Full text of Circulars of the Reconstruction Finance Corporation : Circular No. 13 (Revised) : Information Regarding Loans to Industry

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CIRCULAR No. 13
(REVISED)
OF THE

RECONSTRUCTION
FINANCE CORPORATION
INFORMATION REGARDING LOANS
TO INDUSTRY

FEBRUARY 1935

UNITED STATF.S
GOVERNMENT PRINTING OFFICE
WASHINGTON: 1935

;._)-._,,t_)

INFORMATION REGARDING LOANS TO INDUSTRY

For the purpose of maintaining and increasing the employment of labor the
Reconstruction Finance Corporation is authorized to make loans, when so
secured as reasonably to assure repayment, to solvent industrial businesses,
directly or in cooperation with Federal Reserve Banks or other banks or lending
institutions or by the purchase of participations in loans, when credit at prevailing bank rates for loans of the character applied for is not otherwise available
at banks.
I. Requirements Imposed by Law
(a) Credit at prevailing bank rates for loans of the character applied for
must not otherwise be available at banks.
(b) The loan must be so secured as reasonably to assure rep~yment.
(c) The loan must mature not later than January 31, 1945.
(d) Such loans may be made only when deemed to offer reasonable assurance of maintaining or increasing the employment of labor.
(e) The applicant must be solvent at the time of disbursement of the loan.
(f) Such other terms, conditions, and restrictions as Reconstruction Finance
Corporation may determine must be complied with.

II. Terms and Conditions

Loans to Industry will be made by the Reconstruction Finance Corporation,
either directly or in cooperation with Federal Reserve Banks or other banks or
lending institutions, or by the purchase of participations in loans, upon the
following terms and conditions, and for the following purposes:
A. Maturities

Such loans shall mature at such time, prior to January 31, 1945, as the
Reconstruction Finance Corporation may in each case determine. A program
of payments will be arranged with a view to the borrower's orderly liquidation
of its debt.
It is contemplated that loans will not be made for a longer term than is
justified by the facts of the particular case. However, the period of time so
determined will be sufficient, insofar as it can be estimated at the time the
loan is granted, to enable the borrower to make plans for the development
of future business without being unnecessarily restricted by a repayment
schedule which would impair the borrower's working capital during the life of
the loan. When loans are primarily to finance capital expenditures, a repayment program up to January 31, 1945, may be considered. For established
industries whose need is principally for shorter term credit, such loans usually
should be repaid within five years or less.
114899°-aa

(1)

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B. Interest Rates

Interest shall be at such rate as may be fixed from time to time by this
Corporation.
C. Purposes

As section 5d of the Reconstruction Finance Corporation Act, as amended,
provides that loans thereunder shall be made for maintaining and increasing
the employment of labor, the Corporation will make industrial loans for the
following purposes:
(a) Loans for Labor and Materials.-The Corporation will give consideration to applications for loans, the proceeds of which will be used for the payment
of labor and the purchase of material incident to the operation of a business.
(b) Loans to Pay Existing Indebtedness and Taxes.-The Corporation will give
consideration to applications for loans where a portion of the proceeds is to be
applied to the payment of taxes and existing indebtedness. Loans may be
considered where a substantial portion of the proceeds is to be used to satisfy
existing indebtedness on a compromise basis that would be satisfactory to the
Corporation, provided that it is shown that the loan is necessary to maintain
the employment of labor, and that the applicant, after the debt adjustment
(which may be made either by compromise settlement in full satisfaction of
the debt, or by partial payment in cash and the issuance of junior obligations
or equity securities), will have sufficient operating assets, and that there is
reasonable assurance of continuous operation.
(c) Loans for the Purchase of Additional Machinery.-The Corporation will
give consideration to applications for loans when the proceeds will be used for
the purchase of additional machinery, provided it is shown that such capital
expenditures will assist in rounding out the production of the plant or balancing
its operations and that such expenditures are economically sound.
(d) Loans for New Enterprises and for the Expansion of Existing Businesses .-The Corporation will consider applications for loans to new industries
or to enable established business concerns to expand into new fields of endeavor,
provided it can be shown that such loans will be economically sound and socially
desirable. Applicants must have substantial equity investment, without giving
consideration to services rendered, patents, goodwill, or similar intangibles, or
to the potential value which will be established if the operations are successful,
so that the funds advanced by this Corporation will be secured as required by
law and will not be subject to the risks incident to and properly borne by equity
investors. The new enterprise must be sufficiently beyond the developmental
or promotional stage that profitable future operations, and therefore continuous
employment of labor, can reasonably be assured. Also, it will be required
that after giving effect to the loan from this Corporation the applicant will have
working capital adequate to assure continuous operation. The collateral value
of the security, the net worth and financial condition of the applicant, and
future earnings prospects will be considered carefully.
(e) Loans to Finance Industrial Construction.-When a loan from this
Corporation is to be used in whole or in part to finance industrial construction,
the Corporation may advance funds for this purpose as the construction pro-

