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1462
A meting of the Board of Governors of the Federal Reserve
SYstem was held in Washington on Thursday, October 23, 1941, at 10:30
PRESENT: Mr.
Mr.
Mr.
Mr.
Eccles, Chairman
Szymczak
McKee
Draper
Mr. Bethea, Assistant Secretary
Mr. Carpenter, Assistant Secretary
Mr. Clayton, Assistant to the Chairman
Mr. Thurston, Special Assistant to the
Chairman
Mr. Wyatt, General Counsel
Mr. Smead, Chief of the Division of Bank
Operations
Mr. Parry, Chief of the Division of Security Loans
Mr. Paulger, Chief of the Division of
Examinations
Mr. Dreibelbis, Assistant General Counsel
Mr. Leonard, Assistant Chief of the Division
of Examinations
Mr. Brown, Special Assistant in the Division
of Security Loans
Mr. Dembitz, Special Assistant in the
Division of Security Loans
Mr. Solomon, Assistant Counsel
Mr. Chase, Assistant Counsel
Mr. Roland Robinson, Associate Economist
in the Division of Research and Statistics
Further consideration was given to the three questions in conliecti°n with the proposed amendment to Regulation Wwhich were discussed
uPon which decisions were not reached at the meeting of the Board
Yesterday.
The suggestion was made that the application of the regulation
to
ash loans for the purpose of purchasing a listed article should be
limi
ted to loans of $1,500 or less, and Mr. Dreibelbis stated that if
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10/23/41
—2--
this change were made it would be necessary for the registrant to get
a Purpose statement on all loans up to !n.,500 and, therefore, the same
limitation might
well be adopted for miscellaneous loans for purposes
Other than to purchase listed articles. It was also suggested that
because of the recently increased prices of automobiles all loans of
81,500 or less for the purpose of purchasing listed articles should
be covered by the regulation
.
The conclusion reached during the en—
siling discussion was that when Amendment No. 2 was adopted the amount
k,000 in sections 2(e), 5(a), and 5(b) of the regulation and part
4 of the supplement should be changed to $1,500.
At this point Mr. Hammond, Chief of the Correspondence and
Publications
Section of the Secretary's Office, joined the meeting.
During the course of the discussion of the problem of addi—
ti°ns to outstanding credit, reference was made to the fact that un—
cler the
provisions of the present regulation consolidated loans had
II° advantage over the constituent loans if held separately, and the
°P1111°11 was expressed that in order to relieve department stores and
raail'order houses of the necessity of maintaining records of down pay—
n/ents and required monthly payments on each purchase, the provisions
c)f the regulation
with respect to additions should be liberalized
e/ien though
it was conceded that such a change would give a registrant
Vith
an existing account with a customer an advantage over another
retai
"er, and, in some cases, would permit the borrower to borrow ad-
4t460tN
'"111- money without increasing his monthly payments or without
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10/23/41
—3-
increasing them by the amount of the required monthly payment on a
new and separate loan.
All of the members of the Board concurred in
this opinion but felt that, in order to reduce the cases in which the
c°nsolidation of loans would be advantageous, the amended provision
Of the
regulation should require that, in addition to the requirement
that the
monthly payment on the consolidated loan be as large as the
nactithlY payments on the constituent loans, the payment be larger to
whatever extent might be necessary in order to repay the consolidated
obligation within 15 months.
In connection with a further consideration of Mr. Parry's suggestion that the registrant be not required to obtain down payments of
$t2.00 or less, there was a discussion of the question whether this
change should be coupled with some prohibition of advertising or solicg business on the basis that down payments were not required, and
ther
ewas agreement that Mr. Parry's suggestion should be adopted but
that action on an amendment with respect to advertising or solicitashould be deferred until there was more evidence that such a provision was needed and further consideration could be
given to the sub8tarice and language of the amendment.
At 1:20 p.m. the meeting recessed and reconvened at 2:40 p.m.
/71-th the same
attendance as at the close of the morning session except
that
was in
Dembitz was not present and Mr. Nelson, Assistant Secretary,
attendance.
Upon motion by Mr. Szymczak and by
unanimous vote, the effective date of
Sections 8(a), 8(b), 8(c), and 8(d) of
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10/23/41
-4Regulation Wwas postponed from November
1 to December 1, 1941, and amendment No.
2 to Regulation Wwas adopted, to become
effective December 1, 1941, as follows:
"SECTION 2(e)
"In section 2(e) the figure t1,000 is changed to
1k1,500.
