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2S1 Minutes of actions taken by the Board of Governors of the Federal Reserve System on Friday, February 9, 1951. The Board met in the Special Library at 11:35 a.m. PRESENT: Mr. Mr. Mr. Mr. McCabe, Chairman Szymczak Evans Powell Mr. Carpenter, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Thurston, Assistant to the Board Mr. Riefler, Assistant to the Chairman Mr. Thomas, Economic Adviser to the Board Mr. Vest, General Counsel Mr. Townsend, Solicitor Mr. Young, Director, Division of Research and Statistics Mr. Phelan, Acting Director, Division of Selective Credit Regulation Mr. Noyes, Assistant Director, Division of Selective Credit Regulation Mr. Tinsley, Assistant Counsel Mr. Charles T. Fisher, Special Consultant to the Board Before this meeting there had been sent to each member of the 13°ard a draft of a proposed revised Regulation X, Real Estate Credit, 1111114111 had been prepared pursuant to the discussion at the meeting on 44uary 23 and to which Mr. Norton had referred at the meeting yesterday. In response to Chairman McCabets request, Mr. Vest outlined the r..4 r,4.ncipal provisions of the proposed amendment to the Regulation, Nti ng that it would extend the scope of the Regulation to cover (10 L-clal properties and would provide credit limitation of 50 per 11114 on such construction and the amortization of such credit over a 4144444 Period of 25 years either in equal periodic payments of 144 and interest or equal periodic payments of principal. 2/9/51 -2Mr. Fisher stated that Mr. Wilde, Consultant, had prepared a memorandum recommending adoption of the Regulation in the form in which it had been circulated to the members of the Board, that he concurred in Mr. Wildets recommendation, and that it was the consensus of the other members of the staff who had been studying the matter that the Regulation should be extended to cover commercial properties effective February 15 at the time of expiration of temporary order, M-4, of the National Production Authority restricting the use of materials for such construction. Mr. Evans stated that Mr. Norton, who was not able to be present at the meeting today, had spoken to him subsequent to the meeting yesterday and stated that if he were present he would recommend approval of the Regulation in the form in which copies had been sent to the members of the Board. Mr. Vest stated that it would be necessary to obtain the formal e°ncurrence of the Housing and Home Finance Administrator in the amended Nulation in so far as it related to residential construction. He also Stated that it had not yet been possible to work out with other interested agencies of the Government a provision for exempting defense housing Na the provisions of the Regulation along the lines referred to by 141% Norton at yesterday's meeting and that it was proposed therefore that the amended Regulation be adopted without such an exemption but Illth the understanding that it would be added as soon as a satisfactory *)14tion of that problem could be worked out. Thereupon, upon motion by Mr. Evans, unanimous approval was given to Regulation X, Real Estate Credit, in the following form with the understanding that it would become effective February 15, 1951 if 23 2/9/51 -3Mr. Foley, Housing and Home Finance Administrator, advised that he concurred in the Regulation and its terms and agreed on the proposed effective date: 'REGULATION X February 151 1951 amended effective "As "REAL ESTATE CREDIT "SECTION 1. SCOPE AND APPLICATION OF REGULATION "This regulation is issued by the Board of Governors of the Federal Reserve System (hereinafter called the 'Board'), with the concurrence of the Housing and Home Finance Administrator with respect to provisions relating to real estate construction credit involving residential property and multiunit residential property, under authority of the !Defense Production Act of 19501 1 approved September 8, 1950 (hereinafter called the 1Act1), and Executive Order No. 101611 dated September 91 1950. "This regulation applies to any person who is engaged in the business of extending real estate credit with respect to residences, residential property, multi-unit residential property, or nonresidential property including any person who acts as agent in arranging for such credit. For the purposes of this regulation, a person shall be deemed to be engaged in the business of extending such real estate credit if, in his own right or as agent or fiduciary, he either (1) extends or has extended such real estate credit more than three different times during the current calendar year or during the preceding calendar year, or (2) extends or has extended such real estate credit in an amount or amounts aggregating more than $50,000 during the current calendar year or during the preceding calendar year. For the purposes of this section, such real estate credit shall be deemed to include credit with respect to any residence, residential property, multi-unit residential property, or nonresidential property, whether or not there is any nen construction thereon, and whether or not such credit is extended, insured, or guaranteed by the Federal Housing Adminisration, the Veterans! Administration, or any other department Independent establishment or agency of the United States, and Whether or not such credit is exempt from this regulation. 284 2/9/51 "SECTION 2. DEFINITIONS "For the purposes of this regulation, unless the context otherwise requires: (a) 'Person' has the meaning given it in section 702(a) of the Act.' (b) 'Registrant, means a person who is registered pursuant to section 3 of this regulation. (c) !Credit' has the meaning given it in section 602(d)(2) of the Act.2 (d) "Extending credit,' 'extension of credit' and 'extends credit' shall include extending or maintaining any credit, or renewing, revising, consolidating, refi12.8rainazirchasing, selling, discounting, or lending or "lSection 702(a) of the Act provides: 'The word "person" includes an individual, corporation, partnership, association, or any other organized group of persons, or legal successor or representative of the foregoing, and includes the United States or any agency thereof, or any other government, or any of its political subdivisions, or any agency of any of the foregoing: Provided, That no Punishment provided by this Act shall apply to the United States, or to any such government political subdivision, or government agency.tt' "2Section 602(d)(2) of the Act provides: 1"Credit" means any loan, mortgage, deed of trust, advance, or discount; any conditional sale contract; any contract to sell Or sale or contract of sale, of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract or any contract for the bailment, leasing, or other use of property under Which the bailee, lessee, or user has the option of becoming the owner thereof, obligates himself to pay as compensation a sum substantially equivalent to or in excess of the value thereof, or has the right to have all or part of the payments required by such contract applied to the purchase Price of such property or similar property; any option, demand, lien, pledge, or similar claim against or for the delivery of Property or money; any purchase, discount, or other acquisition of, or any credit under the security of, any obligation or claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect.1" 2/9/51 -5- "borrowing on, any obligation arising out of any credit, or arranging as agent for any of the foregoing, and also shall include a sale of, or other transfer of title to, real property if the vendee or transferee assumes, or takes such property subject to, indebtedness secured by a mortgage or other lien upon such property. (e) 'Real estate construction credit' means any credit3 which (1) is wholly or partly secured by, or (2) is for the purpose of purchasing or carrying, or (3) is for the purpose of financing, or (4) involves a right to acquire or use, new construction on real property or real property on which there is new construction, if such new construction is a residence, multi-unit residence, or nonresidential structure, or a major addition or major improvement to a residence, multi-unit residence, or nonresidential structure, whether such credit is extended before or after such new construction is begun; but the term 'real estate construction credit' shall not include any loan or loans made, insured, or guaranteed, in whole or in part, by the Federal Housing Administration, the Veterans' Administration, or any other department, independent establishment orsgency in the executive branch of the United States, or by any wholly owned Government corporation, or by any mixed-ownership Government corporation as defined in the Government Corporation Control Act, as amended (including any loan evidenced by obligations of any local public agency or public housing agency which national banks may purchase pursuant to the provisions of section 602(a) of the Housing Act of 1949). (f) 'New construction' means any structure, or any major addition or major improvement to a structure, which is or has been begun after 12 o'clock meridian, August 3, 195o. "3Extended on or after October 12, 1950, with respect to farm residences, residential property, and major additions and major improvements to residences; or on or after January 12, 1951, with respect to multi-unit residential property and major additions and major improvements to multi-unit residences; or on or after February 15, 1951, with respect to nonresidential Property and major additions and major improvements to nonresldential structures." 2/9/51 -6- "Construction will be deemed to have been 'begun' when any essential materials which are to be an integral part of the structure have been affixed to or incorporated on the site in a permanent form. (g) 'Major addition' or 'major improvement' means any enlargement, reconptruction, alteration, or repair of an existing structure l4 or any other addition or improvement which becomes or is to become physically attached to and a part of the structure,4 if the cost or estimated cost of such addition or improvement exceeds $2,500, and, also exceeds (1) if the structure is a residence or multiunit residence, an amount determined by multiplying $1,500 by the number of family units in such residence or multiunit residence prior to such addition or improvement, or (2) if the structure is a nonresidential structure, an amount equal to 15 per cent of the appraised value of the nonresidential structure5 as determined in good faith by "4Notwithstanding this definition or any other provision of this regulation, an addition or improvement to any existing structure which will become a 'residence,' 'multi-unit residence,' or 'nonresidential structure' by reason of such addition or improvement shall be treated as an addition or improvement to an existing 'residence,' 'multi-unit residence,' or 'nonresidential structure,' respectively; and, in determining whether the cost or estimated cost of an addition or improvement to an existing structure which will become a 'residence' or 'multi-unit residence' is such that it would be a major addition or major improvement within the meaning of section 2(g), and in determining what the maximum loan value is, the determination shall be according to the number of family units which will be in the structure after the addition or improvement has been completed." "5For this purpose, the value of the land upon which the nonresidential structure is located is not taken into consideration; and the appraised value is the appraised !alue of the structure before the major addition or major improvement is made." Q 2/9/51 -7- "the Registrant who extends the credit.