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1407 A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Tuesday, October 14, 1941, at 11:30 a.m. PRESENT: Mr. Szymczak Mr. McKee Mr. Draper Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary The action stated with respect to each of the matters hereinafter referred to was taken by the Board: Telegram to the Presidents of all of the Federal Reserve Banks reading as follows: "Reg. W-97. A Registrant makes an extension of instalment sale credit arising out of the sale of materials and services (including certain Group D articles) in connection Idth repairs, alterations or improvements upon urban, suburban or rural real property in connection with an existing structure. The bona fide cash purcha se price °f all the materials and services is ,1500 and the bona fide cash purchase price of the Group D articles is ”00. The purchaser makes a cash payment of 150 and remains indebted to the seller in the amount of *1350. Is the transaction exempt under section 6(h) of the regulation? "The exemption in 6(b) does not apply since the '."700 Purchase price of the Group D articles is more than 50 Per cent of the over-all deferred balance of P1350. "Reg. W-98. Facts similar to 1-.97, but the bona fide ash purchase price of all the materials and services is ' ...3,000 and the bona fide cash purchase price of the Group articles is 1'1400. The purchaser does not make any Own-payment and remains indebted in the full amount of 3,000. Inasmuch as l'2500 is the maximum amount of a : -1 0an which may be insure d by the Federal Housing Adminis' u ration under Title I of the National Housing Act, the ?ustomer's obligation totaling '3,000 is divided into w() parts, one in the amount of 2500 which is insured ?Y the Federal Housin g Administration, and the other in 0 1' .11e amount of 500 which is not insured. The '1.400 of r°uP D items exceeds 50 per cent of the 2500 but is 2 1408 10/14/41 -2- "less than 50 per cent of the t3,000. Is the transaction exempt under section 6(b)? "Since the t3,000 represents a single transaction and is divided into two parts merely for convenient treatment under the National Housing Act, it is permissible to treat the t3,0O0 as a unit, and hence as an exempt transaction under Section 6(b)." Approved unanimously. Telegram to Mr. Phelan, Assistant Vice President of the Federal Reserve Bank of New York, reading as follows: "Your inquiry No. 12 of October 9 re Regulation W. Board agrees with your view that airplane financing in question is exempt under section 9(d) re outstanding contracts." Approved unanimously. Letter to Mr. Hays, Vice President and Secretary of the Federal Reserve Bank of Cleveland, reading as follows: "Receipt is acknowledged of your letter of October enclosing a copy of a question under Regulation Zw, 1941 and Y of your Counsel's answer. The question and answer are as follows: 'Question: May the Federal manufacturers' excise tax be included in the bona fide cash purchase price of an automobile under Part 3 of the Supplement to Regulation Vi? It is submitted that this tax may 'Answer: properly be included in arriving at the bona fide cash purchase price of an automobile, either in the manufacturer's retail quotation at factory referred to in item (a)(1) of Part 3 of the Supplement as amended September 20, 1941, or as a Federal tax, under item (a)(3). The amount of the tax cannot, of course, be twice included.' 1409 10/14/41 -3- "The answer is correct. However, there is a matter of terminology which might be mentioned: Part 3 of the Supplement provides that the maximum credit value of a new automobile shall be two-thirds of the bona fide cash Purchase price, or two-thirds of the sum of items 1 through 4, whichever is less. In other words, Regulation Vi does not prevent a dealer from fixing the purchase price at any figure he may wish, but if he fixes it at a figure higher than the sum of items 1 through 4 he does not thereby increase the maximum amount of the credit which he may extend in connection with the sale." Approved unanimously. Letter to Mr. Wallace, Counsel of the Federal Reserve Bank of Richmond, reading as follows: "You have already received replies to some of the questions contained in your letter of September 15, and two more of them (Nos. 4 and 5) have now been answered by v;_92. "Your question No. 6 is whether sales of gas and electric appliances by cities and towns which operate Public utilities are subject to the Regulation. You refer to the general rule that a State or municipal subdivision is not considered an 'individual, partnership, association or corporation' (Sect ion 2(a) of the Regulation). This general subject was consid ered at the time the Regula tion was being prepared and it was the view that