"SECTION 4(e)
. "Section 4(e) is stricken out and a new section 4(e),
Which reads as follows, is substituted:
"(e) amaIk Down„ Payments.—In any case in which the
down payment required by section 4(a) would be $2.00 or
less, the Registrant may disregard such requirement.
"SECTION 5
"Section 5 is changed to read as follows:
"SECTION 5. INSTALMENT LOAN CREDIT
"Except as otherwise permitted by section 6, any extension of instalment loan credit shall comply with the
following requirements:
"(a) Loans Segured by or to Pur_ohase Listed Articles.-If the extension of instalment loan credit is secured, or
according to any oral or written agreement of the parties
Is to become secured, by any listed article which has been
Purchased within 45 days prior to, or is to be purchased
at any time after, such extension of instalment loan credit;
Or if the extension of instalment loan credit, even though
not so secured, is in a principal amount of t1,500 or less
and the Registrant knows or has reason to know that the proceeds are to be used to purchase any listed article:
(1) 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
Specified in the Supplement; and, in determining
such maximum credit value, the Registrant may
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10/23/41
-5-
"accept in good faith a written statement signed
by the obligor setting forth the bona fide cash
purchase price of the article and of any accessories and of any services, except insurance,
rendered in connection with the acquisition thereof, which statement so acceoted shall, for purposes of this regulation be deemed to be correct;
and
(2) The maturity shall not exceed that
specified for the listed article in the Supplement, and such maximum maturity shall be calculated from the date of purchase of such listed
article or from the date of such extension of
instalment loan credit, whichever is earlier.
u Miscellaneous Loans of -1,500 or Less.--If the
"(')
extension of instalment loan credit is not subject to section
5(a) but is in a principal amount of 4'1,500 or less, the maximum maturity shall not exceed that specified in the Supplement
for extensions of instalment loan credit subject to this section 5(b).
u(c) General Requirements.--Whether subject to section
5(a) or section 5(b), the extension of instalment loan credit
shall comply with the following additional requirements:
(1) The extension of instalment loan credit
shall be evidenced by a written instrument or
record, and there shall be incorporated therein
or attached thereto a written statement, of which
a copy shall be given to the obligor as promptly
as circumstances will permit, and which shall set
forth the terms of payment and, if the loan is
subject to section 5(a), the bona fide cash purchase price used for determining the maximum
credit value of the listed article involved;
(2) Except as permitted by section 5(c)(3),
the total of the principal and any interest or
finance charges shall be payable in instalments
which shall be substantially equal in amount or
be so arranged that no instalment is substantially greater in amount than any preceding instalment; and
(3) Instalments shall be payable at approximately equal intervals not exceeding one month,
except that, when appropriate in order to facilitate repayment in accordance with the seasonal
nature of the obligor's main source of income
or to encourage off-seasonal purchases of seasonal
goods, the payment schedule may reduce or omit
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10/23/41
-6"payments over any period or periods totaling
not more than 4 months during the life of such
extension of credit if the schedule increases
the scheduled payments in such manner as to
meet the other requirements of this section
5.
"(d) Statement of the Borrower.-- On and after January
1, 1942, no Registrant shall make any extension of instalment loan credit (except under the provisions of section
8(a)) unless, at or before the execution of the loan contract, he shall have obtained and accepted in good faith
a signed Statement of the Borrower as to the purposes of
the loan in form prescribed by the Board. No obligor shall
willfully make any material misstatement or omission in
such Statement. The Registrant, acting in good faith, may
rely upon the facts set out by the obli5or in such Statement and, when the Registrant is so acting, such facts
shall be deemed to be correct for the purposes of the Registrant. Until January 1, 1942 (after which date a Statement of the Borrower must be obtained) the Registrant, in
ascertaining the purposes of the loan or the maximum credit
value of any listed article, may, in good faith, accept and
rely upon a written statement in any form signed by the obligor and such statement shall, for the purposes of this
regulation, be deemed to be correct. In case the Registrant
accepts in good faith a written statement signed by the
obligor that any listed article which secures an extension
of instalment loan credit has not been purchased within 45
days prior to such extension of credit, such statement shall,
for the purposes of this regulation, be deemed to be correct.
"(e) Credit Subjegt t9 Section 5(a) Only in Part.--In
case an extension of instalment loan credit consists only
111 part of an extension of credit subject to section 5(a),
the amount and terms of such extension of credit shall be
such as would result if the credit were divided and each
Part treated in good faith as if it stood alone.
