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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
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-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: