purposes.
3. Loans on residential property (more than 4 family units) and on commercial property.— Loans
on residential property (more than 4 family units) and loans on commercial property, such as office
buildings, stores, hotels, motels, motor courts, restaurants, etc., shoidd be screened as to purpose and
the loan shoidd not be made unless it is in harmony with the principles o f the Program. I f the loan is
to be made in connection with a sale of commercial or residential property a determination by the
financing institution that the sale and the sale price are bona fide may constitute a sufficient screening
of the loan. The Committee conceives that it is not the function of the Voluntary Credit Restraint
Program to make the transfer o f real estate impossible or impracticable, but rather to reduce inflation­
ary pressures by limiting the amount of additional credit created in the process of real estate transfer.
Financing institutions are urjred to limit a loan, on any type of property described in this section,
whether or not a sale is involved, to an amount which would not cause the total amount o f credit out­
standing with respect to the property or with respect to the transaction3 to exceed 66 2z per cent of the
/
fair value o f the property. Also, the Committee urges that financing institutions require an appro­
priate and substantial amortization of principal.
The Committee recognizes that hardship cases may arise where a 66^ per cent loan limitation
would not be sound or equitable. Such cases would include a loan to finance the sale of property to
close an estate or to pay estate taxes, the refinancing of a maturing mortgage, or the sale o f property of
a bankrupt company. The Committee makes no recommendation in such cases.
4. Loans on industrial property.— Loans on industrial property should be screened as to purpose
whether or not the loan is to be made in connection with a sale of real property. In this instance, how­
ever, there appears to be no need for a percentage limitation on the amount of the loan, since in the
industrial field mortgage security usually is merely one of the factors considered by the lender in deter­
mining whether to make the loan and often bears comparatively little relation to the amount of the loan.
5. Leasing arrangements.— The Committee also urges financing institutions to recognize that leasing
arrangements sometimes are used as substitutes for mortgage financing and therefore come within the
Program and should be screened as to purpose. This principle should apply to existing construction of
all types and should also apply to new construction o f commercial or industrial property, since leasing
arrangements involving commercial or industrial property are no longer subject to Regulation X . Some
examples o f leasing arrangements which may be used as substitutes for mortgage credit and where,
if this is the case, the above principle (i.e., screening as to purpose) should apply are sale-lease-back
arrangements, long-term leases which may be renewed for a nominal rental, and leases in which the
lessee has the right to have rental payments applied to the purchase price in a subsequent exercise of
an option to buy the leased property.
1 W herever used in this bulletin, “ fa ir va lu e” means:
1. I f the loan is to be made to finance the purchase o f real p rop erty: The bona fide sale price, or the appraised
value o f the property securing the loan, whichever is low er;
2. In all other cases: The appraised value o f the property securing the loan.
The appraised value should be determined in accordance with sound and established practice in the community. A good
definition o f “ bona fide sale p r ic e ” is given in section 2 (j) o f Regulation X .
2 A s a w orking rule, the above statement may be interpreted as meaning that where the fa ir value o f the property
is $16,700 or less the limits o f Regulation X would apply and where such fa ir value is more than $16,700 the lim it o f
662/3 per cent would apply.
3 I f the fa cts are n ot already known, the financing institution presumably w ill want to request the borrower to
furnish inform ation as to any other indebtedness or credit existing or contem plated in connection w ith the transaction.




REAL ESTATE CREDIT
AMENDMENT NO. 8 TO REGULATION X
ISSUED BY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Regulation X is hereby amended as follows, effective December
31, 1951:
1. Add the following new subsection (o) to section 5:
(o) Nonresidential Leases.— The prohibitions of section 4 of
this regulation, except subsection 4 (a) (5), shall not apply to any
extension o f real estate construction credit which is a contract for
the leasing of nonresidential property.1
83
18 a Leases exempt under this subsection shall be considered “ subject t o ”
the regulation fo r purposes o f subsection 4 ( a ) ( 5 ) . Moreover, even though
contracts fo r the leasing o f nonresidential property are exempt to the extent
provided in subsection ( o ) above, in cases where there is borrowing to finance
nonresidential construction on leased land, and under the contract for leasing
the lessee has the option o f becoming the owner o f the land, or has the right
to have all or part o f the payments required by the contract subsequently
applied to a purchase o f the land, or obligates himself to pay a sum substan­
tially equivalent to or in excess o f the value o f the land, the amount o f credit
outstanding b y reason o f the lease must be taken into account in determining
the amount o f additional credit which may be extended to the lessee to finance
the construction. In such cases, the amount o f credit outstanding b y reason
o f the lease shall be considered to be the appraised value o f the land less
any amounts which have been paid and which are applicable to the purchase
o f the land.




P X IN T X D

IN

NEW

YORK


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102