the Regulation would apply to governmental agencies. AcZordingly, the Home Owners Loan Corporation, the Electric Rome and Farm Authority and various other agencies of the Federal Government have regarded themselves as subject to the Regulation and have sent circulars to their field offices explaining the Regula tion and revising the procedure of those offices so as to conform to its requirements. "Your question No. 14 relates to a case where the Regulation would require a down payment of g10 and monthly : 1 nstalments of P5, but the purchaser would like to pay 430 "a down payment and skip the first four instalments. As !::311 say, it would seem to be reasonable to permit the pur?naser to do so, and the question is under consideration with a proposed amendment to the Regulation, Which, „.. alch, incidentally, would also take care of the 'farmer' .rse where the purchaser's income is received in irregular amounts. 1410 10/14/41 -4- "Your question No. 9 (relating to the $5 minimum monthly payment) is also under consideration in connection with a proposed amendment. "Your question No. 3 is not entirely clear to us. Section 5(a)(1) places a limit upon the amount which may be lent, the limit being: 'The principal amount lent to the obligor (excluding any interest or finance charges, and the cost of any insurance) shall not exceed the maximum credit value of the listed article * * * 1. "This means that the Regulation is not violated if the loan does not exceed the prescribed maximum after interest, finance charges and insurance have been deducted from the amount of the loan. Therefore the nature of the insurance would seem to be of little practical importance since in lost cases liability insurance as well as property damage It:Isurance is on a 12 months basis. However, if we have not given you the information which you require in connection With this question, please let us know." Approved unanimously. Letter to Mr. Fry, Vice President of the Federal Reserve Bank of Richmond, reading as follows: . "Reference is made to your letter of Octobe r 8, with Which was enclosed a copy of a letter dated Octobe r 7 from the Mohawk Home Improvement Company, suggesting a meeting at the Board' s offices the morning of October 15. "As you know, the staff is at present workin on a g A /lumber of amendments of Regulation Wwhich are considered be of an urgent nature. These do not include any ret io g the list of articles in the Supplement, which deferred for later consideration. It is suggested, therefore, that the meeting desire d by the men eng,ged in the roofin g and siding business be postponed these amendments are out of the way. This, it is hoped, will be within ten days or two weeks, and we will ;luidertake to let you know when we feel that the way has been cleared." 14til Approved unanimously. traw, of Letter to Mr. Hodgson, Assistant Counsel of the Federal Reserve In_ -...-Lnneapolis, readin g as follows: 1411 10/14/41 -5- "Receipt is acknowledged of your letter of October 8 and the enclosed letter of October 6 from Thompson Yards, Incorporated, retail dealers in lumber. "The Corporation asks whether a mechanic's lien securing the price of lumber would be exempt under section 6(a) if the purchaser executed an agreement to give a first mortgage to secure the sale but the Corporation agreed to rely on a mechanic's lien rather than to require the execution and filing of a first mortgage. "The advice which you gave the officials of the company, namely, that this arrangement would not constitute a first lien within the meaning of section 6(a), appears to be correct, in view of t-26. "However, a proposed amendment to section 6(a) is now under consideration, and if the amendment is adopted the question asked by the Corpora tion will become moot. ' 011 will of course be advised promptly if the amendment is adopted. "As requested, the Corporation's letter is returned to you herewith." Approved unanimously. Letter to Mr. Hodgson, Assistant Counsel of the Federal Reserve 8ank of Minneapolis, reading as follows: . "Receipt is acknowledged of your letter of October 8 e.,sking INhethe r, under Regulation W, a dealer who entered into a pre-Septem ber contract with a purchaser for an automobile of a specified kind and who finds himself unable to deliver precisely that kind of automobile may enter into a contract with the purchaser for an automob ile of another Todel, which he is able to deliver, the contrac t being on • erms corresp onding to the pre-September agreement and not in conformity with the requirements of Regulation W. "Assuming, as appears to be implicit in the case decrlbed in your letter, that the transaction is not entered for the purpose of evasion but results solely from fact that the dealer is not able to deliver