° (h) 'Real property' includes leaseholds and other interest in such property. (i) The 'maximum loan value' of any property7 shall be the amount which is computed in the manner prescribed in the Supplement to this regulation. In making such computations: (1) For a major addition or major improvement to a residence, multi-unit residence, or nonresidential structure 'value' shall be the cost or estimated cost' of such major addition or major improvement; (2) For residential property, other than major additions or major improvements: 06It should be noted that section 2(f) defines 'new construction' as including 'any major addition or major improvement' and that section 2(e) defines 'real estate construction credit' as including certain credit with respect to !real property on which there is new construction.' Accordingly, if a major addition or major improvement is made to an existing structure, even though such structure was erected or begun prior to August 3, 1950, any subsequent extension of credit with respect to such structure or the property on which it is located is 'real estate construction credit.' However, in determining whether property has become !real property on which there is new construction' by reason of a major addition or major improvement having been made to an existing structure, there shall be considered only such costs as are or have been incurred during any period of 12 consecutive months (or during a period not exceeding 12 months beginning January 12, 1951, if the structure is a residence or multi-unit residence, or beginning February 15, 1951, if the structure is a nonresidential structure)." "7As used here, 'property' means residential property, multi-unit residential property, nonresidential property, a residence on farm property, or a major addition or major improvement to a residence, a multi-unit residence, or nonresideptial structure, as the case may be." *°Based on such evidence and supporting data as normally would be required by a prudent lender." 1. 2/9/51 -8- “(A) In the case of an extension of credit in connection with a bona fide sale of residential property, 'value' shall be the bona fide sale price; (B) In the case of any other extension of credit with respect to residential property; (i) If the entire cost of the property to the borrower has been incurred by him not more than 12 months prior to the extension of credit or is to be incurred by him after such extension of credit, Ivaluet shall be the bona fide cost of the property to the borrower, including a bona fide estimate of the cost of completing new construction on such property when the extension of credit is for the purpose of financing such new construction; (ii) If any part of the cost of the property to the borrower has been incurred by him more than 12 months prior to the extension of credit, or if any part of such property has been acquired by gift, exchange, or inheritance, 'values shall be the appraised value as determined in good faith by the Registrant who extends the credit; (3) For an extension of credit which is for the purpose of financing the construction of a residence on farm property, 'value' shall be the total of (A) the cost or estimated cost of such new construction, and (B) 5 per cent of such cost or estimated cost.9 (4) For multi-unit residential property and nonresidential property, other than major additions or major improvements: (A) In the case of an extension of credit in connection with a bona fide sale of multi-unit residential property or nonresidential property, 'value* shall be the bona fide sale price; (B) In the case of any other extension of credit .....„221Lsapect to multi-unit residential property or "9The 5 per cent is added when the extension of credit is for the purpose of financing the construction of a residence on farm property in order to take account of the value of the land upon which the residence is to be constructed.” 289 2/9/51 -9- "nonresidential property, 'value' shall be the appraised value as determined in good faith by the Registrant who extends the credit. Appraisals pursuant to this provision and other provisions of this regulation will be subject to inspection by the Board and the Federal Reserve Banks in accordance with section 6(d) of this regulation, and appraisals found to be in excess of those dictated by sound and established practice in the community shall be deemed sufficient ground for the suspension of the Registrant pursuant to section 3(c) of this regulation. (j) 'Bona fide sale price' means the amount paid or to be paid by the vendee in money or its equivalent. It includes, in addition to cash, (1) the value of any property accepted in part payment, (2) the unpaid principal amount of any indebtedness incurred or assumed by the vendee or to which the property remains subject, (3) the amount of any liens for taxes or special assessments which are in default or currently due and payable, (4) the amount of any mechanics' liens or other liens which the vendee is required to discharge, (5) the amount which the vendee agrees to pay for any alteration or other modification made or to be made to the property as an incident to the sale thereof, and (6) any amounts paid by the vendee for closing costs. It does not include any prepaid charges, or any accrued rents which will be paid to the vendee. (k) gResidencell° means any structure which is used or designed for permanent or transient dwelling purposes, and which include at least one but not more than four family units, if the floor space contained in such family units comprises at least one-half of the floor space of such structure. Houses connected by common walls and commonly known as grow houses' or 'semidetached houses' shall be considered separate structures. (1) 'Multi-unit residencell° means any structure such as an apartment house or apartment hotel (whether owned cooperatively or otherwise) which is used or designed for Dermanent or transient dwelling purposes, and which includes "10Structures such as hotels, motels, rooming houses, Club houses, fraternity or sorority houses, rest homes, and the like, in which more than one-half of the floor space consists of units which do not contain kitchen facilities or !Pace designed for kitchen facilities shall not be deemed to De residences or multi-unit residences. See section 2(r)." q0 2/9/51 —10-. "more than four family units, if the floor space contained in such family units comprises at least one-half of the floor space of such structure. (m) 'Family unit' means space which is used or designed for dwelling purposes and which contains one or more rooms with kitchen facilities (or space designed for kitchen facilities) in or appurtenant to such rooms. (n) 'Residential property' means any real property, other than farm property, on which there is or is to be a residence or residences. (o) 'Farm property' means any real property, other than multi-unit residential property or nonresidential property, located outside of urban areas, which is principally used for the production of crops, livestock or other agricultural commodities. (p) 'Multi-unit residential property' means any real property on which there is or is to be a multi-unit residence or multi-unit residences. (q) 'Nonresidential property' means any real property on which there is or is to be a nonresidential structure or structures. (r) 'Nonresidential structure'll means any structure other than (1) a residence, (2) a multi-unit residence, (3) a school, hospital, or church, (4) a structure exclusively used or designed for use (i) by a public utility, (ii) by any Government or political subdivision,or (5) a structure more than 80 per cent of the floor space of which is used or designed for use (i) in processing materials, goods, or articles into finished or partly finished manufactured products, (ii) in mining or otherwise extracting raw materials, or (iii) on farm property in the production, shelter, or storage incidental thereto, of crops, livestock or other „agricultural commodities. '-1-Nonresidential structures ordinarily subject to this l'egulation include, among others, the following: Office buildings, warehouses, stores (including sales display and service facilities, whether wholesale or retail), banks, hotels, motels, motor courts, garages, automobile service stations, restaurants, and clubs." 291 2/9/51 -11- "(s) 'public utility' means any transportation company, electric light or power company, gas company, water company, pipe line company, telephone company, telegraph company, or other similar business which is operated for the convenience, service or accommodation of the public if (1) the operations of such company are supervised by a Federal or State agency, or (2) the members of the public as such are entitled as of right to demand and use its facilities or services. "SECTION 3. GENERAL REQUIREMENTS AND REGISTRATION "(a) General Requirements.--No person engaged in the business of extending real estate credit with respect to residences, residential property, multi-unit residential property or nonresidential property shall extend real estate construction credit unless (1) he is registered pursuant to this section, and (2) he has no knowledge of, and has no reason to know, any fact by reason of which such credit fails to comply with any applicable provision of this regulation. "(b) Registration.