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Minutes of actions taken by the Board of Governors of the Federal Reserve System on Thursday, February 15, 1951. The Board met I]). the Board Room at 10:40 a.m. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman pro tem. Szymczak Evans Vardaman Norton Powell Mx. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Carpenter, Secretary Sherman, Assistant Secretary Kenyon, Assistant Secretary Thurston, Assistant to the Board Riefler, Assistant to the Chairman Vest, General Counsel Townsend, Solicitor Young, Director, Division of Research and Statistics Phelan, Acting Director, Division of Selective Credit Regulation Solomon, Assistant General Counsel Shay, Assistant Counsel Fawley, Technical Assistant, Division of Selective Credit Regulation Mr. Heath, Assistant Cashier and Assistant Secretary of the Reserve Bank of Chicago, who was assisting temporarily in the alhainistration of Regulation W, Consumer Credit, was also present. Before this meeting there had been sent to each member of the 13°1119. a memorandum from Mr. Phelan dated February 14, 1951 with respect to leasing arrangements under Regulation W. The memorandum stated Ill4t following the tightening of the Regulation, effective October 16, 1950 ,„ '--nY automobile dealers, banks, and finance companies began to 148e or to lay plane for using leasing arrangements as a means of pro- 2/15/51 - viding lower monthly payments than would be required for instalment sale credit under Regulation W, that in an effort to protect the Regulation the Board published a ruling on November 14, 1950 that coverage of the Regulation extended to many kinds of transactions other than "sales", that a further ruling was issued on December 11, 1950 and a notice published in the Federal Register to the effect that "leasing arrangements other than those limited to a single payment in general are subject to" Regulation W, and that this notice stated that the Board is examining further into the characteristics of the proPosed arrangements for leasing automobiles or other listed articles and will consider whether or not any of them are of such a special e48e as to make it desirable or feasible to relax any of the provisions Or (the Regulation) to Any extent for their benefit". The memorandum vent on to say that since the ruling of December 11, 1950 there had been fewer indications of new leasing arrangements for instalment selling but that it appeared certain that any ruling which allowed much lee"11th respect to leases would result in renewed threats to the effectiveness of the Regulation. The memorandum also stated that the Regu- 115:"Ion did not apply to bona fide single payment leases or to contracts elcceeding the ceiling of $5,000 in the case of automobiles and $2,500 thp - case of other listed articles, and that any other leasing e'Llkgements were in compliance with the down payment and monthly 136.1ellt requirements of the Regulation if they provided for deposits 2/15/51 -3- and payments in the required amounts even though all or part of the funds were returned when the arrangement was terminated. The memorandum then suggested the desirability of an amendment which would also exempt short-term rental or lease arrangements, but recommended that, as to other lease arrangements, the principle stated in the Board's ruling Of December 11, 1950 be reaffirmed. Mr. Phelan stated that while there were differences of opinion between members of the Board's legal division and Mr. Townsend concerning the question whether the Board had legal authority to cover all leasing arrangements with respect to listed articles under Regulation W, the Board had taken a position after careful consideration that such leases were subject to the Regulation, and that the reconmiendation. contained in the memorandum above referred to was made after careful consideration of the comments submitted by the Federal Reserve Banks eMfl others as a result of the notice published in the Federal Register PUrsuant to the action of December 11, 1951. Mr. Townsend then made a statement during which he expressed Berious doubt that the Board was authorized by the Defense Production 4°t of 1950 or by Executive Order No. 8843 to regulate leasing arrange- ille4t8 which did not involve an option to purchase and which did not 14vo1ve total rental payments approximating the cash selling price or the article rented, that for these reasons he felt it would be 2/15/5l -4- undesirable to reaffirm the position already taken by the Board, and that it would be his recommendation that the matter be presented to Congress at the earliest opportunity for clarification of the authority Inasmuch as in his opinion it was highly desirable that the Board have authority to regulate all types of leasing arrangements in order to avoid their use as a means of destroying the effectiveness of the entire Regulation. During the ensuing discussion, Mr. Eccles suggested that, in view of the position previously taken by the Board that leases were subject to the Regulation, it would be unwise to submit the matter to the Congress for clarification at this time, and that since there was strong legal opinion that the Board had authority to regulate the leases it proceed on the basis of its existing interpretation even at the risk of litigation. Mr. Evans stated that the problem was a difficult one, that on the basis of the careful study given to the matter in November and IDecember he had taken it for granted there was no question concerning the Board's authority to regulate leases, but that in