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F Re ed eral OF serve Ba n k DALLAS D allas, T exas, June 15, 1951 T o all F in a n cin g In stitu tion s in th e E lev en th F ederal R eserve D is tr ic t: T h e te x t o f B u lletin N o. 4 o f th e n ation al V o lu n ta ry C red it R e stra in t C om m ittee, w h ich fo llo w s , is b ein g fo rw a rd e d to y o u and all o th e r financing' in stitu tion s in this d is trict at its requ est. Y o u rs v e r y tru ly, R . R . G IL B E R T P resid en t B U L L E T IN N O . 4 O F T H E N A T IO N A L V O L U N T A R Y C R E D IT R E S T R A IN T C O M M IT T E E June 14, 1951 L O A N S ON R E A L E S T A T E T h e V o lu n ta ry C red it R estra in t C om m ittee, at its m eetin g on June 6, 1951, discussed the a pp lica tion o f th e p rin cip les o f th e v olu n tary cre d it re stra in t p ro g ra m in th e field o f real estate cred it and a dop ted th e fo llo w in g s ta te m e n t: R eal estate cred it tran saction s gov ern ed b y R egu la tion X , w h ich cov ers th e perm a nent fin ancin g o f m ost n ew con stru ction and m a jo r a ddition s or im provem en ts to e x istin g stru ctu res, are n ot n orm a lly w ith in th e area o f influence o f th is v olu n ta ry p rogram . N eith er does th e p rog ra m a p p ly to F H A o r V A loans o r to o th e r loans gu aran teed or insured or a u th orized as to p u rp ose b y an a g e n cy o f th e U nited S tates G overn m en t. Th e p rog ra m does apply, h ow ever, to all o th e r real estate cre d it tran saction s. F in a n cin g in sti tu tion s ex ten d in g su ch cred it are u rg ed to ob se rv e th e principles and th e sp irit o f the p rogram . F o r th e gu idan ce o f fin ancin g in stitu tion s in g ra n tin g real estate cre d it encom passed b y th e volu n ta ry p rogra m , th e n ation al C om m ittee m akes th e fo llo w in g re co m m e n d a tio n s:1 1. L oa n s on residen tial p ro p e rty (1 - to 4 -fa m ily u n its ). T h e C om m ittee has been in fo rm ed th a t m ost fin ancin g in stitu tion s are fo llo w in g con serv a tiv e lendingp olicies on ex istin g residen tial p rop erties (1- to 4 -fa m ily u n its ). Th e C om m ittee u rges all fin ancin g in stitu tion s to fo llo w such p olicies and in n o case to m ake a loan on ex istin g p rop erty in an am ou nt w h ich w ould cau se th e total am ou n t o f cred it ou tstan d in g (p rim a ry and all o th er cre d it com bin ed ) w ith resp ect to th e p ro p e rty or w ith resp ect to the tran saction to exceed the lim its w h ich R egu la tion X im poses as to n ew con stru ction . This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 2. L oa n s on a g ricu ltu ra l p ro p e rty . W h ile th e C om m ittee recogn izes th a t in som e instan ces a loan on agricu ltu ra l p ro p e rty m a y b e in e ffe ct a loan on residen tial p rop erty , th e C om m ittee fe e ls th a t n orm a lly such a loan fa lls in th e ca te g o ry o f a loan on com m ercia l p ro p e rty (see S ection 3 b e lo w ), and th e lender should be gu id ed b y the recom m en d ation s o f th a t section as to over-a ll cr e d it lim its and purposes. 3. L oa n s on resid en tial p ro p e rty (m o r e th an 4 -fa m ily u n its) and on co m m ercial p rop erty . L oa n s on residen tial p ro p e rty (m o re th an 4 -fa m ily u n its) and loans on com m ercia l p rop erty , su ch as office buildings, stores, h otels, m otels, m otor cou rts, resta u ra n ts, etc., should be screened as to pu rp ose and th e loan sh ould n ot b e m ade unless it is in h a rm on y w ith th e p rin cip les o f th e p rogram . I f th e loan is to be m ade in con n ection w ith a sale o f com m ercia l o r residen tial p ro p e rty a d eterm in ation b y th e fin ancin g in stitu tion th a t th e sale and the sale p rice are bona fide m a y con stitu te a sufficient screen in g o f th e loan. T h e C om m ittee con ceiv es th a t it is n o t th e fu n ctio n o f th e vo lu n ta ry cred it restra in t p rog ra m to m ake th e tr a n s fe r o f real estate im possible o r im practicable, b u t ra th er to red u ce in flation ary p ressu res b y lim itin g th e am ou n t o f additional cre d it created in th e p rocess o f real estate tra n sfe r. F in an cin g in stitu tion s are u rged to lim it a loan, on a n y ty p e o f p ro p e rty d e scrib ed in th is section , w h eth e r or n ot a sale is involved, to an a m ou n t w h ich w ould n ot cause th e tota l a m ou n t o f cre d it o u tstan d in g w ith resp ect to th e p ro p e r ty o r w ith resp ect to th e tra n sa ctio n 1 to exceed 6 6 % p er cen t o f th e fa ir value o f th e p ro p e rty .* A ls o , th e C om m ittee u rg es th a t fin ancin g in stitu tion s req u ire 2 1 an ap p rop riate and substan tial a m ortiza tion o f principal. T h e C om m ittee recogn izes th a t hardsh ip cases m a y a rise w h ere a 6 6 % per ce n t loan lim itation w ould n ot be sound o r equitable. Such cases w ou ld include a loan to finance th e sale o f p ro p e rty to close an estate o r to p a y estate ta xes, th e refinan cin g o f a m a tu rin g m o rtg a g e , o r th e sale o f p ro p e rty o f a ban k ru p t co m pan y. T h e C om m ittee m akes no recom m en d ation in su ch cases. 4. L oan s on indu strial p rop erty . L oa n s on indu strial p ro p e rty sh ould be screen ed as to p u rp ose w h eth er or n o t th e loan is to be m ade in con n ection w ith a sale o f real p rop erty . In th is instan ce, h ow ever, th ere a ppears to b e n o need f o r a p ercen ta ge lim ita tion on th e a m ou n t o f th e loan, sin ce in th e indu strial field m o r tg a g e secu rity usually is m erely one o f th e fa c to r s con sidered b y th e lender in d eterm in in g w h eth er to m ake th e loan and o fte n b ears com p a ra tiv ely little rela tion to th e a m ou n t o f th e loan. 5. Sale-lease b ack a rra n gem en ts. T h e C om m ittee also u rges fin ancin g in sti tu tion s to recog n ize th a t in m ost instan ces a “ sale-lease b a ck ” arran gem en t, w h ereb y real p ro p e rty is pu rch ased b y a fin ancin g in stitu tion and leased t o th e ven d or or h is n om inee, is a su bstitu te f o r a fo r m o f fin ancin g and th e re fo re com es w ith in th e p rog ra m and should be screened as to purpose. 1 If the facts are not already known, the financing institution presumably will want to request the bor rower to furnish information as to any other indebtedness or credit existing or contemplated in connection with the transaction. 2 “ Fair value” as used here means: 1. If the loan is to be made to finance the purchase of real property: the bona fide sale price, or the appraised value of the property securing the loan, whichever is lower; 2. In all other cases: the appraised value of the property securing the loan. The appraised value should be determined in accordance with sound and established practice in the community. A good definition of “ bona fide sale price” is given in Section 2 (j) of Regulation X.
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