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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;