Full text of National Bank Real Estate Loans : Hearings Before a Subcommittee of the Committee on Banking and Currency, United States Senate, Eighty-Eighth Congress, Second Session, on S. 2576, March 4 and 10, 1964

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NATIONAL BANK REAL ESTATE LOANS

HEARINGS
BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
EIGHTY-EIGHTH CONGRESS
SECOND SESSION
ON

S. 2576
A BILL TO AMEND SECTION 24 OF THE FEDERAL RESERVE ACT
(12 U.S.C. 371) RELATING TO CERTAIN LIMITATIONS ON REAL
ESTATE LOANS BY NATIONAL BANKS

MARCH 4 AND 10, 1964

Printed for the use of the Committee on Banking and Currency

30-698 0

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1964

COMMITTEE ON BANKING AND CURRENCY
A. WILLIS ROBERTSON, Virginia, Chairman
JOHN SPARKMAN, Alabama
WALLACE F. BENNETT, Utah
PAUL H. DOUGLAS, Illinois
J & H N ' G . TOWER, Texas
JOSEPH S. CLARK, Pennsylvania
JACOB K. JAVITS, New York
WILLIAM PROXMIRE, Wisconsin
MILWARD L. SIMPSON, Wyoming
HARRISON A. WILLIAMS, JR., New Jersey PETER H. DOMINICK, Colorado
EDMUND S. MUSKIE, Maine
EDWARD V. LONG, Missouri
MAURINE B. NEUBERGER, Oregon
THOMAS J. MclNTYRE, New Hampshire
MATTHEW HALE, Chief of Staff
CHARLES H. BRADFORD, Minority Clerk

SUBCOMMITTEE ON F I N A N C I A L

INSTITUTIONS

A. WILLIS ROBERTSON, Virginia, Chairman
JOHN SPARKMAN, Alabama
WALLACE F. BENNETT, Utah
PAUL H. DOUGLAS, Illinois
JACOB K. JAVITS, New York
WILLIAM PROXMIRE, Wisconsin
MILWARD L. SIMPSON, Wyoming
EDMUND S. MUSKIE, Maine
EDWARD V. LONG, Missouri

CONTENTS
Page

S. 2576
Federal Reserve Act: Changes in existing law made by the bill
Report by Federal Deposit Insurance Corporation
WITNESSES

2
3
5

James J. Saxon, Comptroller of the Currency
,_
Harry P. Bergmann, senior vice president, Riggs National Bank, Washington, D.C., and chairman, Mortgage Finance Committee, American
Bankers Association

5, 19
18

LETTERS AND STATEMENTS SUBMITTED FOR THE RECORD
Bennett, Wallace F., U.S. Senator from the State of Utah: Letter of James
J. Saxon addressed to counsel for a national bank
Comptroller of the Currency, James J. Saxon:
Compilation of State laws concerning real estate loans by banks
Copy of a letter addressed to counsel for a national bank
Letter opposing increase in coverage of Federal deposit insurance
Prepared statement on S. 2576 (H.R. 7878)
Appraised value conventional mortgage loan limits of States
compared with the limit applying to national banks, table 3
Mortgage delinquency rates, by selected States, table 1
Tabulation of States with laws governing term of conventional
mortgage loans relative to regulation governing national banks,
table 2
Private mortgage insurance, use by national banks: Statement
Regulation Q: Statement
.
Federal Deposit Insurance Corporation:
Regulation Q: Statement
Report on S. 2576
Rules and regulations, part 329, "Payment of deposits and interest
thereon by insured nonmember banks"
Federal Home Loan Bank Board: Letter and comments on regulation Q
by Joseph P. McMurray, Chairman
Federal Reserve Board:
Regulation Q, payment of interest on deposits
Views on regulation Q by William McC. Martin, Chairman
Payment of interest on deposits:
Federal Deposit Insurance Corporation Regulation, part 329
Federal Reserve Board, regulation Q
Statement on, by—
Comptroller of the Currency, James J. Saxon
Federal Deposit Insurance Corporation, Joseph W. Barr,
Chairman
Federal Home Loan Bank Board, Joseph P. McMurray,
Chairman
Federal Reserve Board, William McC. Martin, Jr., Chairman.
Treasury Department, Robert V. Roosa, Acting Secretary. _
Treasury Department: Views on regulation Q, by Robert V. Roosa,
Acting Secretary

17
47
17
15
5
10
8
10
23
25
38
5
40
27
31
29
40
31
25
38
27
29
45
45

INDEX OF ORGANIZATIONS
American Bankers Association
Comptroller of the Currency
FDIO
Federal Home Loan Bank Board
Federal Reserve Board
Riggs ^National Bank
Treasury Department

18
5,15,17, 23, 25,47
5, 38, 40
27
29,31
18
40
in

NATIONAL BANK REAL ESTATE LOANS
WEDNESDAY, MARCH 4, 1964
U.S. SENATE,
COMMITTEE ON BANKING AND CURRENCY,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS,

Washington, D.O.
The subcommittee met, pursuant to call, at 10:07 a.m., in room 5302,
New Senate Office Building, Senator A. Willis Robertson (chairman
of the subcommittee) presiding.
Present: Senators Robertson, Sparkman, Douglas, Muskie, Long,
Bennett, Javits, and Simpson.
The CHAIRMAN. The subcommittee will please come to order.
We are working this morning under a rather serious time limitation.
We set this hearing at a time when we did not know that the Senate
would be meeting at 11 a.m., after which we will not be permitted to
meet. So we have just 1 hour in which to hear the witnesses on four
bills. Necessarily, the chance of completing the hearings on these
bills in that time are rather slim.
In deference to the witnesses from out of town, we will hear first,
of course, Members of the Senate who wish to make a statement, and
after that we will hear the out-of-town witnesses, as many as we can.
(The subcommittee then proceeded to a consideration of other bills.)
The CHAIRMAN. We will now take up the Muskie bill to increase
the percentage that national banks can lend on real estate, and we will
insert the bill, S. 2576, at this point.
(The bill is reproduced as follows:)

NATIONAL BANK REAL ESTATE LOANS
88TH CONGKESS
2D SESSION

S. 2576

IN THE SENATE OF THE UNITED STATES
FEBRUARY 28 (legislative day, FEBRUARY 26), 1964

Mr. MUSKIE introduced the following bill; which was read twice and referred
to the Committee on Banking and Currency

A BILL
To amend section 24 of the Federal Eeserve Act (12 U.S.C.
371) relating to certain limitations on real estate loans by
national banks.
1

Be it enacted by the Senate and House of Representa-

2 tives of the United States of America in Congress assembled,
3 That clause (3) of the third sentence of the first paragraph
4 of section 24 of the Federal Reserve Act (12 U.S.C. 371)
5 is amended to read as follows: " (3) any such loan may be
6 made in an amount not to exceed 80 per centum of the
7 appraised value of the real estate offered as security and
8 for a term not longer than thirty years if the loan is secured
9 by an amortized mortgage, deed of trust, or other such in10 strument under the terms of which the installment payments
11 are sufficient to amortize the entire principal of the loan
12 within the period ending on the date of its maturity, and".
H

NATIONAL BANK REAL ESTATE LOANS

CHANGES IN EXISTING LAW
Changes in existing law made by the bill, S. 2576, as reported are shown as
follows (existing law proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no cljange is proposed is shown
in roman) :
SECTION 24 OF THE FEDERAL RESERVE ACT