--Every person engaged in the business of extending real estate credit with respect to residences, residential property, multi-unit residential property or nonresidential property shall be deemed to be registered pursuant to this regulation until such time as the Board, by public announcement, may require registration statements to be filed by all, or any specified classes of, such persons. Should the Board require such registration statements, a person shall continue to be registered after the time such statements are required only if he shall have complied with the requirements of the Board's announcement. Very person who is registered in accordance with the provisions of this subsection is referred to in this regulation as a 'Registrant.' "(c) Suspension of Registration.--Any Registrant may, after reasonable notice and opportunity for a hearing, be suspended by the Board, as to all or as to particular activities or particular offices and for specified or indefinite Periods, because of any willful or negligent failure to comply with any provision of this regulation. "A suspension for a specified period will terminate uPon the expiration of such period. A suspension for an indefinite period may be terminated by the Board, in its discretion, if the Board is satisfied that its action would 292 2/9/51 -12- 'not lead to further violations of this regulation by the suspended Registrant and would not be otherwise incompatible with the public interest. "SECTION 4. EXTENSION OF CREDIT "(a) Amount; Maturity; Amortization.--Except as otherwise permitted by this regulation, no Registrant shall, either in connection with a sale or otherwise: (1) Extend real estate construction credit with respect to residential property, multi-unit residential property, or nonresidential property (other than major additions or major improvements) if the amount of credit outstanding with respect to the property (including any credit exempt from, or not subject to the prohibitions of, this regulation) exceeds, or as a result of such extension of credit would exceed, the applicable maximum loan value of such property; (2) Extend real estate construction credit for the purpose of financing a major addition or major improvement to a residence, multi-unit residence or nonresidential structure if the amount of credit outstanding for the purpose of financing the major addition or major improvement (including any credit exempt from, or not subject to the prohibitions of, this regulation) exceeds, or as a result of such extension of credit would exceed, the applicable maximum loan value of such major addition or major improvement; (3) Extend real estate construction credit for the purpose of financing the construction of a residence on farm property if the amount of credit outstanding for the purpose of financing the construction of the residence (including any credit exempt from, or not subject to the prohibitions of, this regulation) exceeds, or as a result of such extension of credit would exceed, the applicable maximum loan value of such residence; (4) Extend real estate construction credit if such credit would have a maturity which exceeds the applicable maximum maturity provisions, or would be repaid in any manner which does not conform with the applicable amortization provisions, set forth in the Supplement to this regulation; (5) Purchase, discount or lend on any credit instrument evidencing real estate construction credit which is 293 2/9/51 -13- "subject to and not exempt from this regulation, unless the terms of such credit conformed with the provisions of the Supplement to this regulation when such credit was originally extended or conform with the provisions of the Supplement at the time of such purchase, discount or loan; but for the purposes of this paragraph credit shall be considered to be subject to the regulation even though extended by a person other than a Registrant; (6) If the Registrant is acting as principal--sell, or transfer title to, residential property, multi-unit residential property or nonresidential property on which there is new construction (which is a residence, multiunit residence or nonresidential structure, or a major addition or major improvement to a residence, multi-unit residence or nonresidential structure) and with respect to which the vendee or transferee assumes, or takes such property subject to, indebtedness secured by a mortgage or other lien upon such property, if the amount of outstanding credit (including any credit exempt from, or not subject to the prohibitions of, this regulation) which was extended after October 12, 1950, (or after January 12, 1951, if it is a sale or transfer of multiunit residential property or after February 15, 1951, if it is a sale or transfer of nonresidential property) with respect to the property exceeds, or as a result of such sale or transfer would exceed, the applicable maximum loan value of such property, or if any outstanding real estate construction credit (subject to and not exempt from this regulation) with respect to such property does not conform with the provisions of this regulation and the Supplement thereto.12 (b) Secondary Borrowing.--Except as otherwise permitted by this regulation, no Registrant shall extend real estate construction credit if he knows or has reason to know that there is, or that there is to be, any other credit extended with respect to the property13 (1) which, When added to the credit proposed to be extended by the Registrant, would cause the total amount of credit out2.L.92111111.2ill respect to the property13 (including any "12For application to three- and four-unit residences, see section 6(j)." "13As used here, 'property' means residential property, mUlti-unit residential property, nonresidential property, a residence on farm property, or a major addition or major imProvement to a residence, a multi-unit residence or nonresidential structure, as the case may be." 2/9/51 -14- "credit exempt from or not subject to the prohibitions of, this regulation) to exceed the applicable maximum loan value of such property, or (2) which, if it is real estate construction credit subject to and not exempt from this regulation, does not or would not comply with the applicable maximum maturity and amortization provisions set forth in the Supplement to this regulation. "(c) Ascertaining Nature of Credit.--No Registrant shall extend any credit unless he is satisfied, and maintains records which reasonably demonstrate on their face, whether such credit is or is not real estate construction credit; provided, however, unless the Registrant has actual knowledge that the credit is real estate construction credit, the requirements of this sentence shall not apply (1) to any extension of credit which is made by a bank, savings and loan association, or similar institution and which is to be repaid within six months and is fully secured by withdrawable shares issued by or savings accounts held with the lender, or (2) to any extension of credit in the ordinary course of business for a commercial, agricultural, or business purpose where the Registrant, because of a previous course of dealings or correspondence between himself and the borrower, has no reason to believe that the credit is or will be real estate construction credit. The preceding sentence does not require that a Registrant obtain a signed statement from each borrower, and if the Registrant is satisfied that credit is not real estate construction credit, other kinds of records may be used to demonstrate this fact. Such records may Include, among others, (1) any correspondence, memoranda, loan applications or other documents of any kind, whether or not originating in connection with the credit in question, which on the basis of a reasonable interpretation show that the credit is not real estate construction credit; or (2) a written endorsement or rubber stamp legend, placed Upon the credit instrument or upon other papers in connection with the credit and signed by the Registrant or a responsible officer of the Registrant stating that he is satisfied that the credit in question is not real estate construction credit. If, however, a Registrant desires to Obtain, and accepts in good faith, a signed Statement of the Borrower stating that the credit is not wholly or partly secured by, or for the purpose of purchasing or carrying, or the Purpose of financing, or one which involves the right to acquire or use, new construction on real property or real property on 295 2/9/51 -15- "which there is new construction (or that such new construction, if any, is not a residence, multi-unit residence or nonresidential structure, or a major addition or major improvement to a residence, multi-unit residence or nonresidential structure), such Statement shall be deemed to be compliance with the requirements of this subsection. "(d) Statement of the Borrower.--No Registrant shall.extend real estate construction credit unless he has accepted in good faith a signed Statement of the Borrower (l) stating whether the credit is with respect to property-Lit subject to the regulation, and (2) stating, if the Registrant claims that such credit is exempt from this regulation, the reason for such exemption; and, if the credit is not exempt, (3) stating the amount of credit previously extended and outstanding, and the amount of any ottier credit to be extended, with respect to the property214 (4) stating, if the Registrant in computing *value! relies upon cost or estimated cost to the borrower (where such cost or estimated cost may be used for this purpose), the bona fide amount of such cost or estimated cost to the borrower, and (5) stating, if the extension of credit is in connection with a sale, the sale price, that the sale Price was bona fide, and the value and a brief description Of any property accepted in part payment. If the extension of credit is in connection with a sale, such Statement shall state that the vendor of the property has or will have no financial interest in such property or in the proceeds of any subsequent disposition thereof, except such interest as may be fully disclosed to the Registrant. The amount of any such financial interest of the vendor retained in the Property or any proceeds of the disposition thereof shall be deemed to be real estate construction credit extended with respect to such property. The Statement of the Borrower may be made, if desired, on a form a sample of which is .:12.1aaaLat any Federal Reserve Bank or branch. all "11tAs used here, 'property' means residential property, multi-unit residential property, nonresidential Property, a residence on farm property, or a major add!or major improvement to a residence, multi-unit residence, or nonresidential structure, as the case may be." 2/9/51 "SECTION -16- 5. EXEMPTIONS AND EXCEPTIONS "(a) Minimum Amount.--The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to any extension of credit if the total amount thereof, including all outstanding credit which was granted after October 12, 19500 with respect to the same property115 is not in excess of $2,500. "(b) Short-Term Residential Construction Credits.