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1288 A meeting of the Board of Governors of the Federal Reserve SYstem was held in Washington on Wednesday, September 24, 1941, at lit30 a.m. PRESENT: Mr. Mr. Mr. Mr. Ransom, Vice Chairman Szymczak McKee Draper Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the matters hereinafter referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the Pederal Reserve System held on September 23, 1941, were approved unanitacklaly. Memorandum dated September 19, 1941, from Mr. Parry, Chief of the Division of Security Loans, recommending (1) that if the Federal 'Ing Administration was willing to give him a leave of absence for the Purpose, Arthur Frentz, Assistant to the Assistant Administrator of the Federal Housing Administration, be appointed on a temporary baet 8 for a period of not to exceed 90 days as a consultant in the of Security Loans with salary at the rate of t6,500 per an- 4141, effective as of the date upon which he enters upon the performkee„ NJ-L his duties, and (2) that authority be granted to have the tatter taken up with Mr. Ferguson, Administrator of the Federal Hous141g -dMinistration. The memorandum stated that from inquiries that E289 9/V41 had been made there appeared to be no one better qualified than IX. Frentz to lend assistance on problems arising under Regulation W, eonsumer Credit, in connection with real estate modernization loans. Approved unanimously. llemorandum dated September 20, 1941, from Mr. Bethea, Assistant Secretary, recommending (1) that the voucher submitted for 1..!r. era ens, Consultant in the Division of Security Loans, covering travel exoen ses and per diem for the period August 5 to September 10, 1941, the amount of '488.28 be approved, and (2) that continuing authority be granted to pay Mr. Cravens a per diem of '4 10 during the period of his t m e-P°rary employment with the Board, in addition to his actual Ilece„ ' sarY travel expenses between Cleveland and Washington, as well aa actual necessary travel expenses to and from such other points the United States to which he may be sent under proper written travel allthorilzation on official business of the Board. Approved unanimously. Letter to Mr. Berle, Assistant Secretary of State, prepared act ,. _,ord ance with action at the meeting of the Board on September 23, 1941, and reading as follows: "The Board of Governors of the Federal Reserve Sysglad to accede to your request of September 17 Goit it designate members of its staff to assist the Cuban le ernment in preparing central bank and other financial heslation. For this purpose it has selected Yr. Gardner, ee,' of the International Section of the Division of Reand Statistics, and Mr. Vest, Assistant General that,em 9/4/41 -3- "Counsel of the Board, The Board will undertake to pay the expenses of these men while they are serving on the mission, which it understands will remain in Cuba for a period of perhaps four. weeks." Approved unanimously. Letter to the board of directors of the "Bremen State Bank", 131 1';11, Indiana, stating that, subject to conditions of membership 11114thered 1 to 6 contained in the Board's Regulation H, the Board ap1 8 the bank's application for membership in the Federal Reserve 83qtem 'and for the appropriate amount of stock in the Federal Reserve tellk of Chicago. Approved unanimously, together with a letter to Mr. Young, President of the Federal Reserve Bank of Chicago, reading as follows: tem"The Board of Governors of the Federal Reserve SysaPProves the application of the 'Bremen State Bank', irellien, Indiana, for membership in the Federal Reserve 1em, subject to the conditions prescribed in the enBed letter which you are requested to forward to the sr,1:d of Directors of the institution. Two copies of fi n letter are also enclosed, one of which is for your : i.04e8 and the other of which you are requested to forward the Director, Department of Financial Institutions for the S;tate of Indiana for his information. 'Since the amount of estimated losses shown in the ' of examination for membership is relatively small, the los usual condition of membership requiring elimination of t t ses has not been prescribed. It is assumed, however, of 8,Proper provision for losses will be made as a matter ,1 d- banking practice. fund T't is understood that in the State of Indiana trust pre ; deposited in the banking department of a bank are TheZred claims in event of liquidation of the bank. gener'?rel you are authorized, in accordance with the al- authorization previously granted by the Board, 1 1291 9/24/41 -4- "to waive compliance with condition of membership numbered 6 until further notice. "On the date of examination for membership deposits were substantially in excess of the average for the past several years, and according to the examiner the bank -11 probably continue to experience some growth. While it is said that earnings should be sufficient to cover increases in deposits, the