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gresses, provided the initial advances shall be satisfactorily secured by existing
assets of the applicant. Final disbursement would be made on the completion
of the new industrial property free from all liens other than the Reconstruction
Finance Corporation mortgage. In all such cases, it will be necessary to show
that either out of the current assets of the company or out of the proceeds of the
Reconstruction Finance Corporation loans, sufficient funds have been provided
to complete the construction and to provide working capital adequate to insure
continuous operation.
(j) Loans to Oontractors.-In exceptional circumstances, loans may be made
to contractors, provided (1) that satisfactory arrangements have been made
otherwise to finance the entire cost of the project which the contractor has been
engaged to construct, and (2) that the proceeds are to be used for the payment
of labor or the purchase of material while the project is under construction.
An assignment of a contract will not be considered sufficient security for such
loans. Such contracts may be considered as evidence of ability to repay loans
otherwise satisfactorily secured.

It is not the intention of the Corporation to make loans:
(1) Where the collateral offered consists solely or principally of the assignment of unsecured obligations of non-industrial retail customers or consists of
obligations of non-industrial retail customers secured by liens on chattels in
the possession of the customers. However, when an industrial or commercial
concern has acceptable collateral, other than such receivables, of a character
and amount deemed satisfactory to secure a loan, consideration will be given to
the application. The foregoing does not apply to loans to institutions, now or
hereafter established, financing principally the sale of electrical, plumbing or
air-conditioning appliances or equipment or other household appliances, both
urban and rural.
(2) To provide for the operation of any business in receivership. However, applications will be considered for loans contingent upon the termination
of the receivership by a settlement with creditors, or otherwise, so that the
business will be restored to a solvent condition.
(3) To finance imports or exports, except where such imports or exports
are only minor and incidental to the general business conducted.
(4) To finance the development or purchase of new inventions, the cost of
obtaining patents, the expense of infringement suits or any other litigation.

III. Eligibility
Applications for industrial loans will be received from industrial and commerical businesses (including the :fishing industry), whether corporations, partnerships or individµals. It is the view of the Corporation that the purpose of
such loans, as expressed by Congress, i. e. "maintaining and increasing the
employment of labor", necessitates a construction which emphasizes the employment of labor, as in manufacturing concerns, as distinguished from the
purchase of inventories as in commercial business.

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Loans to the ore industries and to managing agencies of farmers' cooperative
mineral rights pools will be made under the provisions of this Corporation's
Circulars Nos. 14 and 16, respectively, and not, generally, under the provisions
of this revised Circular No. 13.
Loans to institutions for the exclusive purpose of :financing the carrying
and orderly marketing of agricultural commodities will be made only under
the provisions of thi~ Corporation's Circular No. 10.
Information regarding loans to institutions :financing principally the sale
of electrical, plumbing or air-conditioning appliances or equipment or other
household appliances, may be obtained from the Corporation upon request.
Loans on real estate which is not owned by and used in connection with
the operation of an industrial or commercial business will be made under the
provisions of this Corporation's Circular No. 18.

IV. Security Requirements
Section 5d of the Reconstruction Finance Corporation Act, as amended,
requires that all loans made thereunder shall be "so secured as reasonably to
assure repayment of the loans." It is the opinion of the Corporation that the
amendment was intended to allow greater latitude, as to what shall constitute
security, than the words "adequate security" as used in Section 5d prior to
January 31, 1935, and contemplates that loans made thereunder shall be secured
by collateral of character and amount which, taken into consideration with other
factors such as the character and ability of the management and prospective
earnings, will afford reasonable assurance of repayment.
The security may consist of one or more of the following: A first mortgage
on real estate, plant and equipment, an assignment of warehouse receipts for
marketable merchandise stored in satisfactory warehouses, a first mortgage on
chattels or an assignment of current receivables (accounts, notes or trade acceptances); but such loans generally will not be made on the sole security of unsecured receivables, or of receivables representing non-industrial instalment
purchases, or of equipment or other chattels not represented by warehouse
receipts. The applicant may offer, as additional collateral, a first lien on any
other assets of sound value.
The Corporation usually ,vill not consider as satisfactory primary security
the following: second mortgages, shares of stock of corporate applicants or shares
of stock without readily ascertainable market value, franchises, patents, goodwill, or foreign securities. An assignment of orders will not constitute satisfactory primary security; however, such orders may be important to establish
the ability of the applicant to repay the loan. A pledge or mortgage of inventories generally will not be regarded as satisfactory collateral, unless stored
in a bonded or otherwise acceptable warehouse or unless the applicable state law
provides for creating and maintaining a satisfactory lien upon inventory not so
warehoused.
V. Solvency
Section 5 (d) of the Reconstruction Finance Corporation Act, as amended,
provides that such loans shall be made only when 1 in the opinion of tlie ~oi:trd