--The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to any credit which is for the purpose of financing the construction of a residence or residences or a major addition or major improvement to a residence, if the maturity of such credit is not more than 18 months; provided, that this exemption shall not be construed to permit any renewal, revision, consolidation, or refinancing of such credit except on terms which conform with the provisions of this regulation and the Supplement thereto. If (1) the initial purpose of an extension of credit having a maturity exceeding 18 months is the financing of the construction of a residence or residences or a major addition or major improvement to a residence and (2) the credit instrument provides, or an agreement with respect to the credit requires, that within 32 days after completion of such construction or upon a specified date when the Registrant estimates in good faith the construction will be completed, which in either case shall be not more than 18 months after the extension of the credit, the terms of the credit shall conform thereafter with the applicable maximum loan value and the applicable maturity and amortization provisions set forth in Schedule Icf the Supplement to this regulation, then in such event the prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to such credit until after the lapse of the time 80 described or specified, but if at any time after the date of the extension of such credit, a Registrant sells or transfers title to the property with respect to which the credit le extended, such sale or transfer of title must conform to :A2ns of this regulation and Schedule I of the "1.5As used here, !property' means residential property, mUlti-unit residential property, nonresidential property, 4 residence on farm property, or a major addition or major improvement to a residence, multi-unit residence, or nonresidential structure, as the case may be." 2/9/51 -17- "Supplement thereto•16 "(c) Other Short-Term Construction Credits.—The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to any credit which is for the purpose of financing the construction of a multi-unit residence or nonresidential structure or a major addition or major improvement to a multi-unit residence or nonresidential structure and which is extended to any person other than the owner of the property and has a maturity of not more than 24 months; provided, that this exemption shall not be construed to permit any renewal, revision, consolidation, or refinancing of such credit except on terms which conform with the provisions of this regulation and the Supplement thereto. Extensions of credit for the Purpose of financing the construction of a multi-unit residence or nonresidential structure or a major addition or major improvement to a multi-unit residence or nonresidential structure may not be made to the owner of the property in a total amount exceeding the maximum loan value of the property; but any such credit extended to the owner of the property shall be exempt from the amortization provision in Schedule III of the Supplement to this regulation if (1) such credit has a maturity of not more than 24 months, or (2) the initial purpose of credit having a maturity exceeding 24 months is the financing of the construction of a nonresidential structure or nonresidential structures or a major addition or major improvement to a nonresidential structure) and the credit instrument provides, or an agreement with respect to the credit requires, that within 32 days after completion of such construction or upon a specified date when the Registrant estimates in good faith the construction will be completed, which in either case shall be not more than 24 months after the extension of the credit, the terms of the credit shall conform thereafter with tilei.,.2Z]_-icab1e maturity and amortization provisions set "It should be noted that this exemption does not apply to any credit which is for the purpose of financing the construction of a multi-unit residence or nonresidential structure or a major addition or major improvement to a multi-unit residence or nonresidential structure. However, see section 5(c)." 2/9/51 -18- "forth in Schedule III of the Supplement to this regulation; but if at any time after the date of the extension of such credit, a Registrant sells or transfers title to the property with respect to which the credit is extended, such sale or transfer of title must conform to the provisions of this regulation and Schedule III of the Supplement thereto. "(d) Medical Expenses, Etc.--The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to any extension of real estate construction credit as to which the Registrant accepts in good faith a signed Statement of the Borrower certifying that the proceeds thereof are to be used for bona fide medical, hospital, dental, or funeral expenses, or to pay debts incurred for such expenses, and that the proceeds of the extension are to be paid over in amounts specified in such Statement to persons whose names, addresses and occupations are stated therein. "(e) Casualties.--The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to any extension of real estate construction credit as to which the Registrant accepts in good faith a signed Statement of the Borrower certifying that the proceeds thereof are to be used solely for the replacement, reconstruction or repair of a residence, multi-unit residence or nonresidential structure destroyed or substantially damaged by flood, fire or other similar casualty. "(f) Contracts to Sell.--None of the provisions of this regulation shall apply to a contract to sell real Property (1) which does not provide for the payment of any Part of the purchase price or of any amount to be subsequently applied to such price, except a deposit of earnest money, before the transfer of title to such property, (2) which is to be performed by a tranfer of title to such property within six months after the date on which the contract was entered into, and (3) which provides for the subsequent transfer of title to such property on terms which conform to the provisions of this regulation and the Supplement thereto in effect on the date the contract was entered into. "(g) Contemplated Construction.--AnY builder or other Person who had made substantial commitments or undertakings before August 3, 1950, with a view to the building or new Construction which is a residence or a major addition or 299 2/9/51 -19- "major improvement to a residence and who asserts that his inability to obtain credit to finance such new construction on the basis contemplated by him and by the Registrant prior to August 31 1950, would cause him substantial hardship, may apply to the Federal Reserve Bank of the district in which the new construction is contemplated for an exemption from this regulation for such new construction, showing all the facts and submitting all necessary supporting documents with respect to his commitments or undertakings and why compliance with the regulation would cause him substantial hardship. If such Federal Reserve Bank after consideration of the application and supporting documents determines that substantial commitments were made prior to August 3, 1950, and that substantial hardship would result from the application of this regulation in such case, it may issue to such builder or other person a certificate approving such application and thereupon any extension of credit to such builder or other person by the Registrant named in such certificate with respect to the new construction that may be specified in such certificate shall be exempt from the prohibitions of subsections (a) and (b) of section 4 of this regulation. Applications under this subsection must be sent to the Federal Reserve Bank prior to March 15, 1951. "(h) Labor and Material.--No person shall be required to register pursuant to section 3 of this regulation because of the fact that he performs labor or furnishes material for new construction on an open account, unless he shall be otherwise engaged in the business of extending real estate credit. "(i) Credits Secured by Life Insurance Policies.-None of the provisions of this regulation shall apply to an extension of real estate construction credit which is fully secured by the loan value or cash surrender value Of a life insurance policy; and, notwithstanding any other provisions of this regulation, a Registrant in determining the amount of credit which he may extend under the provisions of section 4 of the regulation need not take into account any credit which is secured in the manner specified in this subsection. "(j) Farm Property.--The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply t° any extension of real estate construction credit with respect to farm property unless the extension of credit is 300 -20- V9/51 "for the purpose of financing the construction of a residence on farm property or a major addition or major improvement to a residence on farm property.1L7 "(k) Exemption for Certain New Construction.--The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to any real estate construction credit extended prior to May 1, 1951, with respect to new construction (1) begun prior to October 12, 1950, if such new construction is a residence or a major addition or major improvement to a residence, (2) begun prior to January 12, 1951, if such new construction is a multi-unit residence or a major addition or major improvement to a multi-unit residence,18 or (3) begun prior to February 15, 1951, if such new construction is a nonresidential structure or a major addition or major improvement to a nonresidential structure. "(1) Materials, Articles and Services Used in New Construction--None of the provisions of this regulation shall apply to an extension of credit which is for the purpose of purchasing, or is in connection with a sale of, materials, articles and services for new construction if the credit is extended on terms which provide for a minimum down payment of 10 per cent, or a maximum loan value of 90 per cent, and for repayment within 30 months by (1) substantially equal monthly or weekly Payments covering principal and interest or (2) substqqtially equal monthly or weekly payments of principal.-L7 "SECTION 6. MISCELLANEOUS PROVISIONS "(a) Evasions.