Full text of Federal Reserve Bank of New York Circulars : 6469. Interpretation of Regulation A

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FEDERAL RESERVE BANK
OF N E W YORK

C i r c u l a r N o . 6469
J a n u a r y 20, 1970

[
IN T E R P R E T A T IO N O F REGULATION A
E lig ib ility for D isco u n t of M ortgage Com pany N o te s

To the Member Banks o f the Second Federal R eserve D istrict:

P rinted below is an excerpt from the F ederal R egister of January 15, containing the text
of an interpretation of Regulation A of the Board of Governors of the Federal R eserve System.
The interpretation contains the B oard’s holding that notes meeting the m aturity requirem ents
of Regulation A and issued to finance the tem porary ’’warehousing" of real estate m ortgage
loans a re eligible for discount by R eserve Banks.
Additional copies of this circu lar will be furnished upon request.
Alfred Hayes,
P resident.

Title 12— BANKS AND BANKING
Chapter II— Federal Reserve System
SUBCHAPTER A — BO ARD OF G O V ER N O R S OF
THE FEDERAL RESERVE SYSTEM

[Reg. A]

PART 201— A D V A N C E S A N D D IS ­
CO U N T S BY FEDERAL RESERVE
BANKS
Eligibility for Discount of M o rtga ge
C om p an y Notes
§ 2 0 1 .1 0 9
E lig ib ility f o r d is c o u n t
m o r tg a g e c o m p a n y n o te s .

of

(a) T he question has arisen w hether
notes issued by m ortgage banking com ­
panies to finance th e ir acquisition and
tem porary holding of real estate m o rt­
gages are eligible for discount by R e­
serve Banks.
(b) U nder section 13 of th e Federal
Reserve Act th e Board has auth o rity to
define w hat are "agricultural, indus­
trial, or com m ercial purposes”, w hich is
the sta tu to ry criterion for determ ining
th e eligibility of notes and d rafts for
discount. However, such definition may
n o t include paper “covering merely in ­
vestm ents or issued or draw n for the
purpose of carrying or trad in g in stocks,
bonds, or other investm ent securities”.
(c) The legislative history of section
13 suggests th a t Congress intended to
m ake eligible for discount “any paper
draw n for a legitim ate business purpose
of any k ind” 1 and th a t th e Board, in
determ ining w h at paper is eligible,
should place a “broad and adaptable
1 House Report No. 69, 63d Cong., p. 48.




construction ” 2 upon th e term s in section loans would n o t th erefo re seem to be
13. I t m ay also be noted th a t Congress w ithin th e purpose underlying th e ex ­
apparently considered p aper issued to clusions from eligibility in section 13.
carry investm ent securities as paper
(e) Section 201.3(a) provides th a t a
issued for a “com m ercial purpose”, since negotiable note m a tu rin g in 90 days or
it specifically prohibited the Board from less is n o t eligible for discount if th e
m aking such p aper eligible for discount. proceeds are used “for p erm a n en t or
If “com m ercial” is broad enough to e n ­ fixed investm ents of any kind, such as
compass investm ent banking, it would land, buildings or m achinery, or for any
also seem to include m ortgage banking. oth er fixed cap ital purpose”. However,
(d)
In providing for th e discount ofth e proceeds of a m ortgage com pany’s
com m ercial paper by Reserve Banks, com m ercial p aper are n o t used by it for
Congress obviously intended to facilitate any p erm an en t or fixed cap ital purpose,
the c u rren t financing of agriculture, in ­ b u t only to carry tem porarily an inven­
dustry, and commerce, as opposed to tory of m ortgage loans pending th e ir
long-term investm ent.3 In th e main, “packaging” for sale to p erm a n en t in ­
trad in g in stocks and bonds is in v est­ vestors th a t are usually rec u rren t cu sto ­
m en t-oriented ; m ost securities tra n s ­ mers.
actions do n o t directly affect th e p ro ­
(f) In view of th e foregoing consider­
duction or distribution of goods and ations th e Board concluded th a t notes is­
services. M ortgage banking, on th e other sued to finance such tem porary “w are­
hand, is essential to th e construction in ­ housing” of real estate m ortgage loans
dustry and th u s m ore closely related to are notes issued for an in d u strial or
industry and commerce. A lthough in ­ com m ercial purpose, th a t such m ortgage
vestm ent bankers also perform sim ilar loans do n ot co n stitu te “investm ent se­
functions w ith respect to newly issued curities”, as th a t term is used in section
securities, Congress saw fit to deny eli­ 13, and th a t th e tem p o rary holding of
gibility to all paper issued to finance th e such m ortgages in these circum stances
carrying of securities. Congress did n o t is n ot a p erm a n en t investm ent by th e
distinguish between newly issued and m ortgage banking com pany. Accordingly,
outstanding securities, perhaps covering th e Board held th a t notes having n ot
the larger area in order to m ake certain more th a n 90 days to ru n w hich are is­
th a t th e area of principal concern (i.e., sued to finance th e tem porary holding of
trad in g in outstanding stocks and bonds) m ortgage loans are eligible for discount
was fully included. Speculation was also by Reserve Banks.
a m ajor Congressional concern, b u t
speculation is n o t a m aterial elem ent in (Interprets and applies 12 U.S.C. 343)
m ortgage banking operations. M ortgage
By order of th e B oard of Governors,
December 30, 1969.
2 50 Cong. Rec. 4675 (1913) (remarks of
[ seal I
K e n n et h A. K e n y o n ,
Rep. P h elan ).
D eputy Secretary.
3 50 Cong. Rec. 5012 (1913) (remarks of
Rep. Thompson of O klahom a); 50 Cong. Rec.
4731-32 (1913) (remarks of Rep. Borland).

[P R .

Doc. 70-531; Piled, Jan.
8 :46 a.m.]

14, 1970;