exactly th same model as called for by the pre-September contract, he Board is of the opinion that a contract on the terms 2 e Presponding to those contemplated by the pre-September ..ori.lmltment and covering a similar type of automobile, ' 111ch the dealer is able to deliver, may be regarded as 1412 10/14/41 —6— "the performance of a pre-September commitment and therefore not subject to the Regulation, in view of W-1." Approved unanimously. Letter to Mr. Henry D. Brite, Commercial Manager of the Electric Rome and Farm Authority, reading as follows: "Receipt is acknowledged of your letter of October 1 regarding the question whether the phrase 'maximum credit value in per cent of basis price' in the Supplement to Regulation Vi should be interpreted literally or whether down payments which are short a reasonable amount are permissible. You state that in view of this provision, Electric Home and Farm Authority has returned a large number of customer contracts to dealers because down payments are short a few cents, in some cases only four cents, but that it is Your recommendation that the Board permit no exceptions Whatever in down payments inasmuch as your experience indicates that where certain exceptions are made it is difficult to avoid making exceptions to exceptions. "The Board agrees that the 'maximum credit value' provided in the Supplement is a figure which should be calculated mathematically and not be arrived at by approximation, and therefore, the Board does not believe that the Regulation authori zes an extension of credit which even a few cents in excess of the maximum provided by 1.1.e Regulat ion. The Board has, however, been impressed by ie evident desire on the part of those affected by the , /.tegulation to comply with it in spirit as well as its let'er, and the Board believes that, at least during the infew weeks after the effective date of the Regulation, lt is Proper proper to assume, in the absence of facts which would Cr the opposite presumption, that most apparent viola°n3, as well as minute technical violations of the kind 6? which you refer, are the result of inadvertence or of a TlsaPprehension as to the meaning of the provisions of the ' .?gulation. Accordi ngly, the Board has sent a letter to 7-1 : 1 , Federal Reserve Banks, a copy of which is enclosed 368), and it is hoped that the letter may be of some assistance to you in handling matters of this kind. A copy of your letter and of this reply have been sent to the Federal Reserve Bank of Chicago for its information.n Approved unanimously. 1413 10/14/41 -7- Letter to Mr. Stout, President of the Morris Plan Bankers Association, Washington, D. C., reading as follows: "Your letter of September 6, 1941, asks a question concerning the applicability of Regulation IV to a time note (repayable in one payment) and an instalment note taken from the same borrower. The question is whether they may be treated separately or whether they should be lumped together for the purpose of applying Regulation tr. "You say that all of the banks are agreed that the loans could not be treated separately if there was any legal connection between them or if there was any expressed or implied agreement that the time note would be renewed on an instalment basis. However, you say that some of the banks disagree with your thought that the two should not be separated in any case, and that if the total of the two loans were less than $1,000 they would be subject to the Regulation as a single loan even though the instalment loan were for less than $1000. "Since your letter states that the time note here in question is 'taken in connection with an instalment loan', both notes would seem to be parts of a single transaction. this is the case, the Board agrees with your view that both notes are intrinsically part of a single instalment transacti on and that the transaction cannot be divided into two parts in this manner. "However, the Board does not feel that any hard and fast rule can be laid down on the question. The records of the bank might clearly show that the two loans were made for entirely separate purposes and that the borrower Tcpected to repay one out of his salary and the other tlrough the consumma tion of some specific transaction. , n such a case there would seem to be no objection to 6reating the loans separately for the purposes of Regulation w "You also suggest that a loan of $1,000 is exempt Y' the borrower's total indebtedness at the bank exceeds that figure. The Board is of the opinion that this ques' 40n is essentially different from the question of whether 4 slngle instalment transaction can be placed partia3l y Outside the Regulation by dividing it into an instalment Portion and a single-payment portion. Even though the parties could