common stock amounts to only 30,000 and is not in keeping with the size of the bank. II:1 his letter to the Reserve Bank regarding the application the F.D.I.C. Supervising Examiner refers to the relatively small amount of common stock and suggests that in connection with retirements of debentures provision be made for increasing common stock, and it is assumed that matter will be given appropriate attention when the time comes to pass upon future retirements of debentures." Letter to Mr. Fletcher, Vice President of the Federal Reserve Ban" ( of Cleveland, reading as follows: , "Reference is made to your letter of September 8, ' 6941, submitting a request of The Ohio-Merchants Trust d?Tl?anY, Massillon, Ohio, for permission under the con,on of membership numbered 8, to acquire additional ertificates of equitable ownership in the banking builda2C which it occupies under lease, through the purchase a discount of such certificates up to a par amount of the total investment as carried on its books not to exceed ',125,000. , "The Board after a review of the information sub'IjI- tec .1 has concluded that there are no developments in taZ t situa ion which would cause it to change the position in en expressed in its letter to you of March 28, 1939, dach a similar request of the trust company was de• 11 "In addition to the aspects of the matter commented oon in that letter there appears to be serious doubt as whiTether the trust company in purchasing the certificates 11 represent the interests of beneficiaries under: a tago.iministered by it would be properly discharginf is, ' - Algations as trustee, particularly in view of the " t,”_ e for which the purchases would be made, and the facip they are to be made at low or perhaps bargain Prices i J iZ 9/24/41 "In the absence of a satisfactory showing that such Purchases would be in conformity with the law of the State of Ohio, this doubt as to their propriety, and the danger of embarrassing litigation and possible liability furnishes added support for the position previously taken." Approved unanimously. Letter to Mr. Evans, Vice President and Secretary of the Federal Reserve Bank of Dallas, reading as follows: "This refers to Mr. Ford's letter of August 13, 1941, with enclosures, recommending that the Board not require Publication by The First State Bank of Taft, Taft, Texas, °f reports as of the December 31, 1940, April 4, 1941, and June 30, 1941 call dates for certain organizations which an examination of the bank as of July 8, 1941, disclosed to be affiliates. "It appears that the failure to file and publish the required reports resulted from the fact that the bank, h was admitted to membership on November 25, 1940, '14 not realize that such organizations were affiliates ,upon the matter being brought to the bank's iZctiet steps designed to terminate the affiliate re4ttionships were taken. Mr. Ford expressed the view that the Publication at this time of the reports as of past '2?-11 dates would serve no practical purpose and, in the ' 111 :rcumstances, the Board, in accordance with his recomndation, will not insist upon their publication. "However, the Board is not prepared to agree that the °rganizations in question are not now affiliates of re,,+bank. the It does appear that, by the resignation of diari 8 of the bank from the boards of directors of the Of ladates and the election of their wives or the wives af,° her directors of the bank to fill the vacancies, the th'e1J-iate relationships arising under section 2(b)(3) of riot Ba.1?:king Act of 1933 were terminated but the Board is undesa tdsfied that affiliate relationships do not exist rtsection 2(b)(2) of that Act. 'It appears such that, for the purpose of terminating r f l 0 l0 71ationships, certain shareholders of the bank, Cd4.044-ng the recent examination, transferred stock of °1-1 Company and Cage Drilling Company, Inc., to the wives- Similar action was taken in the case of wpi.c 1 r-2-193 A.-.1 9/24/41 -6- "Cage Hardware & Furniture Company following the examination for membership. In such circumstances, it may be assumed, in the absence of strong evidence to the contrary, that there in fact has been no change in the ownership of the stock or at least in its control. Parenthetically, in another case in which similar transfers were made, inquiries from the Bureau of Internal Revenue revealed that, for the purposes of Federal taxation, the Persons involved successfully contended that there had been no change in the ownership of the stock. Aside from the effect of the stock transfers, it should be borne in mind that, in some circumstances, an organization may be controlled by shareholders of a bank even though such Shareholders own or control less than a majority of the °rganization's shares of stock. In determining whether that is the case, consideration may properly be given to the facts concerning the election of directors of the °rganization at the preceding election. "With respect to Cage Implement Company, Inc., and L. A Cage Production Company, relationships of the kind ' tTscribed in section 2(b)(2) have not been reported, but ere appears to be such a community of interest between these_ organizations and their shareholders and the bank d its shareholders as to suggest that full information 0.3,11ceraing the true ownership and control of the stock i; such organizations and the bank might reveal the extence of affiliate relationships. This also is true with respect, to Palm-Meadow Oil Company, an organization which has not been reported as an affiliate. "Please advise First State Bank of Taft in the light Of the foregoing, and advise us as to the results of your ar teussions or correspondence with the bank. Incidentally, comention is called to the fact that, while Cage Implement re,anY, Inc., was reported, on page 21(a)-() of the curba:: report of examination, to be an affiliate of the 37 reason of interlocking directorates, it was stated 13,. pan::t u-Lrectors of the bank constituted only 4 of the Cori10sej directors instead of a majority as provided in ' 1°n 2(b)(3) of the Banking Act of 1933." r Approved unanimously. Letter to Mr. Young, President of the Federal Reserve Bank of 4e°, readiwy as follows: 1294 9/24/41 -7-- "This refers to your letter of August 30, 1941, transmitting a memorandum from Mr. W. H. A. Johnson, trust examiner for your bank, in connection with the application of The First National Bank of Arcola, Arcola, Illinois, for permission to exercise fiduciary powers. "In its letter of July 25, 1941, the Board advised You that it had deferred action on the bank's application Pending a review of the report of the next examination of the bank made by nationaJ bank examiners and requested that the matters referred to in the Board's letter be covered as fully as practicable in such report, the purP°se being to give the bank an opportunity to fully preent its case and to obtain the examiner's appraisal of fhe situation in the light of any information submitted. After consideration of the facts developed by Mr. Johnson, You state that, after you have received a copy of the report of the next examination of the bank, you will discuss this matter with Mr. Hicks, the chief stockholder ?f the bank, and that perhaps you can settle the matter to the mutual satisfaction of all concerned, having in ralnd that the application may be withdrawn. "Accordingly, the Board deems it unnecessary to give furth her consideration to this case until it has received 1-urther advice and recommendation from you." t Approved unanimously. Letter to Mr. Leedy, President of the Federal Reserve Bank of ' ,843 City, reading as follows: "Enclosed herewith is a copy of an opinion by Dorsey Rob 'rlge, Attorneys, Omaha, Nebraska, addressed to Mr. ert B. Marek President, The First National Bank of 48 'Yne V Tayne, Nebraska, concerning the desire of such bankA surrender its right to exercise fiduciary powers. cocoPY of the opinion was furnished to the office of the mLiZtrIoller of the Currency by Mr. Marek and in turn transe(- to the Board, Mr. Marek being advised of the reference. tio "Copies of the reports of investigations made by Naeal Bank Examiner C. R. Anderson in connection with thill lett matter were forwarded to your bank with the Board's ( I's of April 21 and July 3, 1941. Vihile not expressly 1,95 9/24Al -8- "Stated, it appears from such reports that the examiner was satisfied that the duties of the bank as fiduciary have been completely performed and that the bank has been discharged or otherwise properly relieved of all of its duties as fiduciary, except with respect to four trusts created by Mr. John T. Bressler, Sr. "The examiner reported that these trusts were created, aPparently in April, 1931, by the deposit of certain property by Mr. Bressler with the bank to be held in trust un(ler agreements entered into by him and the bank; that on October 16, 1933, Mr. Bressler served notice on the bank Of his intention to withdraw the property deposited with the bank; and that presumably the property was surrendered t° him on October 18, 1933, when he gave the bank a receipt therefor. Copies of only three of the agreements had been found at the time of the last examination. The ,xaminer took exception to the bank's action in surrenderIng the trust property because the agreements of which °pies had been found contained no provision for revocation. f "In their opinion, Dorsey & Baldrige refer to the °11°wing provision of section 11(k) of the Federal Reserve Act: 'Whenever the laws of a State require corporations acting in a fiduciary capacity, to deposit securities with the State authorities for the protection of private or court trusts, national banks so acting shall be required to make similar deposits and securities so deposited shall be held for the protection of private or court trusts, as provided by the State law.' paniesThey l point out that since prior to 1931 trust cornthe only State corporations authorized to exercise been required by the $t,ciarY powers in Nebraska, have law to deposit cash or securities in specified amounts I;t:in the State authorities. Stating that they have been adthat no such deposit has ever been made by The First °nal Bank of 'Wayne, they reach the following conclusion: 'Our conclusion from the foregoing statutes is that the First National Bank of Wayne was never qualified and had no capacity to act as trustee, for the reason that it did not comPly with the state statute requiring a deposit of securities. It therefore never became trustee under the instruments executed by Mr. 9/24/41 -9- "'Bressler and in giving back these securities to him, the bank simply put an end to a situation in which it was assuming to act without power and ultra vires.' "However, it is understood that, with reference to the cash or securities which trust companies were required to deposit with the State authorities, the Nebraska State statutes in effect in 1931 provided as follows: 'The fund deposited as provided in section 9, shall be primarily liable for obligations of such company as guardian, curator, executor, administrator, assignee, receiver, Illatt=„ either by appQintment of court oz under will, and for depository of money in court and shall not be liable for any other debt or obligation of the corporation until all trust liabilities aforesaid have been discharged.' "Since the deposit required of trust companies was 12?t, for the protection of trusts of the kind here in ques09,, the Board is of the opinion that The First National ia;ank of Wayne could act as trustee of such trusts without ttellng required to make a similar deposit. Disagreeing on it S ground with the conclusion reached by Dorsey &Baldrige, S unnecessary to consider questions as to the effect -Ls of failure of a national bank to make a deposit with .re State authorities when it is required to do so and as e whether national banks in Nebraska need ever make such t,P°sits since one purpose of the deposits required of companies is to secure obligations incurred as 'deg i nl eta.of money in court', apparently a non-fiduciary r in_ :In an effort to obtain further information concernorG the trusts in question, we have reviewed the reports 1,,!xaminations of the bank covering the period from April ;111,‘ through October 1933. The information contained therein in some details from that now reported. The reports shes:J- August 31, 1931, January 22, 1932, and July 29, 1932, a„vw that the bank was administering four trusts with an treregate principal amount of :M.74,000 instead of P146,000, reposalount now reported for the four Bressler trusts. The thatrts as of February 24, 1933, and August 15, 1933, show ilIcliethe bank was administering only three trusts, which Itesste;stnes.t the attempted termination of one of the s occurred earlier than is now reported. 17ever the reports contain nothing else of interest with L297 9/24/41 -10- "respect to the fiduciary activities of the bank, except that in reply to a question concerning deposits of securities with the State authorities, the examiners stated: Not a requirement for voluntary trusts'. "Such information as we have raises questions as to Whether the trusts may not have been in part, at least, in violation of the rule against perpetuities and, also, as to what protection the bank has by virtue of estoppel or laches. However, it is assumed that the bank's counsel have explored these aspects of the matter. "Since it has not been established to the Board's satisfaction that the bank has been relieved in accordance With State law of all of its fiduciary duties, the Board cannot now issue a certificate certifying that the bank iS no longer authorized to exercise fiduciary powers. "In the circumstances, this matter is being referred , t:c) You and it will be appreciated if you will advise the 'L ank of the Board's views and make such suggestions as to 117ther action by the bank as you may deem appropriate. 4±3°, it is suggested that you discuss the matter with rC Chief National Bank Examiner for your District in 17der that he and the examiner examining the bank will ,! apprised of its present status. We are not advising e bank that the matter is being referred to you." Approved unanimously. Telegram to the Presidents of all of the Federal Reserve Banks readi ng as follows: "Reg. W-80. An inquiry has been received regarding 1- applicability of Regulation 7; to a special type of contract covering an automobile. The lessor is a a-Ler in automobiles and the lessee is a contractor who 11; mes,a c ost-plus-a ,Departcontract with the War War-fixed 1311116. The lease calls for monthly payments of 10,0 of the lorchase price of the automobile and provides that when Ire aYments have been made title to the automobile will at "In the Government with the option in the Government thearY time to pay the unpaid balance and take title to aut -.utomobile. The contract further provides that the broc) .111°bile may be transferred to another construction ' le"' and in that event the lessor must enter into a dr,” 1298 9/24//a -11- n new lease agreement with the holder of the construction contract at the new location, payments made under the first lease being credited to the second lease. The contract does not provide any means whereby the lessee can acquire title to the automobile. "The Board is of the opinion that in such circumstances the lease is not subject to the requirements of the Regulation." Approved unanimously. Telegram to the Presidents of all of the Federal Reserve Banks rem.; -441g as follows: "Reg. W-81. The classification 'radio receiving sets, Phonographs, or combinations' does not include coin-operated phonographs." Approved unanimously. Letter to Mr. Phelan, Assistant Vice President of the Federal ileserve Bank of New York, reading as follows: "This will acknowledge your letter of September 17 . Concerningen the application of RegulationW to marine radio ,g112-pment. Radio equipment designed for marine use such :8 direction finders, auto-alarms, radio telegraphs, and fad3:0 telephone apparatus is not included in the 'listed artIcles' of the Supplement." Approved unanimously. Letter to Mr. Wallace, Counsel of the Federal Reserve Bank of kehm -4)11d, reading as follows: "Reference is made to your letter of September 16, 1941 In which you ask the following question: 'A home owner desires to have installed in his residence a heating plant, including a furnace or oil burner. The cost of the article and installation is more than q,000 and the 9/24/a -12- "'cost of the article exceeds 505',; of the total cost. The owner applies to a bank for a F.H.A. title one loan for an amount exceeding '1,000 and approximately equal to the entire cost of the improvement, intending to use the proceeds to pay the contractor in full. The bank is willing to make the loan upon a schedule of payments extending over two years. The bank does not require a lien either upon the listed article or upon the house in which it is installed. Is the above transaction prohibited by the Regulation?' "You are correct in your conclusion that the trans,ction is not prohibited. As you point out, the loan by the bank is not an extension of installment sale credit, /-1c1 since the loan is not secured by the listed article lt is not an extension of installment loan credit referred ? in section 5(a) and since it exceeds :71,000 in prinelPal amount it is not an extension of installment loan credit referred to in 5(b)." Approved unanimously. Telegram to Mr. Swanson, Vice President of the Federal Reserve Minneapolis, reading as follows: wive "YoSeptember 19. First question answered by(Regulation) , j 1,77. Second question depends on whether ; ! 1 oe 'knows or has reason to know' under section 8(f). IV depends on the facts of particular case and general ,Aal Principles. Third question answered in negative that section 3(a)(2)(E) because finance company knew credit exceeded credit value of automobile. Fourth estion is under consideration." Approved unanimously. Telegram to Mr. Stroud, First Vice President of the Federal t ank of Dallas, reading as follos: n-ewai -Lmur Wire. Assu,minr transaction is not first retran °r revision of pre-September contract and assuming -saction occurs on or after November 1, Board agrees /200 9/24/41 -13- "that it would be evasion for Registrant to accept cash payment of entire balance due under existing instalment loan and simultaneously make new advance for a period of 18 months." Approved unanimously. Letter to Mr. Brite, Commercial Manager of the Electric Home lirld Farm Authority, reading as follows: "Receipt is acknowledged of your letter of September 18, 1941 asking the following question: 'A customer buys a listed article and makes the required down payment scheduling the deferred balance over a period of 18 months. After a few months the customer becomes delinquent in paying installments. The dealer, who has sold the contract to a financing institution with recourse, decides it is to his advantage to advanc e one or more installments in order to bring the customer payments up-to-date and thereby avoid repossessing the article. Is it a violation of the regulation for the financing instit ution to accept such payments advanced by the dealer when an arrangement of this type may provide, throug an oral h understanding between the dealer and the customer, that the payments advanced will be repaid by the customer after the normal maturity Of the contract? If this character of transaction is held to be a violation of the regulation, is the financing institution also liable under the regulation even though many dealers advance payments for customers without the knowledge of the financing institutions?' 'Section 8(a)(2) of the Regulation provides: 'That nothing in this regulation shall be construed to prevent any Registrant from : 11,1-ng any renewal or revision, or taking any 11 ( action that it shall deem necessary in good faith * * * for the Registrant's own protect °I1 in connection with any obligation which 15 in default and is the subject of bona fide co1lection effort by the Registrant.' t'.!()11 9/24/41 -14- "No general rule can be stated as to what constitutes a bona fide collection effort, beyond stating that court action is not essential. Assuming that the dealer adopts tae method described in your letter believing that it is the best method by which to secure collection of a delinquent obligation, the transaction would not be a violation Of the Regulation." Approved unanimously. Letter for the signature of Mr. Ransom to Mr. Sheppard, House f Representatives, Vashincton, D. C., reading as follows: "In the absence of Chairman Eccles, your letter of September 13 addressed to the Board of Governors of the Federal Reserve System has come to my attention. Careful consideration has been given to the information you request for your assistance in presenting to the Committee on Rules a resolution that you have introduced for the aPPointment of a committee to make some inquiry into the character and extent of the small loan business. You ate it will be helpful if we will request from persons in your letter such data, also listed, as may not blsted e in our files. "The Board's Regulation on the subject of consumer edit was adopted on August 21 pursuant to the President's z4xecutive Order dated August 9, 1941. A pamphlet which !cntains a copy of the regulation and the Executive Order, 'AcTether with a foreword stating its purposes, is enclosed. , s You will see, the regulation is directed primarily toward rescribing the length of time within which installment be t shall be repaid and the amount of down payments to t required. It is not directed toward the control of matmentioned in your letter such as operating costs, cl.nagement or supervisory services, or rates of interest knarged by small loan companies. Interest charges, as you are subject to State laws. Naturally, therefore, a_e, Board has not had occasion to deal with these matters the brief period which has elapsed has necessarily been ?ted to pressing questions involving interpretation and clufl :nistration of the regulation as promulgated. In the -cumstances, the Board has not found the need for ac011 : i,liulating data of the kind enumerated in your letter and Prepared to furnish it to you. comIf your resolution is adopted by Congress and mitte e ls appointed to make inquiry into the character and 1302 9/24/41 -15- “extent of the small loan business, such information as YOU seek where entirely outside of Regulation VT can be requested by the committee from the companies and individuals mentioned in your letter. We shsl] be glad to give such committee upon its request any information we have that will be helpful to the committee or of interest to you as the author of the resolution. "We are extremely sorry that we are unable to give Yitu at this time the information you want and hope that hiS letter will explain why such information is not now our possession as well as the fact that we do not contemplate at this time the necessity for acquiring much of it.” Approved unanimously. Uemorandum dated September 22, 1941, from Mr. Smead, Chief of the 114I....-2 -4.vsion of Bank Operations, recommending that F. R. 1071 Report or tarnings and Dividends of State Bank Members, be amended so that the reports rendered covering the last six months of each year will allow, in addition to the semi-annual figures, corresponding figures t°r the calendar year as a whole. The memorandum stated that it was 1111der5tood that a similar change was being made by the Comptroller °t the Currency in the forms to be submitted by national banks. Approved unanimously. Letter to the Comptroller of the Currency reading as follows: orde "It is respectfully requested that you place an m'en,r with the Bureau of Engraving and Printing, suppleLftg the order requested June 14, 1941, for the print: 4 02f Federal reserve notes of the 1934 Series in the c t and Banr denomination stated for the Federal Reserve of New York: Number of nation Amount sheets $24,000,000" 400,000 Approved unanimously. 1 03 9/24/4 -16Memoranda dated September 22 and 24, 1941, from Mr. Winzfiell, 'Assistant General Counsel, and Mr. Wyatt, General Counsel, respectively, l'esoramendinc, , that there be published in the October issue of the Fed- Reserve Bulletin statements in the form attached to the memoranda 171-th respect to the following subjects: Revised Supplement to Regulation D increasing reserve requirements; Amendment No. 1 to Reollation Interpretations of Regulation W which have been or may be issued before the galley proof of the October Bulletin is returned to the printer; and General Lic2nses and Public Circulars Issued by the Secretary of the Treasury. Approved unanaliou Thereupon the meetinE adjourned. Vice Chairman.
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