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of Directors of the Corporation, the applicant is solvent. If the applicant is
not solvent at the time of making application, the application should indicate
the manner in which the applicant will become solvent prior to the time of disbursement of the proposed loan.
VI. Compliance with National Recovery Administration Codes
Each applicant must execute a certificate that he is complying with and will
continue to comply with each code of fair competition to which he is subject,
and if engaged in any trade or industry for which there is no approved code of
fair competition then, as to such trade or industry, that he has become a party
to and is complying with and will continue to comply with an agreement with
the President under Section 4 (a) of the National Industrial Recovery Act.
In order to comply with Executive Order No. 6646 of March 14, 1934, each
applicant must agree that all contracts and purchase orders by the applicant or
by his general contractor, if any, for articles, materials, supplies or services to
be acquired in whole or in part with any of the proceeds of the loan, shall require,
before performance or delivery, or entrance into any subcontracts or contracts,
a certificate as hereinafter described, signed by the party awarded such contract,
purchase order, or subcontract, and by all concerns supplying, directly or indirectly, the aforesaid articles, materials, supplies, or services. Such certificate
shall state that the party signing the certificate is complying with and will
continue to comply with each approved code of fair competition to which he is
subject, and if engaged in any trade or industry for which there is no approved
code of fair competition, then stating that as to such trade or industry, he has
become a party to and is complying with and will continue ·to comply with an
agreement with the President under Section 4 (a) of the National Industrial
Recovery Act. In the event that invitations for bids are issued by the applicant
or by his general contractor, if any, for articles, materials, supplies or services
to be acquired in whole or in part with any of the proceeds of the loan, such
invitations shall contain a provision requiring the bid to contain such a certificate by the bidder, and an agreement by the bidder to obtain such a certificate
from all concerns supplying directly or indirectly, the aforementioned articles,
materials, supplies, or services.
In addition to the foregoing, certificates of compliance executed by the
applicant and aforementioned parties must contain a provision that all other
conditions and requirements of Executive Order 6646 are being and will be
complied with. Each applicant must give the Corporation such proof of his
fulfillment of his agreement as it may require.
VII. Charges, Commissions, Bonuses, Fees, Etc.
Payment of bonuses, fees, or commissions for the purpose of, or in connection with, obtaining loans is prohibited. However, the borrower, subject to the
prior approval of the Corporation, may be allowed to pay the actual reasonable
costs incurred in the making of the loan. Such charges may include reasonable
compensation for services rendered by attorneys, appraisers, accountants, etc.,
but not in any event for alleged services in connection with the presentation of

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the application to the Corporation. Such charges must be fully disclosed. A
fee based upon a percentage of the loan will be objected to, as also will fees or
charges made contingent upon the obtaining of the loan. Applicants will be
required to furnish satisfactory proof in the application that no bonus, fee or
commission has been or will be paid, and that no compensation, other than
reasonable compensation for services required in making the loan, fully disclosed
and itemized, has been or will be paid.
VIII. Salaries and Dividends
The applicant must agree that, so long as any portion of the loan remains
unpaid, it will not pay any salaries which are not deemed by this Corporation
to be reasonable.
So long as any portion of the loan remains outstanding, no dividends may
be paid by any corporate applicant nor any distribution (except reasonable
compensation for services) made by partnership or individual applicants,
without the consent of this Corporation.
IX. Audits and Appraisals
An independent audit of the applicant and an appraisal of plant and equipment, both satisfactory to this Corporation and made as of a date not more
than 6 months preceding the date of filing of the application, may be required.
However, independent audits may not be required in the case of loans of
$25,000 or less when the applicant furnishes satisfactory sworn financial
statements. The loan agencies of this Corporation, in connection with preliminary applications, do not require formal audits or appraisals.
X. Loans in Cooperation with Banks or Other Lending Institutions and
Purchases of Participations in Loans
The Corporation will receive applications from Federal Reserve Banks or
other banks for the purchase by the Corporation of participations in loans of the
character described in this Circular made by such banks and will make such
loans in cooperation with Federal Reserve Banks, banks, or other lending institutions, when such loans are for the purpose and in accordance with the terms
and conditions set forth in this Circular.
The provision for this purchase of participations is interpreted by the
Corporation to allow Federal Reserve Banks or other banks to complete loans
in their own name to qualified industrial borrowers so that the normal relationship of banker and customer will be maintained. The lending bank may feel
that the loan desired is, for one reason or another, too large for the bank to carry
and may desire that this Corporation participate in the risk. Provided any
such loan is made after consideration by this Corporation of the purchase of a
participation therein and is in accordance with the terms and conditions set
forth in this Circular, this Corporation has authority to purchase, or to make
an agreement to purchase if requested to do so within a specified time, a participation in such loan from the lending bank.

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The Comptroller of the Currency has ruled that the Act of Congress of
June 19, 1934, relating to industrial loans (which Act was amended by the act of
January 31, 1935), was intended to expand the scope of the lending power of
national banks so as to permit a national bank to make a loan under said Act
which exceeds or departs from the restrictive provisions of the United States
Revised Statutes, section 5200, as amended, and the Federal Reserve Act,
section 24, provided that the national bank has obtained a commitment from
the Reconstruction Finance Corporation or a Federal Reserve Bank to take,
within a specified period, a portion of said loan so that the net amount of the
national bank's participation, after giving effect to the commitment, would be
within the limitations imposed by the aforesaid restrictive provisions.
The Corporation will also cooperate with Federal Reserve Banks or other
banks or lending institutions in making. such loans; for instance, by making a
loan directly.to the borrower at the same time that another loan is made by the
bank or other lending institution, or by other mutually satisfactory arrangements which will bring about cooperation between existing financial institutions and the Corporation in lending money.
The Corporation invites the cooperation of banks in making such loans,
and it is expected that banks or other lending institutions will participate in the
program outlined herein, in the hope that such bank or other lending institution
will later take the entire loan, when conditions and the credit risk justify.
Further information concerning such agreements between this Corporation
and the lending bank may be obtained from this Corporation's Circular No. 15.

XI. Information to be Filed and Method of Filing
The proper preliminary application forms and formal application forms
may be obtained from the Loan Agency of the Reconstruction Finance Corporation serving the district in which the applicant is located. (See list of such
Loan Agencies below and map showing Loan Agency districts on page 8.)
Preliminary application forms requiring a minimum amount of information,
and without audit or appraisals, will be considered by the Loan Agencies in
order that applicants may be spared the trouble and expense of filing a formal
application where clearly not warranted by the circumstances.
Applications should be filed with the Loan Agency serving applicant's
district. No application will be received directly at the Washington office of
the Corporation.
All requests for information should be directed to the local Loan Agency
of the Corporation serving applicant's district and not to the Washington office.
Each Loan Agency of the Corporation will, when requested, assist and
advise with applicants in determining their eligibility and in the preparation of
applications; provided, however, that any such assistance, advice or suggestions by such Agencies shall in no sense be considered as a commitment of the
Reconstruction Finance Corporation to make the loan.

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Locations of Local Loan Agencies of Reconstruction Finance Corporation

(The territory served by each Loan Agency is indicated on the map on
page 8 of this Circular.)
Omaha, Nebr.
Houston, Tex.
Atlanta, Ga.
Philadelphia, Pa.
Jacksonville, Fla.
Birmingham, Ala.
Portland, Oreg.
Kansas City, Mo.
Boston, Mass.
Richmond, Va.
Little Rock, Ark.
Charlotte, N. C.
Salt Lake City, Utah.
Los Angeles, Calif.
Chicago, Ill.
San Antonio, Tex.
Louisville, Ky.
Cleveland, Ohio.
San Francisco, Calif.
Minneapolis, Minn.
Dallas, Tex.
Seattle, Wash.
Nashville, Tenn.
Denver, Colo.
Spokane, Wash.
New Orleans, La.
Detroit, Mich.
St. Louis, Mo.
New York, N. Y.
El Paso, Tex.
Oklahoma City, Okla.
Helena, Mont.
XIII. Acts of Congress Applicable to Loans of the Character Herein Described