remove the $1,000 loan from the operation 1414 10/14/41 -8- "of the Regulation by combining it with other indebtedness of the borrower to total more than $1,000, the Regulation continues to apply unless such a consolidation has been carried out." Approved unanimously. ; Letter to Mr. Nelson, Executive Vice President of the National Association of Real Estate Boards Chicag , o, Illinois, reading as follows: "Receipt is acknowledged of your letter of September 29) 1941, suggesting that Regulation W be amended so as to exempt second mortgages taken by builders in connection With normal sales of homes. "If we understand the facts correctly, the second mortgage note would not be subject to Regulation Wbecause it would represent an extension of instalment credit made by the seller and arising out of the sale; and since the thing being sold is real estate and since real estate is not one Of the 'liste d articles' in the Regulation, the extension of credit would not be subject to the Regulation. See section 2(d) of the Regulation, and Interpretati W-92, a on copy of which is enclosed. "We have sent a copy of your letter and of this reply to the Federal Reserve Bank of Chicago and we suggest that 3",°11 will find it more convenient to obtain any further inlormation in this connection direct ly from that bank." Approved unanimously. Letter to Mr. Middleton, Attorney at Law, Peoria, Illinois, reading a8 falOWS: "Receipt is acknowledged of your letter of October 3 "king two questions under Regulation W. , "Taking up the second question first, you ask whethe r _40an company which repossesses an automobile on which it 1;,ia a chattel mortga ge and which buys the car in at the reclosure sale because there are no other bidders, may -7? the car back to the borrow er upon his catching up his `' oellnquent payments and renew the account for the balance 11 ,,the same terms as were in effect before the default. 18,1,,s Tr"4 may be done, because a lender may take any action Chit deems necessary in good faith for its own proteclon in collecting an obligation which is in default. t 5 1415 10/14/41 -9- "Your first question is whether a different loan company could take the automobile as security and lend the Obligor the full amount necessary to pay off the original loan company. If the original loan by the first loan company was made before September 1, the transaction would be permitted, since under section 8(e), as interpreted by 1;719, a Registrant may renew or revise a pre-September obligation once upon any terms which the Registrant would have granted in good faith in the absence of the Regulation, and since the second loan company could give the borrower the same terms as the first loan company could give. If the original loan had been made after September 1 and if the second loan company was making its loan after November 1, it could, as you suggest, make a loan with the same payments and maturity as provided in the origin al loan, without getting a down payment, upon his catching uP with his delinquent payments, in view of section 8(c). "The administration of Regulation Whas been decentralized and therefore it is suggested that you address an furthe r inquiries regarding it to the Federal Reserve Bank of Chicago." Approved unanimously. Letter to Mr. Willson, Willson-Chase, St. Petersburg, Florida, reari;„, --Lug as follows: "Your letter of September 12 to Hr. Leon Henderson has referred to the Board of Governors. "The advertisement enclosed with your letter does not clearly offer instalment credit terms to customers which are prohibited by the Board's Regulation W dealing with ';onsumer credit. It may, in fact, be based on sectio n 6(j) of that regulation, which exempts certain indebtedness of P;50 or less. "Furthermore, Regulation IV does not contain any proWith. respect to advertising and hence may not be Violated by advertising, as distinct from actual ly extend-g credit . b . "This is not to say, howeve r, that the Board would indifferent to incorrect or misleading public statements 't!flesrning the provisions of Regulation W. Certainly ac24al.violations of those provis ions will be the subject of 'Pecial attention. "Complaints similar to yours about similar advertiseof the same advertiser have reached the Board through been 1416 10/14/41 -10- "the Federal Reserve Bank of Atlanta, which is responsible for the administration of Regulation VIin the State of Florida, and are being discussed by the Board with that Bank. It is suggested that it may be convenient for you to address any future communications on the subject to the Federal Reserve Bank of Atlanta, Atlanta, Georgia." Approved unanimousiy. Thereupon the meeting adjourned. 4 Assistant Secretary. APPrOVed:
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