--No extension of real estate construction credit complies with the requirements of this Ilat4LILL1Lif at the time it is made there is any agreement, "17It is to be noted that the term ifarm property, as defined in section 2(o) does not include multi-unit residential property or nonresidential property; accordIngly, the location of multi-unit residential property or nonresidential property does not affect the question whether extensions of credit with respect to such property are subject to the regulation." "18For application to three- and four-unit residences, see section 6(j).11 "19It should be noted that in certain circumstances 114°re restrictive terms would be required by Regulation W." 2/9/51 -21- "arrangement, or understanding, of which the Registrant knows or has reason to know, by which credit is or is to be extended in violation of this regulation, even though such extension of credit is or is to be made indirectly, or which would otherwise evade or circumvent, or conceal any evasion or circumvention of, any provision of this regulation or the Supplement thereto. No Registrant extending credit subject to this regulation shall divide such credit into two or more parts, or enter into any agreement or understanding with any other person as a result of which two or more credits are extended, when the purpose or effect of such action is to circumvent or avoid the amortization or maturity provisions of this regulation or the Supplement thereto. "(b) Outstanding Contracts and Obligations.--The prohibitions of subsections (a) and (b) of section 4 of this regulation shall not apply to or affect (i) any credit with respect to residential property or a major addition or major improvement to a residence if extended prior to October 12, 1950, or pursuant to any firm commitment to extend credit made prior to such date, (ii) any credit with respect to multi-unit residential property or a major addition or major improvement to a multi-unit residence if extended prior to January 12, 1951, or pursuant to any firm commitmentto extend credit made prior to such date, or (iii) any credit with respect to nonresidential property or a major addition or major improvement to a nonresidential structure if extended prior to February 15, 1951, or pursuant to any firm commitment to extend credit made prior to such date, if such firm commitment complies With Clause (1) of the next succeeding sentence. For this Purpose, a firm commitment means either (1) a written agreement under which the Registrant is required without option or discretion on his part to extend credit upon demand by the borrower or upon compliance by the borrower With one or more conditions referred to in such agreement; or (2) any other agreement to extend credit with respect to residential property, a residence, or a major addition or major improvement to a residence which has been entered into in good faith by the parties and in reliance upon which the prospective borrower or builder has taken specific action prior to October 12, 1950, if the Registrant prior to January 1, 19510hall have sent to the Federal Reserve Bank of the district in which he does business a letter or :302 2/9/51 -22- “other statement reciting the facts with respect to such agreement and the specific action taken by the prospective borrower or builder prior to October 12, 1950; or (3) any other agreement to extend credit with respect to multi-unit residential property or a major addition or major improvement to a multi-unit residence which has been entered into in good faith by the parties and in reliance upon which the prospective borrower or builder has taken specific action prior to January 12, 1951, if the Registrant prior to March 15, 1951, shall have sent to the Federal Reserve Bank of the district in which he does business a letter or other statement reciting the facts with respect to such agreement and the specific action taken by the prospective borrower or builder prior to January 12, 1951.'° "(c) Real Property Outside the United States.-None of the prohibitions of this regulation shall apply to any extension of real estate construction credit With respect to real property in Alaska, the Panama Canal Zone, or any territory or possession outside the continental United States. "(d) Preservation of Records; Inspections; Administrative Reports.--For the purpose of determining whether or not there has been compliance with the provisions of this regulation, every person extending real estate credit with respect to residences, residential property, multi-unit residential property or nonresidential property shall preserve for the period hereinafter specified such accounts, correspondence, memoranda, papers, books, and Other records, or photostats or other copies thereof, as are relevant to establishing whether such person is engaged in the business of extending such real estate credit; whether each credit extended is or is not real estate construction credit with respect to a farm residence, residential property, multi-unit residential Property, nonresidential property, or a major addition or major improvement to a residence, multi-unit residence, Or nonresidential structure ; and whether each extension of real estate construction credit conformed with the rovisions of this regulation and the Supplement thereto. "For application to three- and four-unit residences, ees section 6(j).” 2/9/51 -23- "Every such person shall preserve such records for three years after the extension of such credit, or until the repayment of the credit, whichever period is shorter, provided, however, that if such person sells or transfers an obligation evidencing a credit (or releases collateral held as security for such credit) and delivers his records relevant to such credit to the purchaser or transferee, such person need not thereafter maintain such records with respect to the credit but shall keep a record of the identity of the purchaser or transferee and the date of such sale or transfer (or such release). Every such person shall permit the Board or a Federal Reserve Bank, by its duly authorized representative, to inspect such records and business operations as the Board or a Federal Reserve Bank may deem necessary or appropriate; and when ordered to do so, shall furnish, under oath or otherwise, such reports, information, or records relevant to extensions of credit as the Board or a Federal Reserve Bank may deem necessary or appropriate for the enforcement and administration of this regulation.21 "(e) Default and Foreclosure; Serviceman's Preinduction Debt.--Nothing in this regulation shall be construed to prevent any Registrant from taking such action as he shall deem necessary in good faith (1) With respect to any extension of credit to any member or former member of the armed forces of the United States Which was made to him prior to his induction into such service and assignment to active duty, or (2) for the Registrant's own protection in connection with any credit Which is in default and is the subject of a bona fide collection effort by the Registrant. The prohibitions Of subsections (a) and (b) of section 4 of this regulation shall not apply to an extension of credit by a Registrant in connection with a sale of property acquired by him through foreclosure proceedings if such credit does not exceed the unpaid principal amount of the foreclosed credit, the costs of acquisition through foreclosure, and the costs incurred in the rehabilitatlon and repair of the property prior to the sale. "(f) Veterans Programs under State Law.--Nothing 11"I th.....1 -eation shall be construed as prohibiting a "21The reporting and record-keeping requirements this regulation have been approved by the Bureau of L'hel Budget in accordance with the Federal Reports Act °I '1942." 4'1 n 3 , 2/9/51 -24- "State (as distinguished from any other person affected by this regulation) from according rights and preferences to eligible veterans by extending, guaranteeing or insuring, in whole or in part, real estate construction credit pursuant to State legislation similar in purpose or effect to Title III of the Servicemen's Readjustment Act of 1944, as amended, provided that the terms of the credit are no more liberal than are currently -permitted in the case of comparable loans insured or guaranteed under that Act. "(g) State Housing Programs.--Nothing in this regulation shall prohibit extensions of credit to public corporations created pursuant to a public housing program of a State or municipality where such credit is extended, insured, or guaranteed by the State or municipality or the State or municipality has made commitments to furnish funds to assure repayment. "(h) Extension of Credit for Mixed Purposes.--In the case of an extension of credit which is partly subject to one provision of this regulation and partly subject to another provision, whether by reason of the types of property involved, or otherwise, the amount and terms of such credit shall be such as would result if the credit were divided into two or more parts and each part were treated as if it stood alone. In the case of an extension of credit which is partly subject to this regulation and Partly not subject to (or exempt from) the regulation, the amount and terms of the extension of credit will comply with this regulation if they satisfy the requirements of this regulation applicable to the subject portion. "(i) Calculation of Maximum Maturity.--In calculating the maximum maturity of credits which are subject to maximum maturity provisions in the Supplement to this regulation, a Registrant may use, at his option, as 'the date such credit is extended,' any date not more than 32 days Subsequent to the actual date such credit is extended. "(j) Three- and Four-Unit Residences.--Notwithstanding any other provisions of this regulation, the Provisions of sections 4(a)(6), 5(k), and 6(b) of this l'egulation which are applicable to multi-unit residences Shall be applicable to residences containing three or four family units. "(k) Right of Registrant to Impose Stricter Requirements.--Any Registrant, if he desires, may refuse to extend credit, extend less credit than the amount permitted by this regulation, or require that repayment be made within a 205 2/9/51 -25- "shorter period or in larger instalments than prescribed in the Supplement to this regulation. "(1) Reliance upon Statement of the Borrower.--The facts set forth in any signed Statement of the Borrower which a Registrant accepts and relies upon in good faith shall be deemed to be correct for the purposes of the Registrant. "(m) False Statements.--The making or submission by any person of any false, fictitious or fraudulent statement or representation pursuant to, or which is intended to conform to, or show compliance with, any requirement or provision of this regulation, shall be a violation of this regulation. "(n) Statutory Penalties.