The following sections of the Reconstruction Finance Corporation Act, as
amended, applicable to such loans, are quoted for the information of prospective borrowers:
SEC. 5d. For the purpose of maintaining and increasing the employment of labor, when
credit at prevailing bank rates for the character of loans applied for is not otherwise available
at banks, the Corporation is authorized and empowered to make loans to any industrial or
commercial business which shall include the fishing industry, and to any institution, now or
hereafter established, financing principally the sale of electrical, plumbing, or air-conditioning
appliances, or equipment or other household appliances, both urban and rural. Such loans
shall, in the opinion of the board of directors of the Corporation, be so secured as reasonably
to assure repayment of the loans, may be made directly, or in cooperation with banks or other
lending institutions, or by the purchase of participations, shall mature not later than January
31, 1945, shall be made only when deemed to offer reasonable assurance of continued or
increased employment of labor, shall be made only when, in the opinion of the board of
directors of the Corporation, the borrower is solvent, shall not exceed $300,000,000 in aggregate amount at any one time outstanding, and shall be subject to such terms, conditions, and
restrictions as the board of directors of the Corporation may determine.
The power to make loans given herein shall terminate on January 31, 1937, or on such
earlier date as the President shall by proclamation fix; but no provision of law terminating
any of the functions of the Corporation shall be construed to prohibit disbursement of funds
on loans and commitments, or agreements to make loans, made under this section prior to
January 31, 1937, or such earlier date.

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The following sections of the Reconstruction Finance Corporation Act, as
amended, are applicable to loans under section 5d of the Reconstruction Finance
Corporation Act, as amended:
SEC. 16. (a) Whoever makes any statement knowing it to be false, or whoever willfully
ov.ervalues any security, for the purpose of obtaining for himself or for any applicant any
loan, or extension thereof by renewal, deferment of action, or otherwise, or the acceptance,
release, or substitution of security therefor, or for the purpose of influencing in any way the
action of the corporation, or for the purpose of obtaining money, property, or anything of

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value, under this Act, shall be punished by a fine of not more than $5,000 or by imprisonment
for not more than two years, or both.
(b) Whoever (1) falsely makes, forges, or counterfeits any note, debenture, bond, or
other obligation, or coupon, in imitation of or purporting to be a note, debenture, bond,
or other obligation, or coupon issued by the corporation, or (2) passes, utters or publishes, or
attempts to pass, utter or publish, any false, forged or counterfeited note, debenture, bond,
or other obligation, or coupon, purporting to have been issued by the corporation, knowing
the same to be false, forged or counterfeited, or (3) falsely alters any note, debenture, bond,
or other obligation, or coupon, issued or purporting to have been issued by the corporation,
or (4), passes, utters or publishes, or attempts to pass, utter or publish, as true any falsely
altered or spurious note, debenture, bond, or other obligation, or coupon, issued or purporting
to have been issued by the corporation, knowing the same to be falsely altered or spurious,
or any person who willfully violates any other provision of this Act, shall be punished by a
fine of not more than $10,000 or by imprisonment for not more than five years, or both.

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(e) The provisions of sections 112, 113, 114, 115, 116, and 117 of the Criminal Code of
the United States (U. S. C., title 18, ch. 5, secs. 202 to 207, inclusive) insofar as applicable,
are extended to apply to contracts or agreements with the corporation under this Act, which
for the purposes hereof shall be held to include loans, advances, discounts, and rediscounts;
extensions and renewals thereof; and acceptances, releases, and substitutions of security
therefor.

The following section of Public Act No. 35, Seventy-third Congress, is
applicable to loans referred to in this circular:
SEc. 4. The Reconstruction Finance Corporation shall not make, renew, or extend any
loan under the Reconstruction Finance Corporation Act, as amended, or under the Emergency Relief and Construction Act of 1932, (1) if at the time of making, renewing, or extending
such loan any officer, director, or employee of the applicant is receiving compensation at a
rate in excess of what appears reasonable to the Reconstruction Finance Corporation, and
(2) unless at such time the applicant agrees to the satisfaction of the Corporation not to
increase the compensation of any of its officers, directors, or employees to any amount in
excess of what appears reasonable to the Reconstruction Finance Corporation while such
loan is outstanding and unpaid. For the purposes of this section the term '·compensation"
includes any salary, fee, bonus, commission, or other payment, direct or indirect, in money
or otherwise for personal services.

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