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F E D ER A L R ES ER V E BANK O F NEW YO RK Fiscal A gent o f the United States rCircular No. 5 8 7 7 ~l L September 29, 1966 J Maximum Rate of Interest on Regulation V—Loans Increased from 6 to 7^2 % To A ll BanTcs, Other Financing Institutions, and Others Concerned, in the Second Federal Reserve D istrict: Following is the text of a statement issued today by the Board of Governors of the Federal Reserve System: The Board o f Governors o f the Federal Reserve System, after consultation with the Department of Defense and other Government agencies that guarantee loans made by private financing institutions for the financing o f defense contracts, has acted to raise the maximum rate of interest that may be charged fo r these special guaranteed loans (V -loa n s) authorized under the Defense Production Act. No change was made in the existing schedule o f guarantee fees. The B oa rd ’s action also provided that in those cases where the interest rate on a loan is in excess of 6 per cent, the guarantee fee must continue to be computed as though the interest rate were 6 per cent. The new maximum rate on V -loa n s is 7^2 per cent, but the net return to a lending institution is gov erned by the proportion o f the loan that is guaranteed by the Government agency whose defense contract is being financed. F or example, if a loan is 100 per cent guaranteed, the maximum net return to the lending institution will be 4.5 per cent after deducting the guarantee fee payable to the Government agency. A 90 per cent guaranteed loan will yield 5.9 per cent, and a 75 per cent guaranteed loan will yield 6.8 per cent, to the lending institution after guarantee fees have been deducted. Before this change, the maximum inter est rate was 6 per cent, but after deducting the guarantee fee payable to the Government agency, a 100 per cent guaranteed loan netted a lending bank only a maximum of 3 per ce n t; a 90 per cent guaranteed loan, 4.4 per cen t; and a 75 per cent guaranteed loan yielded 5.3 per cent. The action o f the Board is designed to bring the net return to financing institutions on V -loan s under this program more in line with current lending and money market rates and thus help to assure financing from commercial sources fo r contractors and subcontractors engaged in defense work. Inform ation received by the Board from the Federal Reserve Banks showed that the form er ceiling rate, which had been in effect since 1957, provided a net return to financing institutions that had become increasingly noncompetitive with alternative loan and investment opportunities. As a result, the amounts disbursed under authorized V -loan s dropped from $152 million in fiscal year 1964 to $119 million in fiscal year 1965, and $78 million in the year ended June 30, 1966, notwithstanding a substantial increase in m ili tary procurement. A lthough originally a W orld W ar II measure, the V -lo a n program was revived by the Defense Production A ct of 1950. From September 1950 through June 1966 a total of 1,633 loans had been authorized, amounting to $3.5 billion. Most of these loans were made during the Korean war period. The loans average approxim ately $2 million, and are prim arily used by small and medium-sized defense contrac tors having fewer than 500 employees. The income to the Government from the guarantee fees on authorized loans, after deduction of established and foreseeable losses, is in excess of $37 million. Under provisions o f the Defense Production A ct o f 1950, and implementing Executive Orders, desig nated procurement agencies o f the Government1 are authorized to guarantee loans made by commercial banks and other private financial institutions to finance and expedite production fo r national defense and to finance contractors and subcontractors in connection with, or in contemplation of, the termination of their defense contracts. The Federal Reserve Banks act as fiscal agents of the guaranteeing agencies in receiving applications fo r such credits and in the making of guarantee contracts. i The authorized guaranteeing agencies are the Departments of the Arm y, N avy, and A ir Force, the Defense Supply Agency, the Departments o f Commerce, Interior, and Agriculture, General Services Administration, the Atom ic Energy Com mission, and the National Aeronautics and Space Administration. Additional copies of this circular will be furnished upon request. A lfred H ayes, President.
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