SEC. 24. Any national banking association may make real estate loans secured
by first liens upon improved real estate, including improved farm land and improved business and residential properties. A loan secured by real estate within
the meaning of this section shall be in the form of an obligation or obligations
secured by a mortgage, trust deed, or other instrument upon real estate, which
shall constitute a first lien on real estate in fee simple or, under such rules and
regulations as may be prescribed by the Comptroller of the Currency, on a leasehold under a lease which does not expire for at least 10 years beyond the maturity date of the loan, and any national banking association may purchase any
obligation so secured when the entire amount of such obligation is sold to the
association. The amount of any such loan hereafter made shall not exceed 50
per centum of the appraised value of the real estate offered as security and no
such loan shall be made for a longer term than five years; except that (1) any
such loan may be made in an amount not to exceed 66% per centum of the appraised value of the real estate offered as security and for a term not longer
than ten years if the loan is secured by an amortized mortgage, deed of trust, or
other such instrument under the terms of which the installment payments are
sufficient to amortize 40 percentum or more of the principal of the loan within
a period of not more than ten years, and (2) any such loan may be made in an
an amount not to exceed 66% per centum of the appraised value of the real estate
offered as security and for a term not longer than twenty years if the loan is
secured by an amortized mortgage, deed of trust, or ther such instrument under
the terms of which the installment payments are sufficient to amortize the entire
principal of the loan within a period of not more than twenty years, and (3) any
such loan may be made in an amount not to exceed [751 80 per centum of the
appraised value of the real estate offered as security and for a term not longer
than [20j thirty years if the loan is secured by an amortized mortgage, deed or
trust, or other such instrument under the terms of which the installment payments are sufficient to amortize the entire principal of the loan within the period
ending on the date of its maturity, and (4) the foregoing limitations and restrictions shall not prevent the renewal or extension of loans heretofore made and
shall not apply to real estate loans which are insured under the provisions of
title II, title VI, title VIII, section 8 of title I, or title IX of the National Housing
Act or which are insured by the Secretary of Agriculture pursuant to title I of
the Bankhead-Jones Farm Tenant Act, or the Act entitled "An Act to promote
conservation in the arid and semiarid areas of the United States by aiding in
the development of facilities for water storage and utilization,
and for other
purposes," approved August 28, 1937, as amended, or title4 V of the Housing Act
of 1949, as amended, and shall not apply to real estate loans which are fully
guaranteed or insured by a State, or by a State authority for the payment of
the obligations of which the faith and credit of the State is pledged, if under
the terms of the guaranty or insurance agreement the association will be assured
of repayment in accordance with the terms of the loan. So such association
shall make such loans in an aggregate sum in excess of the amount of the capital
stock of such association paid in and unimpaired plus the amount of its unimpaired surplus fund, or in excess of 70 per centum of the amount of its time and
savings deposits, whichever is the greater. Any such association may continue
hereafter as heretofore to receive time and savings deposits and to pay interest
on the same, but the rate of interest which such association may pay upon such
time deposits or upon savings or other deposits shall not exceed the maximum
rate authorized by law to be paid upon such deposits by State banks or trust
companies organized under the laws of the State in which such association is
located.
Any national banking association may make real estate loans secured rby
first liens upon forest tracts which are properly managed in all respects. Such

NATIONAL BANK REAL ESTATE LOANS

loans shall be in the form of an obligation or obligations secured by mortgage,
trust deed, or other such instrument; and any national banking association
may purchase any obligation so secured when the entire amount of such obligation is sold to the association. The amount of any such loan shall not exceed
60 per centum of the appraised fair market value of the growing timber, lands
and improvements thereon, offered as security and the loan shall be made upon
such terms and conditions as to assure that at no time shall the loan balance
exceed 60 per centum of the original appraised total value of the property then
remaining. No such loan shall be made for a longer term than three years:
except that any such loan may be made for a term not longer than fifteen
years if the loan is secured by an amortized mortgage, deed of trust, or other
such instrument un'der the terms of which the installment payments are sufficient
to amortize the principal of the loan within a period of not more than fifteen
years and at a rate of at least 6% per centum per annum. All such loans secured by first liens upon forest tracts shall be included in the permissible aggregate of all real estate loans prescribed in the preceding paragraph, but no
national banking association shall make forest-tract loans in an aggregate sum
in excess of 50 per centum of its capital stock paid in and unimpaired plus 50
per centum of its unimpaired surplus fund.
Loans made to finance construction of industrial or commercial buildings
and having maturities of not to exceed eighteen months where there is a valid
and binding agreement entered into by a financially responsible lender to advance the full amount of the bank's loan upon the completion of the buildings
and loans made to finance the construction of residential or farm buildings and
having maturities of not to exceed eighteen months, shall not be considered as
loans secured by real estate within the meaning of this section but shall be classed
as ordinary commercial loans whether or not secured by a mortgage or similar
lien on the real estate upon which the building or buildings are being constructed : Provided, That no national banking association shall invest in, or be liable
on, any such loans in an aggregate amount in excess of 100 per centum of its
actually paid-in and unimpaired capital plus 100 per centum of its unimpaired
surplus fund. Notes representing loans made under this section to finance the
construction of residential or farm buildings and having maturities of not to
exceed nine months shall be eligible for discount as commercial paper within
the terms of the second paragraph of section 13 of this Act if accompanied by
a valid and binding agreement to advance the full amount of the loan upon the
completion of the building entered into by an individual, partnership, association,
or corporation acceptable to the discounting bank.
Loans made to established industrial or commercial businesses (a) which
are in whole or in part discounted or purchased or loaned against as security
by a Federal Reserve bank under the provisions of section 13b of this Act, (b)
for any part of which a commitment shall have been made by a Federal Reserve
bank under the provisions of said section, (c) in the making of which a Federal
Reserve bank participates under the provisions of said section, or (d) in which
the Reconstruction Finance Corporation or the Housing and Home Finance
Administration cooperates or purchases a participation under the provisions
of the Reconstruction Finance Corporation Act, as amended, or of section 102
or 102a of the Housing Act of 1948, as amended, shall not be subject to the restrictions or limitations of this section upon loans secured by real estate. Loans
in which the Small Business Administration cooperates through agreements to
participate on an immediate or deferred basis under the Small Business Act
shall not be subject to the restrictions or limitations of this section imposed upon
loans secured by real estate. Home improvement loans which are insured under
the provisions of section 203 (k) or 220(h) of the National Housing Act may
be made without regard to the first lien requirements Of this section.
Loans made to manufacturing and industrial businesses where the association looks for repayment out of the operations of the borrower's business, relying primarily on the borrower's general credit standing and forecast of operations, with or without other security, but wishes to take a mortgage on the
borrower's real estate as a precaution against contingencies, shall not be considered as real estate loans within the meaning of this section but shall be classed
as ordinary commercial loans.

