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FED ER AL RESERVE BANK O F NEW YORK r C ircular No. 6 9 0 9 1 L M arch 2, 1972 J ADVANCES AND DISCOUNTS BY FEDERAL RESERV E BANKS T o the M em ber B anks of the Second Federal Reserve D istrict: T h e B oard of G overnors of the F ed eral R eserve System has issued an in terp retatio n , effec tive F e b ru a ry 25, 1972, re g a rd in g the eligibility of consum er loans and finance com pany paper fo r discount w ith and as collateral fo r advances by F ed eral R eserve B anks. T he in terp retatio n replaces a 1965 published in terp reta tio n of the B oard of G overnors on the sam e subject (12 C F R 201.104). T h e new in terp reta tio n — (a) Establishes an assumption that 50 percent of “direct consumer instalment loans” by a finance company as to which there is no definite information as to the purpose of such loans can be regarded as “notes receivable which appear eligible for rediscount” in determining whether the amount of the finance company’s loans for eligible purposes exceeds its current liabilities; (b) Defines “current liabilities” as meaning “notes due within one year,” rather than “liabilities maturing within one year,” in order to exclude liabilities for accrued payroll and tax expenses; (c) Makes it clear that notes given for the purchase of mobile homes, when acquired by a finance company from dealers, may be regarded as notes that “appear eligible for rediscount” ; and (d) Makes it clear that a note of an agricultural finance company engaged in making loans for agri cultural purposes is eligible for discount and as collateral for advances if it has a maturity of not more than nine months. P rin te d below is the te x t of the new interp retatio n . I t will be published shortly in the Federal Register and in the M arch 1972 issue of the Federal Reserve Bulletin, b ut is being sent to you now so th a t you m ig h t have p rom pt notice of its content. A lfred H a y e s , President. (12 CFR 201) Eligibility of Consum er Loans and F inance Com pany P ap er Effective February 25, 1972, §201.104 is revised to read as follows: § 201.104 Eligibility of consumer loans and finance company paper. (a) The Board of Governors has clarified and modi fied its position with respect to the eligibility of con sumer loans and finance company paper for discount with and as collateral for advances by the Reserve Banks. (b) Section 13, Paragraph 2, of the Federal Reserve Act authorizes a Federal Reserve Bank, under certain conditions, to discount for member banks “* * * notes, drafts, and bills of exchange arising out of actual com mercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Board of Governors of the Federal Reserve System to have the right to determine or define the character of the paper thus eligible for discount, within the mean ing of this Act.” (c) It continues to be the opinion of the Board that borrowing for the purpose of purchasing goods is bor rowing for a commercial purpose, whether the borrower intends to use the goods himself or to resell them. Hence, loans made to enable consumers to purchase automobiles or other goods should be included under ( o v er ) commercial, agricultural, and industrial paper within the meaning of the Federal Reserve Act, and as such are eligible for discounting with the Reserve Banks and as security for advances from the Reserve Banks under section 13, paragraph 8, of the Federal Reserve Act as long as they conform to requirements with respect to maturity and other matters. This applies equally to loans made directly by banks to consumers and to paper accepted by banks from dealers or finance companies. It also applies to notes of finance companies themselves as long as the proceeds of such notes are used to finance the purchase of consumer goods or for other purposes which are eligible within the meaning of the Federal Reserve Act. (d) If there is any question as to whether the pro ceeds of a note of a finance company have been or are to be used for a commercial, agricultural, or industrial purpose, a financial statement of the finance company reflecting an excess of notes receivable which appear eligible for rediscount (without regard to maturity) over total current liabilities (i.e., notes due within one year) may be taken as an indication of eligibility. Where information is lacking as to whether direct con sumer loans by a finance company are for eligible pur poses, it may be assumed that 50 per cent of such loans are “notes receivable which appear eligible for redis count”. In addition, that language should be regarded as including notes given for the purchase of mobile homes that are acquired by a finance company from a dealer-seller of such homes. (e) The principles stated above apply not only to notes of a finance company engaged in making con sumer loans but also to notes of a finance company engaged in making loans for other eligible purposes, including business and agricultural loans. Under sec tion 13a of the Federal Reserve Act, paper representing loans to finance the production, marketing, and carry ing of agricultural products or the breeding, raising, fattening, or marketing of livestock is eligible for dis count if the paper has a maturity of not exceeding nine months. Consequently, a note of a finance company the proceeds of which are used by it to make loans for such purposes is eligible for discount or as security for a Federal Reserve advance, and such a note, unlike the note of a finance company making consumer loans, may have a maturity of up to nine months.
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