--The Act provides that 'Any person who willfully violates any provision of section * * 602 (relating to real estate construction credit) or any regulation or order issued thereunder, upon conviction thereof, shall be fined not more than $5 000 or imprisoned not more than one year, or both.' "(0) Enforceability of Contracts.--Nothing in this regulation shall affect the enforceability of any contract. "SUPPLEMENT TO REGULATION X "As amended effective February 15, 1951 "SCHEDULE 1. ONE- TO FOUR-UNIT RESIDENTIAL PROPERTY AND FARM RESIDENCES Mlaximum Loan Value.--For the purposes of Regulation X, maximum loan values for all residential property, farm residences, and major additions and major improvements to residences shall be determined as follows: (1) Determine the 'value' of the residential property, farm residence, or major addition or major improvement to a residence, as the case may be, in accordance with section 2(i) of the regulation; (2) divide this 'value' by the number of family units in order to determine the 'value per family unit'; (3) determine the 'maximum loan value per family unit' from the table below; (4) multiply the 'maximum loan value per fam4y unit' by the number of family units in order to determine the maximum loan value of the residential property, farm residence, or major addition or major improvement, as the case may be. Where a major addition or major improvement will change the number of family units, the 'value per family unit' shall be computed on the basis of the number Of family units which the residence will contain after the 2/9/51 -26- "addition or improvement has been completed. In the case of credit extended with respect to residential property or farm residences involving more than one structure, the maximum loan value may be applied separately with respect to each such structure or with respect to the entire property or all such residences, at the election of the Registrant. The 'maximum loan value If the 'value per family unit' is per family unit' is Not more than $5,000 90% of 'value perfamily unit' More than $5,000 but not more $4,500 plus 65% of excess of than $9,000 'value per family unit' over $5,000 More than $9,000 but not more $7,100 plus 60% of excess of than $15,000 'value per family unit' over $9,000 More than $15,000 but not more $10,700 plus 20% of excess of than $20,000 'value per family unit' over $15,000 More than $20,000 but not more $11,700 plus 10% of excess of than $2h,250 'value per family unit' over $20,000 Over $24,250 50% of 'value per family unit' 'Waturity.-- For the purposes of Regulation X, the following maturity requirements are prescribed for credit With respect to residential property, farm residences, and major additions and major improvements to residences: No such credit subject to the regulation shall have a maturity of more than 20 years from the date such credit is extended except that a credit extended with respect to property having a value (determined as provided in section 2(1) of the regulation) of $7,000 or less may have a maturity of not more than 25 years if it is to be fully repaid at or before the date of maturity through amortization on the basis prescribed in clause (2) of the following paragraph relating to amortization: "Amortization.--For the purposes of Regulation X, the following amortization requirements are prescribed for credit with respect to residential property, farm residences, and Major additions and major improvements to residences: With respect to every such credit subject to the regulation, amortization payments shall be required which either (1) will ,Ilnually reduce the original principal amount of such credit Q.,Y* not less than 5 per cent until the outstanding balance gt" such credit has been reduced to an amount equal to or 307 2/9/51 -27- "less than 50 per cent of the value of the property with respect to which such credit was extended or (2) will fully liquidate the original principal amount of such credit not later than the date of the maturity of the credit through substantially equal monthly, quarterly, semiannual, or annual payments covering principal and interest or through substantially equal monthly, quarterly, semiannual, or annual payments of principal. The value referred to in the preceding sentence shall be determined as of the date the credit was extended in the manner provided in section 2(i) of the regulation. If the amount of the credit when extended is not more than 50 per cent of such value, such credit shall not be subject to the amortization provisions of this paragraph. "SCHEDULE II. MULTI-UNIT RESIDENTIAL PROPERTY "Maximum Loan Value.--For the purposes of Regulation X, maximum loan values for all multi-unit residential Property and major additions and major improvements to multi-unit residences shall be determined as follows: (1) determine the 'value' of the multi-unit residential Property, or major addition or major improvement to a multi-unit residence, as the case may be, in accordance With section 2(i) of the regulation; (2) divide this 'value' by the number of family units in order to determine the 'value per family unit'; (3) determine the 'maximum loan value per family unit' from the table below; (4) multiply the 'maximum loan value per family unit' by the number of family units in order to determine the maximum loan value of the multi-unit residential property, or the major addition or major improvement, as the case may be. Where a major addition or major improvement will change the number of family units, the 'value per family unit' shall be computed on the basis of the number of family units which the multi-unit residence will contain after the addition or improvement has been completed. In the case of credit extended with respect to multi-unit residential property involving more than one such multiunit residence, the maximum loan value shall be applied separately with respect to each such multi-unit residence or with respect to the entire property, at the election °f the Registrant. 2/9/51 "If the 'value per family unit' is Not more than $71000 More than $71000 but not more than $15,000 More than $151000 but not more than $231500 Over $231500 -28The 'maximum loan value •er family unit' is 3 of 'value per family unit' $5,810 plus 53% of excess of 'value per family unit' over $71000 $101050 plus 20% of excess of 'value per family unit' over $15,000 50% of 'value per family unit' "SCHEDULE III. NONRESIDENTIAL PROPERTY "Maximum Loan Value.--For the purposes of Regulation X1 the maximum loan value of any nonresidential property or major addition or major improvement to a nonresidential structure shall be 50 per cent of the 'value' of the property, or the major addition or major improvement, determined in accordance with section 2(i) of this regulation. In the case of credit extended with respect to nonresidential property involving more than one nonresidential structure, the maximum loan value may be applied separately With respect to each such structure, or with respect to the entire property, at the election of the Registrant. "Maturity.--For the purpose of Regulation X1 the following maturity requirements is prescribed for credit with respect to nonresidential property and major additions and major improvements to nonresidential structures: No such credit subject to the regulation shall have a maturity Of more than 25 years from the date such credit is extended. "Amortization.--For thepurposes of Regulation X1 the following amortization requirement is prescribed for credit With respect to nonresidential property and major additions and major improvements to nonresidential structures: With respect to every such credit subject to the regulation, amortization payments shall be required which will fully liquidate the original principal amount of such credit not later than the date of the maturity of the credit through substantially equal monthly, quarterly, semiannual, or annual payments covering principal and interest or through substantially equal monthly, quarterly, semiannual or annual Payments of principal." 2/9/51 -29Secretary's Note: Advice WAS received in a letter dated February 12, 1951 that the Housing and Home Finance Administrator concurred in the Regulation and its terms and that he also concurred in its becoming effective February 15, 1951. It was also agreed unanimously that a press statement with respect to the amended Regulation would be given to the press on February 14, 1951, for publication in the morning papers of February 15, 1951, in such form as was approved by Chairman McCabe and Mr. Norton. Unanimous approval was also given to the following telegram to the Presidents of the Federal Reserve Banks and the Managing Officers of the Federal Reserve Bank Branches: "This wire to all Federal Reserve Banks is also being sent to Federal Reserve Bank branches for their information. The Board has approved amended Regulation X to cover nonresidential property and, assuming that the necessary clearance can be obtained from the Housing Administrator, this information will be given to the press on the afternoon of Wednesday, February 14, 1951, for release in morning papers on Thursday, February 15, 1951. Amended regulation will become effective February 15. Photo offset negatives and page Proofs will be mailed or air mailed special delivery to reach your head office not later than Monday, February 12. please have regulation printed as soon as negatives are received and mail copies to interested Registrants to reach them not earlier than, but if possible on, the morning of Thursday, February 15. Press release will be wired to you as soon as possible. It should be made clear at any press conference that you may hold that any Registrants who do not have copy of regulation on Thursday morning can obtain copy at any Federal Reserve Bank or branch. Please keep informatlon contained in this wire strictly confidential until time Of release of press statement." 