NATIONAL BANK REAL ESTATE LOANS

AGENCY REPORT
FEDERAL DEPOSIT INSURANCE CORPORATION,
OFFICE OF THE CHAIRMAN,

Washington, May 25, 1964.
Hon. A. WILLIS ROBERTSON,

Chairman, Committee on Banking and Currency,
U.S. Senate,
Washington, B.C.
DEAR MR. CHAIRMAN : I would like to express the views of the Corporation on
S. 2576, a bill which would amend section 24 of the Federal Reserve Act relating
to certain limitations on real estate loans by national banks.
S. 2576 would authorize national banks to lend on real estate loans up to 80
percent of the appraised value of the real estate offered as a security for a term
not in excess of 30 years. The present provisions of section 24 of the Federal
Reserve Act permit national banks to lend up to 75 percent of the appraised value
of the real estate offered as security, for a term not longer than 20 years.
The Corporation would not favor the relaxation, to the extent provided for in
S. 2576, of the existing restrictions on loans which national banks may make on
the security of real estate. If the Congress determines that national banks are
operating under a competitive disadvantage in meeting a demonstrated need for
longer maturities, we suggest that consideration be given to the enactment of
statutory limitations applicable to all insured banks which would limit real
estate loans up to 75 percent of appraised value of the real estate and a maximum
maturity of 25 years. It should be noted that national banks may now meet such
needs by FHA and GI loans with greater maturities and percentages of appraised
value than provided by existing law.
We have been advised by the Bureau of the Budget that it has no objection from
the standpoint of the administration's program to the submission of this letter.
Sincerely yours,
JOSEPH W. BARR, Chairman.

STATEMENT OF JAMES J. SAXON, COMPTROLLER OF THE CURRENCY

The CHAIRMAN. YOU may testify on that.
Mr. SAXON. This bill also, Mr. Chairman, originated in our Office,
and it seeks to provide additional flexibility in this area for national
banks in line with the much more liberal terms under most State laws.
It provides additional competitive capability which would benefit the
borrower and the economy. We feel there is great merit to this bill
and would like to see it enacted.
(The prepared statement of Mr. Saxon follows:)
STATEMENT OF JAMES J. SAXON, COMPTROLLER OF THE CURRENCY, ON S. 2576

(H.R. 7878)
The law pertaining to the mortgage loan activity of national banks now
specifies that such institutions may not make conventional loans in excess of
75 percent of the appraised value of improved real estate, and may not offer a
conventional mortgage for longer than 20 years. H.R. 7878 would modify these
constraints by permitting national banks to make conventional real estate loans
for not more than 80 percent of the appraised value of the property and for a
term of not more than 30 years.
In appraising the merits of this bill, I should like to explore briefly what statutory standards may be appropriate for such loans.
There is a natural constraint on mortgage terms even in the absence of restrictive controls, because of the conservatism, prudence, and caution of the typical
bank loan officer. With minor exceptions, it is highly unlikely that banks would
extend themselves beyond reasonable limits in setting mortgage terms. These
exceptions, moreover, would not likely escape the criticism of our examining
staffs.

30-698 O—64

NATIONAL BANK REAL ESTATE LOANS

In determining the appropriate limitations for real estate loans, the principal
question is: Should the ceiling on mortgage maturity and the loan-to-value ratio
be set with the view of minimizing bank losses, or to encourage a maximum level
of home ownership consistent with some bearable level of bank losses.
If Congress desired the former goal, the loan-to-value ratio would be set very
low, and the maximum maturity of the mortgage would be fixed at a short-term
level. I do not believe that this is good public policy in terms of our general goal
of achieving a high rate of real income growth, which includes adding to our
stock of housing and nonresidential productive capital in commercial and
industrial buildings.
If commercial banks are to fulfill their functions, they must be allowed to take
risks. Neither legislation nor administrative regulation should hamper them
from doing so, within the bounds of ultimate safety of the deposit funds they
have accepted. To assure the effective operation of banks, broad lending discretion is required.
Prospective mortgagors differ widely in their creditworthiness. They differ
in terms of present income, prospective income, employment stability, ownership
of liquid assets, insurability, and character. They live, furthermore, in widely
varying economic environments, a fact which will color their credit capacity
quite apart from the above-named characteristics. All of the factors enter into
the calculation of the terms upon which mortgage loans can be made with reasonable prudence.
Because of these facts, there are some borrowers whose credit worthiness
clearly indicates loan terms more restrictive than those set in the present law as
maxima; and there are other borrowers who could make mortgage commitments
on terms considerably more liberal than these proposed maxima, without subjecting the lending bank to unreasonable risk. The effect of present ceilings is
thus to penalize in substantial degree both the prospestive borrower and the
prospective lender. The prospective borrower may find liberal terms in his
long-range interest, particularly where his normal income curve will rise in the
future, and he expects later prepayments to offset the higher cost in the short
run.
In recent years, the delinquency rates on conventional mortgages have tended
to be lower than on FHA- and VA-insured loans. (See accompanying table 1.)
This can be interpreted in three ways: (1) The legal limitations on the terms of
conventional mortgages have made them less subject to delinquency; (2) the data
reflect inherently more credit-worthy applicant borrowers in the conventional
category; or (3) lenders screen uninsured risks more rigorously than those that
are insured.
There is no reason to suppose that the stricter legal requirements for conventional mortgages are the bases for these differences. Since such borrowers are
subject to generally higher amortization payments for any given loan size, a
higher delinquency rate would be expected. Nor does there appear to be any
reason why the more credit-worthy borrowers would seek convention loans in
preference to insured loans. It would thus seem that lenders have in the past
exercised greater care in screening conventional mortgage applicants than those
for insured loans. On this basis, I would anticipate even more careful screening
of applicants for liberalized terms, and a consequent reduction in their delinquency and default rates.
At this point I should like to call your attention again to table 1. As you can
see, delinquency rates have fallen from 1961 to the latest quarter, June 1963.
Conventional mortgage delinquencies show no trend since 1960. While FHA and
VA delinquencies are higher now than in 1960, they have improved considerably
in the more recent period.
A mortgage default is never due to the loan having too long a maturity. It is
unlikely, therefore, that the passage of this amendment would alter the pattern
of mortgage defaults, which tends to follow the course of the business cycle.
We are therefore concerned solely with the impact that the extended maximum
term would have on the safety and viability of our banking system and individual
banks within that system.

NATIONAL BANK REAL ESTATE LOANS

The impact on a single bank of longer rather than shorter term mortgages
is a reduction in the rate of cash payback from a given volume of outstanding
loans. To the extent that those who hold mortgages from the banks are
also its depositors, this slower payback from very long term mortgages simply
means that both deposit liabilities and loan assets are extinguished at a lesser
rate than would otherwise be the case. And if the borrowers are not depositors,
but customers of other banks, then the lending bank under such circumstances
will find its excess reserves augmented at a rate which is smaller than that
which would obtain in the case of shorter term loans. In both cases, the
practical effect of longer term loans is to reduce the cash inflow of the lending
bank and thus to reduce its freedom to alter its asset structure in the very
short run. I do not consider this a significant handicap, however, because
the'individual bank must provide for short-run liquidity needs largely through
holdings of cash and secondary reserves, rather than through its prospective
return flow of funds from amortized loans. In other words, the safety and
viability of an individual bank does not turn primarily on the maturity of its
amortized mortgage loans, but on the wisdom of its management of primary
and secondary reserve assets as well.
Account must also be taken of equity considerations. The mortgage loan
limitations on national banks are, in general, more restrictive than many
State laws affecting State-chartered banks—and also more restrictive than
Federal and State laws affecting savings and loan associations and other
financial intermediaries. The accompanying tables provide appropriate comparisons between legislation affecting national banks and that governing banks
in the several States.
I wish to make clear that I would support this bill even if all comparable
Federal and State laws were either equally or more stringent than the existing
Federal limitations.
I believe this bill can thus stand on its own positive merits. Congress, in
passing this bill, will not only benefit the public, but remove the present discrimination against federally chartered commerical banks.
I strongly recommend the passage of H.R. 7878.

