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FE D E R AL R E SE R V E BANK OF N E W YORK r C i r c u la r N o . 3 7 2 L J u n e 14, 1951 1 1 J LOANS ON REAL ESTATE B u lletin N o. 4 o f V olu n tary C redit R estraint C om m ittee To all Financing In stitution s in the Second Federal Reserve D istrict: F ollow in g is the text o f Bulletin No. 4 o f the national V oluntary Credit R estraint Com mittee, which was issued today fo r publication June 15, 1951: June 14, 1951 LOANS ON R E A L ESTA TE The V oluntary Credit Restraint Committee, at its meeting on June 6, 1951, discussed the applica tion o f the principles o f the V oluntary Credit Restraint Program in the field o f real estate credit and adopted the follow ing statem ent: Real estate credit transactions governed by Regulation X , which covers the permanent financing o f most new construction and m ajor additions or improvements to existing structures, are not nor mally within the area o f influence o f this V olu n tary 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. F o r the guidance o f financing institutions in granting real estate credit encompassed by the V olun tary Program , the national Committee makes the follow ing recom m endations: 1. Loans on residential property (1 to 4 fam ily u n its).— The Committee has been inform ed that most financing institutions are follow ing conservative lending policies on existing residential properties (1 to 4 fam ily u n its). 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) with respect to the property or with respect to the transaction to exceed the limits which Regulation X imposes as to new construction. 2. Loans on agricultural property.— W hile the Committee recognizes that in some instances a loan on agricultural property may 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 commercial property (see section 3 below ), 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 commercial property, such as office buildings, stores, hotels, motels, motor courts, restaurants, etc., should be screened as to purpose and the loan should not be made unless it is in harmony with the principles o f the Program . I f the loan is to be made in connection with a sale o f commercial or residential property a determination by 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 not the function o f the V oluntary Credit Restraint Program to make the transfer o f real estate impossible or impracticable, but rather to reduce inflationary pressures by lim iting the amount o f additional credit created in the process o f real estate transfer. (o v e r ) Financing institutions are urged to lim it a loan, on any type o f property described in this section, whether or not a sale is involved, to an amount which would not cause the total amount o f credit out standing with respect to the property or with respect to the transaction1 to exceed 66^3 per cent o f the fair value o f the p rop erty.2 Also, the Committee urges that financing institutions require an appropri ate and substantial amortization o f principal. The Committee recognizes that hardship cases may arise where a 66^3 per cent loan limitation would not be sound or equitable. Such cases w ould 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 mortgage, or the sale o f property o f a bankrupt com pany. The Committee makes 110 recommendation in sueh cases. 4. Loans on industrial property.— Loans 011 industrial property should be screened as to p u r 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 limitation on the amount o f the loan, since in the industrial field mortgage security usually is merely one o f the factors considered b y the lender in determining whether to make the loan and often bears com paratively little relation to the amount o f the loan. 5. Sale-lease back arrangements.— The Committee also urges financing institutions to recognize that in most instances a “ sale-lease back” arrangement, whereby real p roperty is purchased by a financing institution and leased to the vendor o r 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. 1 I f the facts are not already known, the financing institution presum ably w ill want to request the borrow er to furnish in form ation as to any other indebtedness or credit existing or contem plated in connection w ith the transaction. 2 “ F air va lu e” as used here means: 1. I f the loan is to be made to finance the purchase o f real p rop erty : The b on a fide sale price, or the appraised value o f the property securing the loan, whichever is low er; 2. In all other eases: The appraised value o f the property securing the loan. The appraised value should be determined in accordance with sound and established practice in the com munity. A good definition o f “ bona fide sale p r ic e ” is given in section 2 ( j ) o f Regulation X . Additional copies o f this circular will be furnished upon request. A llan S proul, P re sid e n t.
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