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F ed eral Re serve b a n k OF DALLAS Dallas, Texas, September 13, 1951 To A ll Financing Institutions in the Eleventh Federal Reserve District: The tex t o f the revision o f Bulletin No. 4 o f the national Voluntary Credit Restraint Committee, w hich follow s, is being forw arded to you and all other financing institutions in this district at its request. Yours very truly, R. R. GILBERT President B U L L E T IN N U M B E R 4 (R E V IS E D ) OF T H E N A T IO N A L V O L U N T A R Y CREDIT R E ST R A IN T COM MITTEE L O A N S ON R E A L E ST A T E September 13, 1951 The V oluntary Credit R estraint Committee at its meeting on September 5, 1951, evaluated the experience to date with Bulletin No. 4 covering loans on real estate, and adopted the follow ing statem en t: The perm anent financing o f m ost new construction will continue to be governed by Regulation X as revised on Septem ber 1, 1951, to conform with the provisions o f the recently enacted Defense Housing and Com m unity Facilities and Services A ct o f 1951. Section 1 o f Bulletin No. 4 is revised to recommend, in the case o f loans on residential proper ties o f 1- to 4-fam ily units, that loans on existing properties should not exceed the lim itations imposed b y Regulation X or 6 6 % per cent o f the fair value o f the property, whichever is greater. This means that on properties the fa ir value o f w hich is §16,700 or less, the recommended limita tions are those im posed b y Regulation X (all o f which are above 66% per c e n t ) ; on properties the fa ir value o f w hich is greater than §16,700, the limitation on borrow ing is 6 6 % per cent. In all other respects Bulletin No. 4 remains unchanged. Experience indicates that tw o points in Bulletin No. 4 are deserving o f special emphasis. First, in determ ining w hether proposed financing conform s to the bulletin, all m ortgage indebtedness to be outstanding on the property, including secondary financing, should be taken into account. Second, loans on residential property o f m ore than 4 units and loans on com m ercial property should be screened as to purpose and loans should not be made unless they are in harm ony with the principles o f the program . A sale w ith credit involved not exceeding that recommended in this bulletin is sufficient evidence o f proper purpose. M ortgage lenders, who do not have a regional com m ittee from which to obtain opinions in doubtful cases, m ay refer questions to the Regional Insurance Voluntary Credit Restraint Com m ittee serving their area. For the guidance o f financing institutions in granting real estate credit encompassed by the voluntary program , Bulletin No. 4, as amended is reprinted on the reverse side. (O n r) This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) LO A N S ON R E A L E STA TE Real estate credit transactions governed by Regulation X , which covers the permanent financing o f m ost new construction and m ajor additions or improvements to existing structures, are not within the area o f influence o f 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 o f the United States Government. The program does apply, however, to all other real estate credit transactions. Financing institutions extending such credit are urged to observe the principles and the spirit o f the program . 1. Loans on residential property (1- to 4-fam ily units). The Committee has been inform ed that m ost financing institutions are follow ing conservative lending policies on existing residential properties (1- to 4-fam ily 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 (prim ary and all other credit com bined) w ith 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 o f 6 6 % per cent o f the fa ir value1 o f the property, whichever o f such limits is the greater.2 2. Loans on agricultural property. W hile the Committee recognizes that in some instances a loan on agricultural property m ay be in effect a loan on residential property, the Committee feels that norm ally such a loan falls in the category o f a loan on com m ercial property (see Section B b e lo w ), and the lender should be guided by the recommendations o f that section as to over-all credit limits and purposes. 3. Loans on residential property (m ore than 4-fam ily units) and on com m ercial property. Loans on residential property (m ore than 4-fam ily units) and loans on com m ercial property, such as office buildings, stores, hotels, motels, m otor courts, restaurants, etc., should be screened as to purpose and the loan should not be made unless it is in harm ony with the principles o f the program . I f the loan is to be made in connection with a sale o f com m ercial or residential property a deter mination b y the financing institution that the sale and the sale price are bona fide m ay constitute a sufficient screening o f the loan. The Committee conceives that it is n ot the function o f the volun tary credit restraint program to make the transfer o f real estate impossible or impracticable, but rather to reduce inflationary pressures by limiting the amount o f additional credit created in the process o f real estate transfer. Financing institutions are urged to limit a loan, on any type o f property described in this section, w hether or not a sale is involved, to an amount w hich would not cause the total amount o f credit outstanding with respect to the property or with respect to the transaction3 to exceed 66% per cent o f the fa ir value o f the property. Also, the Committee urges that financing institutions require an appropriate and substantial am ortization o f principal. The Com m ittee recognizes that hardship cases m ay arise where a 6 6 % per cent loan lim ita tion would not be sound or equitable. Such cases would include a loan to finance the sale o f property to close an estate or to pay estate taxes, the refinancing o f a m aturing m ortgage, or the sale o f property o f a bankrupt com pany. The Committee makes no recommendation in such cases. 4. Loans on industrial property. Loans on industrial property should be screened as to pur pose whether or not the loan is to be made in connection with a sale o f real property. In this instance, however, there appears to be no need fo r a percentage lim itation on the amount o f the loan, since in the industrial field m ortgage security usually is m erely one o f the factors considered by the lender in determ ining w hether to make the loan and often bears com paratively little relation to the amount o f the loan. 5. Sale-lease back arrangem ents. The Committee also urges financing institutions to recognize that in m ost instances a “ sale-lease back” arrangement, w hereby real property is purchased b y a financing institution and leased to the vendor or his nominee, is a substitute fo r a form o f financing and therefore comes within the program and should be screened as to purpose. 'Wherever used in this bulletin, “ fair value” 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. 2 As a working rule, the above statement may be interpreted as meaning that where the fair value of the prop erty is $16,700 or less the limits of Regulation X would apply and where such fair value is more than $16,700 the limits of 66% per cent would apply. 3 If the facts are not already known, the financing institution presumably will want to request the borrower to furnish information as to any other indebtedness or credit existing or contemplated in connection with the transaction. (Over)
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