ffl

Table 1.—Mortgaffe delinquency rates, by selected States

(Percentages of number of loans delinquent to number outstanding)
| N M ^ ^ALL REPORTING STATES

MASSACHUSETTS
CONNECTICUT
VA
FHA
VA CCNV. TOTAL FHA

2 . 24

1.69
.72
.97
.79
1.36
1.15
1.60

2. 76
3.71
1.03
1. 26
.90
1.33
1.21
1.96
2.39

1.77
1.92
1.88
2.02

1.70
1.86
2.43
2.13

.42

2.01

.41

2.29

FHA

.33
.50
.25
.22
.25
.34
.28
. 50
.63

. 15
.33
..20
.17
.15
.21
.21
.41
.69

.45
.86
.32
.26
.32
.43
.32
.53
.66

.44
:24
.23
.26
.32
.29
.53
.57

20
.33
.24
.24
.31
.38
.34
.69
.75

13
.21
.30
.29
.24
.32
.44
.58
.83

.72
.34
.28
.44
.54
.40
.88
.96

16
.24
.19
.21
.23
.29
.29
.61
.65

.62
.32
.34
.34
.63
.44
.50
.52

16
.34
.24
.32
.28
.45
.38
.39
.56

. 57
1.09
.40
.36
.50
.90
.52
.50
.59

. 51
.55
.30
.23
.27
.55
.42
.53
.48

2.58
1. 13
.91
.79
.87
.94
1.46
1.89

March
June
Sept.
Oec.

.61
.59
.59
.r,0 r

.72
.72
.72
.73r

.63
.58
.60
.60

.53
.52
.50
.53

.62
.63
.59
.67

.56
.70
.65
.71

.73
.74
.73
.77

.59
.56
.53
.62

.54
.56
.49
.44

.56
.53
.51
.50

.66
.68
.63
.55

.49
.53
.45
.38

19631
March
June

.60

.69

.61

.55

.66

.77

.62

.42

.39

.46

.55

.61

.56

.51

.64

.58

.70

.63

.44

.45

.51

TOTAL

FHA

1948
1952
19S4
19S7
1938
1959
1960
1901

END OF
PERIOD TOTAL
1943
1949
1952
1954
19 57
1958
1959
1960
1961
March
June
Sept.

• 36

1.85
1.25
1.48
1.17
.81
1.15
1.12
1.37

1.24
.84
1.50
.48
.22
1.33
.89
.77
1.77

1.51
1.21
1.35
1.15

. 40

. 49

NEW YORK CITY

NEW YORK

FHA

CONV.

3.85
5.06
2.07
1.50
1.47
.61
.67
1.20
.83

.50
1.64
.84
1.54
.S7
.83
1.49
1. 13
1.57

.12
.19

.33
.39

.14
.23
.27
.31
.40
.52

.25
.51
.20
.25
.37
.51
.30
.39
.42

.49
.41
.08
.07
.14
.15
.19
.21
.26

.33
.39
.30
.27
.36
.52
.43
.64
.67

.27
.27
.14
.20
.13
.26
.28
.44
.51

.37
.36
.20
.32
.35
.61
.51
.60
.63

.39
.45
. 18
.26
.49
.60
.46
.74
.76

1.68
.67
1.79
1.12

1.59
1.17
1. 15
1.32

1.44
1.34
1.35
1.07

.36
.33
.33
.36

.50
.54
.49
.51

.40
.33
.37
.37

.24
.21
.20
.25

.69
.60r
.65
.65

.70
.50
.51
.63

.68
.63
.67
.68

.39
.33

.56
.45

.38
.33

.30
.26

.70
.64

.61
.50

.71
.65

1.34

.92

1.24

1.49

June

1.26

1.39

1.45

1.15

.35
.37
.23
.17
.27
.35
. 27

-•24

1.71

RHODE ISLAND
CCNV. TOTAL

TOTAL

FHA

2.20

I . 3d
1. 10

.41
.81
.75
.31
1.35
1.29

2.48
2.09
1.09
1.20
1.17
.47
1.53
1.78

1.20

1.06
. 74
.67
.61
.53
1.36
1.79

.39
.75
.26
.63
.44
.16
1.90
1.52

2.07
2.59
2.47
2.56

1.66
1.67
1.40
1.74

1.21
1.24
1.16
1.23

1.46
1.13
1.35
1.27

2.17

2.48

1.73

I . 28

2.31

3.03

1.95

I." 12

CONV.

.22

.20
.23
.46

1.13

".83

1.37
1.04
1.12
1.45

1.14
1.32
1.15
1.23

.88
.83
.97
.87

1.12
1.06
1.35
1.22

1.35
1.31
1.30
1.41

.78
.73
.88
.75

1.09

1.57

1.22

.71

1.09

I. 11

.61

.92

1.13

1.14

.60

1.02

.81

.52

.76
. 13

.62
.59
.27
1.23

.48
.47
.30
.17
.02
.07
.03
.24
.16

.53
.46
.44
.4U

.23
.21
.20

.48r

.61
.61
.61
.80r

.49
.39

.73
.63

.46
.40

.20
.12

.35
.12
.31
.36
.30
.40
.50

.08
.31
.08
.20
.32
.31
.51
.63

.35
.22
.20
.38
.41

.70
.62r
.69
.65

,63
.49
.45
.49

,86
.62
.59
.62

.69
.30
.34
.52

.40
.54
.47
.39

.46
.43
.42

.72
.68

.52
.46

.64
.64

.57
.50

.3S

. 18

. 12

. 31

1.25

.40
.12
. 11
. 18
. 16

.49
.46

. 16

CONV.

. 25
.62
1.25
1.34
1.16
1.07
.64
1. 14
1.57

1.46
2.90
.58
. 13
.17
.25
. 19
.57
.55

. 73

.65
.55
.92
1.03
1.10
.41
.95
1.07

.22
.32
.25
.04
.04
.13
.18
.63
.65

.46
.06
. 18
. 13
.34
.49
.36
.35
.51

FHA

24
.51
.50
.59
.58
.59
.40
.78
.98

I. 05

NEW JERSEY1
PENNSYLVANIA
UPSTATE
VA CONV. TOTAL FHA
VA CONV. TOTAL FHA
VA CONV. TOTAL

CONV. TOTAL

1963;
March

TOTAL

VERMONT

FHA

1.27

CONV.

NEW HAMPSHIRE

MAINE

FHA

CONV. TOTAL

'TOTAL

nPiftft\00*

.22r

.05
.02
.05
.07
.04
.04
.05
.23

. 30

.36
.27
.34
.39
.42
.34
.69

MARYLANO

FHA
-

CONV.

_
-

.06
.22

. 15
.03
. 12
. 13
.03
. 12
.09
.36

.03
.10

.16
.19
.11
.15

.09
.19
.16
.20

.33
.23
.09
.22

. 10
.0*

. 12

.13
. 12

.19
.'23

.c:

. 12

.06
.08
.08

.02
.04

.03
.1*7

.04

•o
u.