"A loan or part thereof which is secured by a listed
article only because of an 'overlap agreement', 'spreader
clause', or other form of general over-all lien or only beUse the Registrant is prevented by a State law or regulation from having in effect more than one contract of loan
from the same borrower at the same time, but which otherwise would not be subject to section 5(a), shall not be
deemed to be so secured within the meaning of such section.
"(0 Loans to Make Down Payments Prohibited.--An exten sion of instalment loan credit does not comply with the
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10/23/41
-7-
II
requirements of this regulation if the Registrant making
such extension knows or has reason to know that any part
of the proceeds thereof is to be used to make a down payment on the purchase price of any listed article: Provided,
That if the Registrant accepts in good faith a written
statement signed by the obligor that no part of the proceeds is to be so used, such statement shall, for the purposes of this regulation, be deemed to be correct.
"SECTION 6(a)
"Section 6(a) is changed to read as follows:
"(a) Any extension of credit which is secured by a bona
Ilftt first lien on improved real estate duly recorded or
Which is for the purpose of financing or refinancing the
construction or purchase of an entire residential building
or other entire structure.
"SECTION 6(1)
"A new subsection reading as follows is added at the
end of section 6:
"(1) Any extension of instalment loan
credit which is made to a person whose income
is derived principally from the operation of
a business enterprise of which such person is
the owner or proprietor, provided the extension
of credit is for the purpose of financing such
business enterprise and is not for the purpose
of purchasins' any listed article or secured by
any listed article purchased within 45 days before the extension of credit.
"SECTIONS 8(a), 8(b), 8(c) AND 8(d)
"Sections 8(a), 8(b), 8(c) and 8(d) are changed to
read as
follows:
"(a) Renewals or Revisions.--If any obligation or
claim evidencing any extension of instalment sale credit
?r instalment loan credit is renewed or revised by a Peglstrant, the extension of instalment credit does not cornP1 with the requirements of this regulation if
such renewal or revision has the effect of changing the terms of
rePayment to terms which this regulation would not have
rmitted in the first instance for such credit; Provided,
at nothing in this regulation shall be construed to
Prevent any Registrant from making any renewal or revision,
r
1469
10/23/41
"or taking any action that it shall deem necessary in good
faith (1) with respect to any obligation of any member of
the armed forces of the United States incurred prior to
his induction into such service, or (2) for the Registrant's
OWn protection in connection with any obligation which is
in default and is the subject of bona fide collection effort by the Registrant.
"(b) Additions to Outstanding Credit Held by Registrant.--An extension of instalment sale credit or instalment
loan credit does not comply with the requirements of this
regulation if it is consolidated with any obligation or
Obligations held by the Registrant evidencing any prior
extension or extensions of instalment credit to the same
Obligor, unless the additional extension of credit complies
with the maximum credit value limitations applicable thereto
(if any) and, in addition, the consolidated obligation complies with one of the following options:
Option 1. The terms of the consolidated
obligation shall be such as would have been necessary to meet the requirements of this regulation if the two obligations had not been consolidated; or
Option 2. The consolidated obligation
shall provide for a rate of payment, throughout its term, which is (A) at least as large
per month as the rate of payment or payments
on the outstanding obligation or obligations
being consolidated would have been for the month
commencing on the date of consolidation, and
(B) is larger to whatever extent may be necessary in order to repay the consolidated obligation within 15 months.
"(c) Credit to Retire Obligations Held Elsewhere.-AnY extension of instalment loan credit, the proceeds of
which a Registrant knows or has reason to know will be
used in whole or in part to retire any extension of instalment credit not held by such Registrant, shall be
subject to the provisions of this regulation to the same
extent as if the obligation being retired were held by
the Registrant.
"(d) Statement of Necessy toTrevent Undue Hard--Notwithstanding the provisions of sections 8(a),
'1 and 8(c), if a Registrant accepts in good faith a
statement of necessity as provided in the following paragraPh, the renewed, revised or consolidated obligation may
10/23/41
-9-
It
provide for a schedule of repayment as though it were a
new extension of instalment loan credit subject to section
5(b), even though such action results in the reduction of
tne rate of repayment thereon.