view of the 8"ious doubts expressed by the Board's Solicitor, who would have to cletend any suit against the Board, he would be inclined to ask Congress a clarification of the Board's authority. After a full discussion of the matter in the light of the (littering views of attorneys for the Board, Mr. Szymczak suggested -5- 2/15/51 that the Legal Division and the Solicitor's Office prepare memoranda setting forth their respective views and that the matter be considered again at an early meeting of the Board. This suggestion was approved unanimously. Messrs. Pawley and Heath withdrew at this point. Mr. Norton stated that pursuant to the understanding at the meeting on February 13, he discussed with Mr. Foley, Housing and Home Finance Administrator, the revised statement prepared for submission to the Senate Banking and Currency Committee with respect to the Defense -Rousing and Community Facilities and Services Act of 1951, and that Mr. Foley had suggested a number of changes, several of which were of Minor consequence and might be accepted. He said that Mr. Foley had 4180 strongly urged elimination of any reference in the statement to the target of 800 to 850 thousand units for housing starts during 1951, as well as elimination of the closing paragraph of the statement which auggested that the $3 billion authorization for additional mortgage illsurance to Federal Housing Administration be reduced. Mr. Norton /Iellt on to say that he recommended that the paragraph with respect to the reduction in the authorization for mortgage insurance be retained 14 the statement, but that other changes made in the statement as a (1321Promise to meet Mr. Foley's suggestions be approved. Mr. Norton's recommendations were approved unanimously with the under- 2/15/51 -6standing that if the Board were requested to testify or submit a statement on the proposed legislation the revised draft would be used for that purpose. At this point all of the members of the staff with the exception of Messrs. Carpenter, Sherman, and Kenyon withdrew, and the action stated with respect to each of the matters hereinafter referred to was taken by the Board: Minutes of actions taken by the Board of Governors of the Pederal Reserve System on February 14, 1951, were approved unanimously. Memoranda from the heads of the Divisions indicated below recommending increases in the basic annual salaries of the following etployees in those Divisions, effective February 18, 1951: Date of Memo SIoNe & z,4ERNATIONAL FINANCE 411:8. Dorothy V. Wright 2/12/51 ADMINISTRATIVE SERVICES t!r13. Ethelyn M. Palmer 4Ugh T. Ladd Ilaiborne Johnson erlY A. Carter -vnimmin L. Dinkins Title Clerk Secretary to Mr. Kelleher Offset Pressman Senior Mail Clerk Mail Clerk Mail Clerk Salary Increase From To $3,035 $3,115 3,035 3,225 2,875 3,130 2,930 3,100 3,355 3,050 2,412 2,530 Approved unanimously. Memorandum dated February 12, 1951, from Mr. Hilkert, Acting 14rector of the Division of Personnel Administration, recommending that myrtle B. Caldwell, a clerk-stenographer in the Division of IliterriationAl Finance, be transferred on a non-permanent basis in 2/15/51 -7- accordance with the policy adopted December 29, 1950) to the Division Of Personnel Administration as a clerk-stenographer, with an increase in her salary from $2,730 to $2,875 per annum) effective February 18) 1951. The memorandum also stated that the Division of International Pinance was agreeable to this transfer. Approved unanimously. Letter to Mr. Dearmont) Chairman of the Federal Reserve Bank of St. Louis, reading as follows: "In the January 30) 1951) issue of The American Banker it is indicated that Mr. Leslie M. Stratton) Jr., who was appointed a director of the Memphis Branch by the Board of Governors effective January 1) 1946, has recently been elected to the Board of Directors of the Union Planters National Bank and Trust Company, Memphis) Tennessee. "As you know, the Board's regulations relating to the operation of branches of Federal Reserve Banks Provide that the directors appointed by the Board of Governors shall be persons who are not primarily engaged in banking and preferably are not directors Of banks, although they may be stockholders. While this provision permits some latitude in the selection of directors) it follows the general principle established in the Federal Reserve Act that some of the directors of the Federal Reserve Banks should not be associated with commercial banks. The Board feels that it is in the public interest to have diversified representation on the boards of directors Of the branches as well as the parent bank, and it has followed the general policy of selecting as its appointees individuals who were not serving as directors of commercial banks. As in a few similar situations in the past, however) the Board of Governors interposes to objection to Mr. Stratton's continuing to serve ae a director of the Memphis Branch for the remaining Portion of his term." Approved unanimously. 2/15/51 Letter to The National City Bank of New York, New York, New York, reading as follows: "The Board of Governors of the Federal Reserve System authorizes The National City Bank of New York, pursuant to the provisions of Section 25 of the Federal Reserve Act, to establish an additional branch in San Juan) Puerto Rico) and to operate and maintain such branch subject to the provisions of such section; upon condition that unless the branch is actually established and opened for business on or before March 1) 1952, all rights granted hereby shall be deemed to have been abandoned and the authority hereby granted shall automatically terminate on such date." Approved unanimously, for transmittal through the Federal Reserve Bank of New York. Telegram to the Presidents of all Federal Reserve Banks, 14"tPared in accordance with the understanding at the meeting on ebl"uary 13, 1951, reading as follows: "Information has come to us from several sources that some banks are refusing to participate in the V-loan program because of the low return available after payment of the guarantee fee. The small borrower engaged in defense work is said to be most adversely affected by this development as it is in such cases that a high percentage of guarantee is most usually required. Apparently the difficulty is not confined to this group, however, for at least one large loan involving both working capital and facilities is said to be held up for the same reason. "The Board's staff is studying this matter and 17°111d appreciate your comments on the following as Promptly as possible. "1. Do you know of any prospective borrowers in Your district whose applications for a V-loan have ?een turned down because the net return to their !1 anks after payment of the guarantee fee would have , 'men unattractive? 2/15/51 -9- "2. Should the Board consider: (a) increasing the maximum permissible rate from 5 per cent to 6 per cent on loans of $2500000 and less, (b) increasing the maximum permissible rate on all loans, (c) decreasing the guarantee fee on loans of $2501000 or less so as to increase the net return to lenders on loans in this category, (d) decreasing the guarantee fee on all loans? "3. Should the same or different guarantee fees and maximum rate of interest be applicable in cases in which guaranteeing agencies decide to guarantee long-term loans for facilities purposes under the V-loan program?" Approved unanimously. Tolegram to Mr. Everson, Assistant Vice President of the Federal Reserve Bank of San Francisco, reading as follows: "Refer your letter January 301 1951, re inquiry from Brobeck, Phleger & Harrison re Regulation W. "It appears that the company referred to would be 'engaged in business' subject to Regulation W and that none of the various arrangements suggested in the letter would be exempt from the regulation. Accordingly, the Board agrees with your view that the plan and contemplated variations would be within the purview of the regulation." Approved unanimously. Letter to Mr. Rowell S. Buck, Hill Mortgage Corporation, 1230 Rand Building, Buffalo 3, New York, reading as follows: "Your letter of January 231 19511 concerning the aPPlication of Regulation X to a mortgage loan for a combination residence and professional office, has been referred to the Board of Governors for reply. "Under section 2(k) of the regulation, "Residence" Means any structure which is used or designed for permanent or transient dwelling purposes, and which includes at least one but not more than four family units, if the floor space contained in such family 453 2/15/51 -10- "units comprises at least one-half of the floor space of such structure* * *' Accordingly, if the floor space contained in the office portion of the proposed structure will comprise less than onehalf of the floor space of such structure, the structure will be a -residence- within the meaning of section 2(k). "The 'value' under section 2(i)(2) of the regulation would be the bona fide cost of the property to the borrower. You stated that the residence portion of the structure will cost $25,000, the office portion $15,000, and the land $5,7001 or a total of $45,700. Assuming there would be only one family unit in the residence, the maximum loan value under Schedule 1 of the Supplement to the regulation would be $22,850, that is, 50 per cent of the 'value' of $45,700. "The administration of Regulation X is decentralized through the 12 Federal Banks and their branches, and it will be appreciated if you would address any further inquiry to the Federal Reserve Bank of New York, or its Buffalo branch." Approved unanimously. Telegram to the Presidents of all Federal Reserve Banks and 14anaging Officers of all Federal Reserve Bank Branches, reading as follows: "(This wire to the Presidents of all Federal Reserve Banks is also being sent to the Managing Officers of all Federal Reserve Bank Branches for their information). "Following is a statement being given to the press at 4:30 p.m. Eastern Standard time today for release in morning newspapers, Friday, February 16, 1951: 'The Board of Governors of the Federal Reserve System today obtained a judgment in the United States District Court at Indianapolis, Indiana, against the Bogda Motor company, Inc., a dealer in new and used automobiles in Indianapolis and its 1/3 2/15/51 -11- "'President, Oscar W. Bogda, enjoining them from further violations of consumer credit Regulation W. 'Regulation W provides that credit for the instalment financing of certain listed articles, including automobiles, shall not be extended without obtaining a down payment in the amount prescribed by the Regulation. In the case of automobiles the present terms of the Regulation require a down payment of one third of the cash price of the automobile and the balance must be paid within 15 months. In this case the defendants had violated the Regulation by not obtaining the required down payment in a number of its sales and by not maintaining adequate records.' "Will appreciate your giving release whatever distribution in your district you feel would be desirable." Approved unanimously. f 1I / AA Secrery.
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