=rz

» « ^ C b

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I

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. 1962 rate
a change 1

NATIONAL BANK REAL ESTATE LOANS

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to 1960 ate not s t r i c
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and
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years pi
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une

CC.NV.
n. r
n. r

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.28

ypc reporte
TOTA

prcgrair. an
oans in t h e process of

.84

rractor.
for savi
holders,
dividins

asslfi- 1
mort1
and the cr
oans report
to 4-faml
n. r
n. r

1*1
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a quartc
1956. a]
.70

.20

conti

ST ST
JFOR
SOU

TOTA
FHA

.21

.24

fATES
fHER AT
RIO

10
TABLE

NATIONAL BANK REAL ESTATE LOANS
2.—Tabulation of States with laws governing term of conventional mortgage loans relative to regulation governing national banks
States with laws regarding term of conventional real estate loans that are—
More restrictive

Oklahoma
South Carolina
Wyoming
Virginia
(4)

Less restrictive 1
Alabama
Alaska
Arizona
Arkansas
Connecticut
Delaware
Florida
Hawaii
Illinois
Kansas
Kentucky
Louisiana
Maine
Maryland
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Hampshire
New York
North Carolina
Rhode Island
South Dakota
Tennessee
Utah
Washington
West Virginia
Wisconsin

Same
California
Colorado
Georgia
Idaho
Indiana
Iowa
Massachusetts
Michigan
Montana
New Jersey
New Mexico
North Dakota
Ohio
Oregon
Pennsylvania
Texas
Vermont
(17)

(30)
1

Includes States with no restrictions on term of conventional mortgage loan.

TABLE

3.—Appraised value conventional mortgage loan limits of States compared
with the limit applying to national banks
States having appraised value conventional mortgage loan limits that are—
More restrictive

Minnesota2
Montana
New Mexico
North Dakota
Oklahoma
South Carolina
Texas
(7)

Less restrictive 1
Alabama
Alaska
Arizona
Arkansas
Connecticut
Delaware
Florida
Illinois
Kansas
Kentucky
Louisiana
Maine
Maryland
Mississippi
Missouri
Nebraska
Nevada
New Jersey
New York
North Carolina
Rhode Lsland
Tennessee
Utah
Washington
West Virginia
Wisconsin

Same
California
Colorado
Georgia
Hawaii
Idaho
Indiana
Iowa 2
Massachusetts
Michigan
New Hampshire 8
Ohio
Oregon
Pennsylvania
South Dakota
Vermont *
Virginia
Wyoming
(17)

(26)
1
2

Includes States with no restrictions on term of conventional mortgage loan.
Only 40 percent of the loan must be amortized in the 20-year period.
»New Hampshire law provides for maxima of 50 to 80 percent of appraised value, depending on the location
of the property.
4
66H to 80 percent, depending on type of property.

NATIONAL BANK REAL ESTATE LOANS

The CHAIRMAN. Senator Long.
Senator LONG. DO the national banks make many real estate loans
of 80 percent of the value of real estate security for 30 years?
Mr. SAXON. They are not permitted to do so.
Senator LONG. They would under this.
Mr. SAXON. Yes; and it is a matter of competitive capability, really.
In Maryland and other States iii the Mid-Atlantic States it is 30 years
and 80 percent, and in other States it is 100 percent, and I do not
suggest at all that a great many banks will make a great many of these
loans, but there ought to be the competitive capability to do so, and
so long as that exists, I think we have approved a competitive climate
condition that is of benefit to the borrower and salutary for the
economy.
Senator LONG. I have had some experience, and I do not believe that
banks loan anywhere near that high percentage for that length of
time.
Mr. SAXON. Yes.
Senator LONG. I just
Mr. SAXON. It varies

wondered what your comment would be.
throughout the country. Some banks in some
States would take advantage of this, others not, as their prudent
banking judgment dictated. We do believe that the flexibility ought
to be there to do so.
Senator JAVITS. I would like to ask, to what extent would this
enlarge the availability of loanable bank funds from the national
banks ? In other words, there are certain ground rules for long-term
mortgage investments. They can only invest a certain proportion, I
assume, of their resources. You might tell us what that is. And then
tell us to what extent this change would expand their loanable funds
for long-term real estate loans.
Mr. SAXON. It is difficult to make any firm estimate, as you know.
But there would be some sure, substantial reflection of this increased
capacity in lending. However, this is a matter of the individual
judgment of each institution. I think primarily it would be used only
as a competitive device.
Senator JAVITS. The competition would be with savings banks and
with State-chartered institutions and with savings and loan associations, too; would it not?
Mr. SAXON. Yes, sir; that is correct.
Senator JAVITS. I S this an essential competitive change, because
thev are not in competition now adequately ?
Mr. SAXON. Yes, sir; it is essential.
Senator JAVITS. In your judgment.
Mr. SAXON. It is essential that this competitive capability be made
available.
Senator JAVITS. It is true that large commercial banks, national
banks, are looking more and more for savings in their savings departments, are they not?
Mr. SAXON. Yes.
Senator JAVITS. And

is it a fact that the same regulation which
applies to a national bank generally, applies not only to its commercial
department but also to its sayings department?
Mr. SAXON. Yes, sir; that is correct.

NATIONAL BANK REAL ESTATE LOANS

Senator JAVITS. SO that that regulation would also apply to. its
savings deposits, and and this bill would largely apply to those longterm savings departments, would it not?
Mr. SAXON. Yes,
Senator JAVITS.

sir.

Are all these facts correct? I am aware of this
from the New York banks, and this is why I am asking.
Mr. SAXON. It is true countrywide, speaking generally as to banks.
Some banks, of course, as a matter of individual discretion, may not
use it at all or may not be very active in this area. On the whole
however, there has been much more intensive activity by the commercial banks in the mortgage area to the clear benefit of this economy. It has driven mortgage rates down now to 5.07 and 5.06 on
first-rate real estate paper.
Senator JAVITS. It is now a fact that there is now also competition
in the acquisition of mortgages by pension and welfare funds ?
Mr. SAXON. Yes.
Senator JAVITS. For

example, it is said that there is a hundred million dollars available currently from pension and welfare funds. Is
that true ?
Mr. SAXON. Yes, sir.
Senator JAVITS. And

the bill would enable the banks to participate
in this competition, too ?
Mr. SAXON. That is correct.
Senator JAVITS. I have heard some criticism, Mr. Comptroller, of
regulation Q which puts a certain ceiling on the interest-paying capability of the national banks.
Mr. SAXON. Yes.
Senator JAVITS. Would

you have any comment on that—also within
this same area of competition ?
Mr. SAXON. Yes, sir, Senator, I believe it is an unfortunate regulation, that it is price fixing in its raw sense. It controls the rate
which member banks, State and National, can pay for funds. I think
it can easily be demonstrated that it has had the most damaging effect
on the country domestically and internationally. It has been a large
factor in the Euro dollar market, because it has prevented the major
money center banks from competing for funds except by the devious
device of having them deposited abroad where, of course, they are
free of such restrictions.
It has been damaging domestically because it has put a halter on
encouragement of the creation of additional savings. Today something must give on regulation Q, either the ceiling must be lifted or
eliminated. We have an estimate of $10y2 to $12 billion of CD's
outstanding. Money rates are hardening very obviously. As these
CD's run off, they will go to other instruments unless banks are in a
position to compete to retain these funds by renewing these CD
contracts.
In these circumstances—and this applies particularly to the nonmoney-center city banks which have to pay 25 to 40 basis points more
for these funds because they don't have the names to carry the competitive rates in the Chicago, New York, and San Francisco markets—
these funds would either float to New York or the other large money

NATIONAL BANK REAL ESTATE LOANS

centers or into other channels of competing paper, commercial paper
and other such channels. Something must give in this area.
Now, we are facing what appears to me to be a most serious threat
to liquidity in the commercial banking system as a result of the ceiling
on Q, at least at this level.
Senator JAVITS. NOW, this is a Federal Eeserve Board ceiling, is it
not?
Mr. SAXON. Yes,
Senator JAVITS.

sir.

The Federal home loan banks—and I notice our
good friend, Mr. McMurray is here—are similarly under the awning,
as it were of the Federal Eeserve Board Regulations, are they not ?
Mr. SAXON. NO, sir; they are not.
Senator JAVITS. They are not ? It does not affect that ?
Mr. SAXON. NO, sir.
Senator JAVITS. But

it would affect their system competitively,
would it not ?
Mr. SAXON. Yes, sir, certainly. They are able to compete more
freely. This is a matter of fundamental principle, and as to whether
an institution in our type of society—supposely we are dealing in a
market society where supply and demand determine rates and supply—ought to be restricted by fixing the price or pegging the market.
Senator JAVITS. IS there any other system of banking under any
other jurisdiction other than yours and the Federal Home Loan Bank
Board which would be competively affected by regulations here?
Mr. SAXON. Well, there is no such restraint, as far as I know. Mr.
Gannon is here, of the Bureau of Federal Credit Unions. This isn't
a very substantial factor as yet. Mortgage funds, of course, are a
very substantial factor. Insurance companies—others—today are
practically in the banking business, in lending areas as well as the
savings area.
Senator JAVITS. Except that they are not under any form of restriction.
Mr. SAXOX. They are under no regulation. Banks have been freed,
and quite wisely, it seems to me, in New York.
Talking about money, there ought to be a chance to compete for
those funds, as banks may need them and put them to profitable use.
They should not be restrained by an artificial inflexibility and pricefixing such as this, in our opinion.
Senator JAVITS. Mr. Chairman, as this is extremely important, may
I make the following unanimous consent request: that the witness may
review his testimony on this subject and in any way supplement it
and revise it and submit any written document that he wishes to on
this matter. And as Mr. McMurray has left the stand—it is may
fault, I was not here
Senator BENNETT. He has not been on yet.
Senator JAVITS. Oh, he has not been on yet. I was going to suggest
that our staff request—and I will be happy to make the request—of
the Federal Home Loan Bank Board and any other Government
agency that w^ould have a competitive interest, a similar comment so
that the committee might have all together in one place a point of
view from the Federal Government standpoint of this regulation Q,
including the regulation itself.
30-698—64

NATIONAL BANK REAL ESTATE LOANS

The CHAIRMAN. I t is quite apparent we cannot go into executive
session on these bills today. We have only 15 minutes left. So I
think it is quite pertinent that we get the information on the Federal
Reserve Boards regulation Q and the comparable FDIC regulation,
part 329, which are certainly of interest not only to New York, but
outside. Is there objection? The Chair hears none.
Senator JAVITS. Thank you.
(Mr. Saxon subsequently submitted the requested statement which
appears at p. 25.)
The CHAIRMAN. NOW, Mr. Saxon, before you leave the stand, I
want to call your attention to the fact that after 2 years of service
in World War I, I got married and I rented a house, but I wanted to
build one. Well, I had money enough to buy a lot and that was all,
and I went looking around for some building funds, and there were
no savings and loans in that area, and I found the commercial banks
did not want to lend more than 50 percent of the fair value. When
was the limit fixed at 75 percent ?
Mr. SAXON. At 70 about 3 years ago, sir, I believe.
The CHAIRMAN. Fixed at 75 percent. Anyway, following World
War I most of them loaned at 50 percent. In 1932 a lot of them
went broke on 50 percent, is that not true? Well, they went broke
for some reason. What broke them? What closed all the banks
down, because so many of them either broke or were going broke ?
Mr. SAXON. NO, sir; we find, Mr. Chairman, the loss ratio in the
conventional amortized mortgage area is almost negligible, almost
nonexistent. We have learned since that time
The CHAIRMAN. When ? It was not negligible back there in 1934.
Mr. SAXON. YOU know, since these new techniques have been developed and loans are primarily on an amortized basis, which has
been most
The CHAIRMAN. I do not argue that the Home Loan Bank Board
does not save them when they took in some of these homes, established
a market, and we gradually pulled out of that real estate depression,
and Mr. McMurray will tell you about that when he takes the stand.
I was here, and I know how the homes were being foreclosed and
how we made loans to the homeowner and carried the bank along
until confidence could be restored and wTe would get better values for
our property.
Now, the proposal pending here is to raise it from 75 to 80 percent,
but we did not bring it up to 75 percent until when?
Senator BENNETT. Three years ago.
Mr. SAXON. 1959; 3 years ago.
The CHAIRMAN. All right; we have had the greatest boom in real
estate in the last 3 years that the world ever saw. Now, how long
that will last I do not know, but I am just calling attention to the
fact that when I wanted to borrow money for my home the limit was 50
percent.
Mr.

SAXON. Yes.

The CHAIRMAN. And a lot of them went broke on 50 percent.
Now, this is proposed to raise it to 80 percent, and are you advocating
that you insure them for $25,000 on top of that? Insure deposits^
Mr. SAXON. NO, sir. No, indeed. I am not advocating an increase
in the level of deposit insurance at all; no, sir.

NATIONAL BANK REAL ESTATE LOANS

(Mr. Saxon later submitted the following letter:)
COMPTROLLER OF THE CURRENCY,
U.S. TREASURY,

Washington, D.C., March 12,1964.
Hon. A. WILLIS ROBERTSON,

Chairman, Senate Banking and Currency Committee,
Washington, D.C.
DEAR MR. CHAIRMAN : At the hearing of the Subcommittee on Financial Institutions of the Senate Committee on Banking and Currency, on March 4, 1964,
you asked whether we were advocating an increase in the coverage of Federal
deposit insurance. I indicated that we were not advocating such an increase,
and this letter outlines the basis for this opposition. We would appreciate it if
this statement could be incorporated in the record.
Increased coverage of deposit insurance would not, in our view, serve any
useful public purpose, and it would be likely to produce harmful effects. The
chief reason advanced in support of such an increase is to avert disruptions in
the economy resulting from the unavailability of deposit balances to commercial
and industrial firms. Although there are sound reasons for insuring deposits
to safeguard the smaller less knowledgeable depositors, commercial and industrial firms are better able to select the institutions in which their balances will
be secure. An increase in insurance coverage is thus not required for those most
in need of protection by this means.
The most harmful effect of increased deposit insurance coverage would be the
danger of erosion of the prudency of bank management. The maturing risks
under deposit insurance are not borne solely by the affected institutions, so
that the incentive for prudent management is weakened as the coverage of risks
is extended. Moreover, broadened insurance coverage would adversely affect
the competitive position of banks with the highest quality of management performance, since it would tend to make depositors indifferent to such performance.
This could have a severely harmful effect on the proper functioning of the banking system. Finally, since insurance assessments are based on total deposits,
the costs of providing this competitive advantage to some banks would be inequitably borne by other banks.
In our view, the function of deposit insurance is to operate, not as a crutch,
or as a barrier to initiative, but only as a limited safeguard in the case of occasional bank failure. Judged in these terms, we can see no necessity for an extension of the amount of deposit insurance coverage.
Sincerely,
JAMES J. SAXON,

Comptroller of the Currency.

Mr. SAXON. NOW, the other point. We think the mortgage contract today is a wholly different instrument than that which existed
in the past. Amortization of loans was the principal change, but
there are others. Additionally, in the depression period it was the
general decline in the economy that affected stock market collateral,
everything, other collateral. The only thing that came out the best
was unsecured paper where the banker relied on the borrower, his
character, and his capacity.
The CHAIRMAN. I am just trying to emphasize the fact, based upon
a service in the Congress for 31 years and much longer than that in
State government, that you do not have perpetual prosperity.
Mr. SAXON. Yes.

The CHAIRMAN. And you know if you ever went to school in the
country and they had the water pitcher on the outside of the room, and
as you went out somebody threw water up and said, "What goes up
must come down, and unless you get from under you are going to get
water on you." I cannot think that we should, in the greatest real
estate boom that I have ever known in this country, legislate on the

NATIONAL BANK REAL ESTATE LOANS

assumption that it will never be any cheaper than it is now. That is
the point I want to develop.
Senator BENNETT. Mr. Chairman, may I ask a question?
The CHAIRMAN. Senator Bennett.
Senator BENNETT. Mr. Saxon, on January 20, 1964, you published
on your letterhead what is called the "Copy of a Letter Addressed to
Counsel for a National Bank," and in that letter the question was
raised: May a bank under existing statutes rely on private mortgage
guarantee insurance coverage to support a loan in excess of the legal
limit which is 75 percent and 20 years ?
Mr. SAXON. Yes.

Senator BENNETT. And you answer was, in effect: Yes, the bank
may rely on such mortgage loan guarantees which in effect would then
take the loan out of the real estate loan within the meaning of 12
U.S.C. 371, although as a matter of prudent banking practice it may
also be secured by real estate.
Now you are raising the limit to 80, you are increasing the term to
30 years. Would your answer be the same to a similar inquiry today ?
Mr. SAXON. Yes.
Senator BENNETT. IS

not this a device to carry the national banks
above their legal limit ?
Mr. SAXON. NO. The answer is "Yes," we would make the same
answer to the inquiry today. We think that the bank can make, as
indeed many do, loans for the purchase of real estate on a plain note.
There is nothing to prevent a bank universally to lend to Saxon
enough money to buy a house without taking it back as security.
Senator BENNETT. I^ko the Washington bank did to Bobby Baker,
take no security, a $125,000 loan because he is a good man ?
Mr. SAXON. Well, it's a nice day. [Laughter.]
And, indeed, we noted in our ruling that where the insurer is reliable, and the bank's records, information therein contained, demonstrates the reliability of the insurer, that we see no objection to
this.
Senator BENNETT. The obvious followup question: The mortgage
guarantee insurance company, which I think fills a need in our financial system as a private guarantor of mortgage insurance—and I am
not bringing it up because of the relationship of some of its stockholders to a current problem—this would indicate that this company
which has in the past been serving savings and loan associations
largely, is encouraged to extend its activities to national banks if it
can persuade the management of those banks to use its services, and
you have no objection, I take it.
Mr. SAXON. It is if, as is brought out in our closing point in the
last sentence, the records of the bank show that this is a reliable company. Now, it is clear today that other companies are moving into
this area, and some very substantial insurance companies, some of the
big-name companies.
Senator BENNETT. Yes.
Mr. SAXON. And what we are doing, what we did, is very similar
to the present law on VA insured mortgages. If the VA insures 20

NATIONAL BANK REAL ESTATE LOANS

percent of the mortgage, it takes the whole thing out of the section
371 limit under the present law.
Senator BENNETT. Mr. Chairman, I would like to offer this letter
for the record.
The CHAIRMAN. Without objection, it wTill be included in the record.
(The letter referred to is as follows:)
COMPTROLLER OF THE CURRENCY,
U.S. TREASURY,

Washington, B.C., January 20,1964.
COPY OF A LETTER ADDRESSED TO COUNSEL FOR A NATIONAL BANK

In your letter of November 21, 1963, you requested a ruling for your client,
the Citizens & Southern National Bank, Atlanta, Ga., as to whether, under existing statutes and regulations governing national banks, as interpreted by the
Comptroller, private mortgage guarantee insurance coverage may be used to
support a mortgage loan in excess of 75 percent of the appraised value of real
estate and/or for an amortization term longer than 20 years. In other words,
may private mortgage guarantee insurance, which is modeled after the FHA-VA
type of coverage, be used to remove a mortgage loan from the classification of
"real estate loan" within the meaning of 12 U.S.C. 371?
Paragraph 2000 (b) of the "Comptroller's Manual" provides that a real estate
loan within the meaning of 12 U.S.C. 371 is any loan secured by real estate
where the bank relies upon such real estate as the primary security for the
loan. However, where the bank in its judgment relies principally upon other
factors, such as the general credit standing of the borrowers, guarantees, or
security other than real estate, the loan does not constitute a real estate loan
within the meaning of 12 U.S.C. 371, although as a matter of prudent banking
practice it may also be secured by real estate.
It is your conclusion that where such mortgage insurance is the primary
security relied upon, a national bank would be able to make those loans which
would otherwise not qualify as conforming real estate loans, but which would
in all other respects be real estate loans within the meaning of the applicable
statutes. Your conclusion is based on the premise that mortgage insurance
falls within the same classification as other types of guarantees, accommodation
endorsements, and take out commitments, all of which have been held to remove
loans from the definition of a real estate loan within the meaning of 12 U.S.C.
371.
We agree with your conclusion that private company mortgage insurance or
guarantee may be used as a substitute for the insurance or guarantee of a
Government agency and that where a national bank makes a loan in primary
reliance upon such insurance or guarantee, the loan does not constitute a real
estate loan within the meaning of 12 U.S.C. 371.
Where the bank relies on private insurance or guarantee as primary security
for a loan, its files should contain evidence to demonstrate that the bank is justified in placing such primary reliance on the insurance contract.
Sincerely,
JAMES J. SAXON,

Comptroller of the Currency.

Senator MUSKIE. Mr. Chairman, Mr. Bergmann has submitted part
of his statement, that dealing with S. 2259. He did not read the rest
of it. I wonder if he wanted to submit the whole statement for the
record, or whether he wanted to be called back to testify.
Mr. TIEMANJST. Mr. Bergmann just left, and he would like to have
his entire statement made a part of the record.
Senator SPARKMAN. Of course, Mr. Bergmann is here in town, but
we will include in the record at the appropriate place the pertinent
discussion under each of the two bills, S. 2259 and S. 2576.