"The requirements of a statement of necessity will be
complied with only if the Registrant accepts in good faith
a written statement in form and content prescribed by the
Board and signed by the obligor that the contemplated renewal, revision or other action is necessary in order to
avoid undue hardship upon the obligor or his dependents
resulting from contingencies that were unforeseen by him
at the time of obtaining the original extension of instalment credit or which were beyond his control, which statement also sets forth briefly the principal facts and circumstances with respect to such contingencies and specifically states that the renewal, revision, or other action is
not pursuant to a preconceived plan or an intention to evade
or circumvent the requirements of this regulation. Until
the Board has prescribed the form and content of the statement of necessity the Registrant may in good faith accept a
written statement in any form, provided such statement otherwise conforms to the requirements of this section.
"SECTION 9(f)
"Old section 9(f), which is superseded by language in
the amended section 5(e), is stricken out and a new section
9(f), which reads as follows, has been substituted:
"(f) 'Farmer Plans'.--When appropriate for the purpose
of facilitating repayment in accordance with the seasonal
nature of the obligor's main source of income, an extension
instalment credit which is made to a person who is enL;ed
.
in agriculture and derives income principally therer°m may be payable in any amounts and at any intervals,
;
otwithstanding sections 4(c),
4(d) and 5(c): Provided,
hat (1) the extension of credit complies with the applicable
Provisions concerning the amount and maximum maturity of
ee credit and (2) at least one-half of the credit is to
repaid within the first half of the applicable maximum
matuy.ity.
r
V
"SECTION 10
"Section 10 is changed to read as follows:
"SECTION 10. EFFECTIVE DATE OF REGULATION
"This regulation shall become effective September 1,
10/23/41
-10-
"1941, except that sections 8(a), 8(b), 8(c) and 8(d) and
the amendments made by Amendment No. 2 shall not become effective until December 1, 1941.
"SUPPLDENT, PART 4
"In Part 4 of the Supplement, the figure
changed to ,1,500."
1,000 is
In connection with the above action,
unanimous approval was given to the following telegram to be sent today to the
Presidents of the Federal Reserve Banks
with the understanding that the press
statement contemplated in the telegram,
upon approval by Messrs. Szymczak and
Thurston, would be given to the press
for release in the morning papers of
October 27, 1941:
"Board has postponed effective date of sections 8(a),
8(b), 8(c), and 8(d) of Regulation IV to December 1, 1941,
and has adopted amendments to those and other sections effective December 1, 1941. No announcement to be made until
morning papers Monday, October 27. Text of amendments in
form suitable for publication will be telegraphed to you
today and mimeographed conies will be airmailed tonight.
Please arrange immediately to have adequate supply printed
for distribution in your district by Monday, October 27.
Printed copies should be on same size pages as Regulation
and should follow form of Amendment No. 1 as closely as
Possible."
Mr. Szymczak said that copies of the amendment would be sent toril°1
'
1
1(c)
to the members of the consultative committee created by section
n-P
Ilxecutive Order No. 8843.
4 flee
tlng
He also stated that it was planned that
of representatives of the Federal Reserve Banks who were admin-
r TIg
the regulation at the Banks should be held in tashington as soon
Possible. The members of the Board concurred in the suggestion that
the
c°nference should not be held until sometime in November.
At this point Messrs. Thurston, tyatt, Smead, Parry, Paulger,
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10/23/41
-11-
Dreibelbis,
Leonard, Brown, Solomon, Chase, Robinson, Hammond, and
Nelson left the meeting and the action stated with respect to each of
the
matters hereinafter referred to was then taken by the Board:
The minutes of the meeting of the Board of Governors of the
Federal Reserve System held on October 22, 1941, were approved unaniMously.
Telegram to the Presidents of all Federal Reserve Banks, reading
as follows:
"3-3821 W-104 should read: The classification 'plumbing and sanitary fixtures designed for household use' includes water softeners having a rated capacity of 120,000
grains or less of hardness removal between regenerations."
Approved unanimously.
Letter to Mr. Hays, Vice President and Secretary of the Federal
Reserive Bank of Cleveland, reading as follows:
, . "Receipt is acknowledged of your letter of October
lb inquiring whether a loan made to retire a loan exempt
Under section 6(a) of Regulation Viis itself exempt.
"As your Counsel points out, if the new loan is also
”cured by a first lien on improved real estate duly recorded,
is exempt. However, if the new loan is not so secured,
it is not exempt even though its purpose was to retire a
loan which was exempt under section 6(a)."
Approved unanimously.
Thereupon the meeting adjourned.
Assistant Secretary.
@FedFRASER