0 2/9/51 -30The following statement for publication in the Federal Register was approved unanimously: "2. a. Part 225 is issued by the Board of Governors of the Federal Reserve System, with the concurrence of the Housing and Home Finance Administrator with respect to provisions relating to real estate construction credit involving residential property and multi-unit residential property, under authority of the Defense Production Act of 1950, approved September 8, 1950, and Executive Order No. 10161, dated September 9, 1950. "The purpose of this part is to prescribe appropriate terms in connection with real estate construction credit, including appropriate supporting rules, in order to carry out the purposes and policy of the aforementioned authorities. The principal purpose of this amendment is to broaden the scope of this part by making it applicable to non-residential real estate credit with certain exceptions. The amendment also makes other changes with the view of providing more workable and effective regulation. "b. Section 709 of the Defense Production Act of 1950 provides that the functions exercised linder such Act shall be excluded from the operations of the Administrative Procedure Act (60 Stat. 237) except as to the requirements Of section 3 thereof. "In amending this part and in accordance with the requirements of the aforesaid section 709, there has been oonsultation with industry representatives, including trade association representatives, and consideration has been given to their recommendations." At this point all of the members of the staff with the exceptiort of Messrs. Carpenter, Sherman, and Kenyon withdrew, and the action 4t4ted with respect to each of the matters hereinafter referred to was takeX1 by the Board: Minutes of actions taken by the Board of Governors of the Peclerai Reserve System on Thursday, February 8, 1951, were approved 1 2/9/51 -31There were presented telegrams to the Federal Reserve Banks of Boston, New York, Cleveland, Richmond, Atlanta, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco stating that the Board approves the establishment without change by the Federal Reserve Bank of San Francisco on February 6, by the Federal Reserve sank of Atlanta on February 7, by the Federal Reserve Banks of New York) Cleveland, Richmond, St. Louis, Minneapolis, Kansas City, and Dallas on February 80 1951, and by the Federal Reserve Bank of Boston today, of the rates of discount and purchase in their existing sahedules. Approved unanimously. Memorandum dated February 7, 1951, from Mr. Horbett„ Assistalit Director of the Division of Bank Operations, recommending an increase in the basic salary of Howard G. Smith, an analyst in that kvision, from $3,450 to $3,575 per annum, effective February 18, 1951. Approved unanimously. Memorandum dated January 19, 1951, from Mr. Margot, Director the Division of International Finance, recommending the appointof Lamrence Bostow as an Analyst in that Division, on a temporary 1114finite basis, with basic salary at the rate of $4,200 per annum, '1141 " tive as of the date upon which he enters upon the performance "his duties after having passed the usual physical examination. Approved unanimously. 3`i 2/9/51 -32Letter to Mr. Leedy, President of the Federal Reserve Bank Of Kansas City, reading as follows: "Thank you for your letter of January 25, 1951, advising us of the officers who have been appointed by the Directors for the current year. It is noted that Vice Presidents Phillips and Pipkin will attain the age of 65 during 1951 and that their reappointments have been limited accordingly. "Since our telegram of January 31, the Government has issued regulations which, among other things, permit salary increases which are within the pattern of previous established practice. Accordingly, the Board of Governors approves the payment of salary to John T. Boysen as an officer of the Bank with the title of Assistant Cashier at the rate of $6,800 per annum for the period January 18, 1951, through May 31, 1951." Approved unanimously. Telegram to the Presidents of all Federal Reserve Banks, leWing as follows: ' "As one means of accumulating reserve stocks of currency to be paid out only in an extreme emergency, suggestion has been made that silver certificates in one dollar denomination and own Federal Reserve notes in five, ten and twenty-dollar denominations sorted as 'unfit' not be cut and forwarded for redemption as at present, but be retained by Federal Reserve Banks and Branches until a Supply of such 'unfit' currency has been accumulated equal to approximately one month's total payments. In determining unfit currency same standard of fitness would be used as at present, except that torn and patched currency would not be included in emergency supply. Informal advice has been received from Treasury that suggestion meets with general approval although certain details would have to be worked out. Treasury would probably request Federal Reserve Banks, as Fiscal Agents of the United States, to hold accumulation of silver ones in a special custody account. Unfit currency other than that mentioned above would be forwarded for redemption as heretofore. It is understood Mr. Rounds, Coordinator of the System's defense Planning, intends to include the subject of currency in his 313 2/9/51 -33- "next report to Presidents' Conference, but feels this specific suggestion has merit and should be adopted at this time. Accordingly, we will work out details with Treasury if you will indicate approximate date your Bank wishes to start accumulating emergency currency supply. If, because of limited vault facilities or other reasons, your Bank is not prepared to adopt suggestion, we would appreciate it if you would advise us fully in regard thereto." Approved unanimously. Letter to Mr. Sproul, President of the Federal Reserve Bank of New York, reading as follows: "The Board appreciates very much the frank statement in your letter of January 11, 1951, with respect to the study being undertaken to determine the best method of Providing active service death benefits for employees of the Federal Reserve System. "On the first point in your letter, when the matter was considered by the Special Committee selected to study the active service death benefit, there was agreement with the desirability of engaging an outside consultant to aid in the study. The matter was discussed with the Towers firm because of their reputation as pension consultants. So far as we know, no objection was raised during the discussions of the matter to the use of this firm in connection With the study, and it appeared to be the unanimous view at the joint meeting of the Presidents and the Board that there Should be an early solution of the problem. Accordingly, ir.1 the interest of expedition, and, because of the reputation of the firm, the Board authorized the Towers firm to undertake the study. "Informal inquiries have led to our understanding that under insurance laws a company is not permitted to quote to a client who deals directly rates which are lower than those quoted when the client acts through an agent. The customer, as we understand it, does not receive the penefit of any sums that might otherwise be paid as cornThe commissions that would be paid would depend somewhat on the company with which the business is placed. nowever, it is our understanding from the informal inquiries we have made that the basis on which the arrangement with 2/9/51 -34- "the Towers firm was made is in accordance with the usual procedure in cases of this kind. It is our belief also that the commissions would not be excessive. Our inquiries indicate that the group insurance business is highly competitive and that from company to company there are variations in premium rates. "The tax matter was not taken up with the Bureau of Internal Revenue for the purpose of seeking a special ruling because of the opinion that, as indicated in your letter, that course presumably would result in a protracted period of delay at a time when everyone concerned felt it was desirable to move promptly toward providing increased protection for the employees of the System. The exploration of the tax question by the Retirement System can, of course, be undertaken concurrently with the Towers study. As you know, this exploration has already been started. At the meeting of the Special Committee held in Washington on January 26, John Wurts gave a brief outline of the informal conversation which Counsel for the Retirement System had had with the Bureau of Internal Revenue. A report of this meeting was given to the Presidents by Mr. A. H. Williams in his recent memorandum." Approved unanimously. Letter to Honorable Burnet R. Maybank, Chairman, Joint e°mmittee on Defense Production, United States Senate, Washington, 0) reading as follows: "In the hearings before the Joint Committee in December 1950, both the National Used Car Dealers Association and the National Automobile Dealers Association indicated that they would like to present further information to the Board of Governors in connection with the effect of Regulation W in their particular field. These organizations were invited to present their views, and after postponement at their request, both organizations , 1,1 ave now been heard by the Board; the National Used Car uealers Association at 11:00 a.m. and the National Automobile Dealers Association at 2:30 p.m., Thursday, January 18, 1951. "The Board granted a request of the National Used Car Dealers Association for two weeks in which to suppleMent the material presented in its consultation. That 2/9/51 -35- "Association later asked that it be given additional time to prepare its supplemental information and the Board in a letter dated February 6, 1951, extended the original two weeks period to February 151 1951. This supplementary information when received will be forwarded to your Committee together with a transcript of the original consultation and Board staff comments. "Two transcripts of the views and information submitted by the National Automobile Dealers Association are attached as well as two copies of a supplemental statement and covering letter of January 31, 1951, submitted by the National Automobile Dealers Association. The supplemental statement and letter were submitted Pursuant to the granting of the request of the Association for an additional two weeks in which to supplement the material presented at the consultation. There are also attached two copies of a memorandum prepared by the Board's staff commenting on claims made by the National Automobile Dealers Association." Approved unanimously. Letter to Honorable W. Ellery Allyn, President, National Association of Insurance Commissioners, Hartford, Connecticut, l'eaqng as follows: "We have recently concluded a series of regional meetings with Federal Reserve Banks at which we discussed the results of our conference with the Liaison Committee Of the National Association of Insurance Commissioners in Los Angeles in connection with the enforcement program for Regulation X. As you undoubtedly know, a procedure was agreed upon with the Liaison Committee for the investigation of insurance companies for the purpose of ascertain, -11g compliance with the Regulation. A number of Federal neserve Banks have already held conversations with local ate Insurance Commissioners and have made arrangements Lor the investigation of insurance companies in accordance with the proposals approved by the Liaison Committee. "The general program agreed upon by the Liaison ComMittee is as follows: 2/9/51 —36— "1. When a Federal Reserve Bank decides that it is desirable to investigate an insurance company for compliance with Regulation X, it will notify (a) the State Commissioner of Insurance within whose state the insurance company is located and (b) the N.A.I.C. zone chairman. 2. The Commissioner, if he wishes, may be represented in the investigation, by one or more of his examiners who can accompany the investigators for the Reserve Bank and participate in the investigation. 3. A copy of the investigation report will be forwarded to the State .Commissioner. "In general it would be our purpose to investigate the head offices of insurance companies, although occasionally it may be necessary to investigate branches when they are given independent authority by their home offices to make extensionsof real estate credit. 'We will be glad to transmit our understanding of the arrangements made with the Liaison Committee to its chairman, J. Edwin Larson, if you deem it advisable for us to do so. "We greatly appreciate your personal interest in having arranged for us to address the Mid-Winter Meeting of your Association, and think that the occasion was a most beneficial one since through your kindness we were able to talk both to the Commissioners and the large representation from the insurance companies at the same time. We also appreciated meeting with the members of the Liaison Committee for the purpose of working out arrangements which mould be satisfactory to the National Association. "Of particular satisfaction to us was the strong support You gave the regulation of real estate credit in your address to the meeting, and we are appreciative of the generous assurances of cooperation that you gave us." Approved unanimously. Letter to Honorable James C. Davis, House of Representatives Wash. "4-ngton, D. C., reading as follows: 11_ , "Thank you for referring to the Board of Governors ;'. N. H. Forsyth's letter of January 13 concerning the elication of credit restrictions to existing houses. ! „..) opinions of men with experience in the real estate 'Ltd mortgage business are always welcome. 2/9/51 -37- "As you know, the Defense Production Act of 1950 is the statutory authority for the present controls on real estate credit. The Act authorizes, among other things, restrictions on 'conventional' mortgage financing (that is, credit not insured or guaranteed by the Government) in connection with construction begun after August 3, 1950. This authority was delegated by the President to the Board of Governors which, accordingly, issued its Regulation X effective October 12, 1950. The Act also authorizes restrictions on Government insured or guaranteed credit. This authority was delegated to the Housing and Home Finance Administrator who issued regulations in this field coincident with Regulation X and applicable to both new and existing houses. "So far as Government-insured or guaranteed credit is concerned, therefore, regulations are already in force on existing houses. However, regulations cannot be applied to existing houses which are conventionally financed until Congress so directs. "As the economy moves forward in the defense effort, inflationary pressures are becoming increasingly severe. The mounting inflation in the real estate field was a primary consideration in the action of Congress in providing for real estate credit controls, and existing regulations Will be of aid in restraining rising prices of homes. As Previously stated, there are no restraints on prices of existing homes which are conventionally financed and prices of these homes have already risen rapidly since October 12. Houses which are not subject to the regulations make up a large segment of the total housing supply, and increases in their price will have a profound effect on the living costs of many families. "As you know, legislation designed to provide for defense housing is now being considered by Congress. The Board is anxious to further the defense effort and will make sure that its restrictions on real estate credit do not hinder that effort. It believes, however, that the credit regulations, by helping to restrain inflation, will contribute toward the maintenance of a strong economic 81 1Stem. "Please do not hesitate to call upon us if we can be of further service in the matter." Approved unanimously. a/9/51 -38Letter to Mr. Roger X. Jones, Assistant Director, Legisla- tive Reference, Bureau of the Budget, ffashington 25) D. C., reading as follows: "This refers to your letter of February 7, 1951, stating that your office will be prepared to take immediate clearance action upon receipt from us of a draft bill which incorporates the suggestions made in your letter for revision of a proposed amendment to the Assignment of Claims Act of 1940, designed to clarify the liability of banks accepting assignments of funds payable on Government contracts as collateral for loans to finance defense contractors. "In our opinion, certain of the suggested changes in the language of the proposed amendment would substantially limit its effectiveness; and it is believed that unless the bill as finally enacted is acceptable to lending banks so as to remove the present impediment to the financing of defense contractors, the amendment will not succeed in the accomplishment of its purposes. "However, on the basis of informal discussions between members of your staff and of the Board's staff, it is our understanding that clearance of this proposal by Your office is dependent upon the incorporation of the suggested changes in the proposed amendment; and it apPeats that even in its revised form the amendment would Provide a certain measure of protection for assignee banks "Accordingly, we will appreciate your advice as to *ether the enclosed draft of the amendment incorporating the suggestions made in your letter is acceptable to your office. Since the matter is one of great urgency your earlY advice in this matter will be appreciated in order that prompt steps may be taken to obtain the introduction of this legislation in Congress." Approved unanimously. Letter to Mr. W. A. Sparling, General Manager, Oakland °1141/11be,,, - or Commerce, Oakland 12) California, reading as follows: "This refers to your letter of January 24, 1951, enclosing a copy of a Resolution of the Oakland Chamber of 2/9/51 -39- "Commerce requesting the Board to declare Alameda County a critical area insofar as the need for housing is concerned and to relax all controls on such homes as would be possible for persons of low income to purchase in order to prevent hardship. "Although no action has yet been taken to relax the credit restrictions in certain areas where housing is needed for defense purposes, the Board of Governors and the Housing and Home Finance Administrator recognize that this may be necessary and have been seriously considering how this may be done with the least possible inflationary impact. I can assure you that the Board is anxious to further the defense effort and will take whatever action is necessary as soon as practicable. "We thank you for bringing this matter to our attention." Approved unanimously. Letter to Mr. DeMoss, Vice President of the Federal Reserve 8ank of Dallas, reading as follows: "Acknowledgement is made of your letters of January 25, 1951 and January 29, 1951, enclosing copies of letters from Thomas L. Hall, President of Standard Stores, Inc., and requesting our comments on a leasing plan of that corporation. "It was noted that Standard Stores, Inc. leases Old sewing machines on a straight rental basis at $6.00 Per month payable in advance. You further stated that the corporation was informed that even though its leasing plan did not provide for rental payments to be applied to the purchase price of a machine, or for an option to purchase, or for delivery on a rental basis With the anticipation of an instalment sale, clearance could not be given at present to the rental plan until further advice WAS received from the Board inasmuch as the matter of leasing arrangements was being considered at this time by the Board. "ffe suggest that you advise Mr. Hall that on the l_;aeis of the information contained in his letters, there u0 not appear to be any facts which would prevent his ?. frrangement from being subject to the regulation. Since 14-1". Hall stated, 'We shall discontinue the rental machines V9/51 -4o- "tat your request', we would further suggest that you advise him that the regulation does not in fact forbid renting or leasing, but it does require obtaining certain payments. In other words, the regulation would not in any event require him to 'discontinues the rental of sewing machines. As stated in W-110 1* * * a lessor could comply with the regulation by obtaining the required down payment and monthly payments (or deposits in equal amounts), and later could return to the customer any portion of such payments or deposits when the article is returned and the lease terminated. The lease might even provide in advance for such refunds. "Thus, in the present case assuming a sewing machine had a value of $100.00, a down payment of $25.00 with equal monthly instalments of at least $5.00 would be required. This payment schedule would apply whether the term WAS for the full 15 months or for a shorter period. On termination of the lease, the corporation might refund to the lessee any part of the payments which it desired. "In addition you might suggest to Mr. Hall that if he desired he might submit further information as to the actual details of his operation to supplement the rather limited information available from his letters and contract form. For example, it might be significant to know such things as the average length of the rental Period, whether in practice additional sewing machines are rented to the lessee under the same contract or substituted for the one presently rented by the lessee, to what extent, if any, the rental period is extended or the leasing contract is renewed for a lessee, and the extent, if any, to which sewing machines are sold to the lessee upon termination of the contract. "If it should appear that the rental period in actual practice is a short period such as thirty, sixty, or ninety days, that there is no renewal of the contract 11Pon termination, and that the lessee does not purchase ?,he machine upon termination of the contract, etc., the ! 3°4rd might wish to consider an amendment to the regu.Lation to exempt such short-term temporary transactions." /1 Approved unanimously. 400P'11,40/1dri r 0 / 7 'A Secretary.
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