NATIONAL BANK REAL ESTATE LOANS

(Mr. Bergmann's statement on S. 2576 follows:)
STATEMENT OF HARRY P. BERGMANN, SENIOR VICE PRESIDENT, RIGGS NATIONAL
BANK, WASHINGTON, D.O., AND CHAIRMAN, MORTGAGE FINANCE COMMITTEE,
AMERICAN BANKERS ASSOCIATION

S. 2576 would modernize present limitations on national bank real estate lending authority by providing additional flexibility for the banks. Existing limitations of real estate loans to 75 percent of appraised value and 20-year terms
are unrealistic in some cases.
National banks hold approximately $14 billion in residential real estate loans
and, in addition, originate a substantial volume of such loans for other permanent investors. Thus they are very significant participants in the residential
mortgage market, yet they must operate at a serious disadvantage when compared with other mortgage lenders, including State-chartered commercial banks.
For example, State-chartered banks in 20 States have no statutory limitations at
all on loan-to-value ratios, while in 24 States there is no statutory limitation on
the maximum maturities which can be given borrowers by State banks. Further,
some of the States which do have limitations have less severe restrictions than
are applicable to national banks.
The flexibility to be gained by national banks from a broadening of mortgagelending authority is important for several reasons: First, it would enable them
to serve those potential homeowners who, for various reasons, require a higher
ratio of loan-to-value of property or a longer maturity or both. In communities
where commercial banks are the principal mortgage lenders, modernized lending
powers would be especially beneficial in permitting the servicing of those prospective borrowers who do not have the present ability to meet available terms
and do not have ready access to other mortgage lenders. Second, since a significant activity which commercial banks perform in the housing finance field
consists of loan origination for sale to other mortgage holders, they should have
the more flexible powers to provide loan terms which would more nearly match
the requirements of the prospective borrower and the standards established by
the ultimate holder of the mortgage loan.
With respect to the latter point, it may be noted that the terms provided by
S. 2576 would be especially advantageous in fast-growing areas where available
mortgage credit facilities are inadequate to meet local mortgage-financing needs.
In such areas, commercial banks often fill the gap by originating mortgage loans
for sale in the secondary market.
It cannot be emphasized too strongly that modernization of real estate loan
limitations for national banks does not mean that henceforth all residential real
estate loans by national banks will be at 80 percent of appraised value and for
30-year terms. This is not the case with State banks today (in States permitting such loans) nor would it be for national banks. Indeed it is doubtful that
adoption of this legislation would alter significantly the present lending policies
of national banks. What it would do, however, is provide a degree of flexibility
for national banks which would enable them, in appropriate circumstances, to
make sound loans under somewhat more liberal terms than are presently
possible.
For the foregoing reasons we respectfully request that your committee report
favorably on S. 2576.

NATIONAL BANK REAL ESTATE LOANS
TUESDAY, MARCH 10, 1964
U.S. SENATE,
COMMITTEE ON BANKING AND CURRENCY,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS,

Washington, D.C.
The subcommittee met, pursuant to recess, at 10 a.m., in room 5302,
New Senate Office Building, Senator A. Willis Robertson (chairman
of the subcommittee) presiding.
Present: Senators Eobertson, Sparkman, Proxmire, Long, and
Bennett.
(The subcommittee commenced the hearing with a consideration
of other bills.)
The CHAIRMAN. NOW we will return to the bill that we had under
consideration. That is the bill that raises the limitations on loans
by national banks on real estate, and we will ask our distinguished
Comptroller of the Currency if he will return to the witness stand.
STATEMENT OF JAMES J. SAXON, COMPTROLLER OF THE CURRENCY
The CHAIRMAN. We welcome you, Mr. Saxon.
Mr. SAXON. Thank you, Mr. Chairman.
The CHAIRMAN. DO you wish at this time to add anything to your
principal statement on this bill ?
Mr. SAXON. Sir, if I may, I should like to have the privilege of
putting into the record a statement on the proposal to modestly liberalize conventional amortized mortgage lending by national banks.
The CHAIRMAN. Just a minute, please. I see one or two commentators from our financial institutions with pencils poised, and they
didn't catch just what you were going to recommend.
Mr. SAXON. I ask the privilege, Mr. Chairman, to have incorporated
into the record a statement on the bill which would modestly liberalize
the conventional amortized mortgage-lending authority of national
banks.
The CHAIRMAN. IS there anything different in that statement from
what you testified to heretofore ?
Mr. SAXON. I didn't read any statement earlier, Mr. Chairman. I
just made a few comments about a minute long, and I thought in view
of the great importance of this issue to the national banks of the country, and it is of great significance, that the statement ought to be incorporated in the record and if the chairman should like, I would be
glad to read this statement. This bill has very, very broad support
throughout the national banking system and is urged by, I would say,
95 to 98 percent of the national banks of the country. It is a matter
of considerable significance to us.

NATIONAL BANK REAL ESTATE LOANS

The CHAIRMAN. The distinguished Senator from New York, Mr.
Javits, thought that regulation Q either was or was going to become a
burning issue, and he asked you to have something to say on that
subject. I believe you prepared a statement.
Mr. SAXON. Yes,

sir.

The CHAIRMAN. Have you made that available to the press gallery ?
Mr. SAXON. I believe it has been, Mr. Chairman.
The CHAIRMAN. I see it is rather long. You might summarize it
briefly. Are you for it or against it?
Mr. SAXON. We would strongly urge the abolition of any ceiling or
limitations on the payment of interest on time and savings accounts by
member banks on the grounds set forth in this statement, because we
think it is an artificial restraint which has very damaging effects on
the economy, nationally and internationally, and it is price pegging in
its worst form, pegs the market, deprives one type of institution of the
opportunity to compete for funds, as the need therefor and the profitable use thereof may exist. It results in certain threats of serious
illiquidity today because of such artificial limitations. We believe
the question of rates should be left to the determination of the marketplace, not by the judgment of one or more men in a distant governmental capacity, but by the marketplace.
We would hope, therefore, that as we spell out here in considerable
detail in this statement in response to Senator Javits' question, we
would hope that the Federal Reserve Board would lift the present
ceiling.
The CHAIRMAN. Who would conduct those hearings? Who do you
have in mind?
Mr. SAXON. On regulation Q?
The CHAIRMAN. Yes.
Mr. SAXON. Part of the

answer lies in existing authority of the Federal Reserve Board to lift, or as we think in reading the statute, to
eliminate the ceiling altogether. Authority here congressionally lies
within the Banking Committees of the Congress.
The CHAIRMAN. We have no bill on the subject.
Mr. SAXON. NO, sir. There is no specific bill, to my knowledge, although S. 1799, among other things, provides for standby interest rate
regulation.
The CHAIRMAN. We will ask the opinion of other agencies dealing
with financial institutions for an expression of opinion, but as of now,
we are not concerned immediately because we are limited to three bills,
and in fact we have no bill on regulation Q.
Mr. SAXON. This statement was submitted and prepared in response
to Senator Javits' request.
The CHAIRMAN. It will be put in the record for consideration.
(See p. 25.)
The CHAIRMAN. The Senator from Missouri is recognized.
Senator LONG. Mr. Saxon, I appreciate your coming back this morning. I haven't had the opportunity to read your statement on regulation Q. I thought that I understood at least a reference in your remarks the other day about elimination of ceiling.
Now, so that 1 am sure we are talking about the same thing, you
were referring to the ceiling of 4 percent on certificates li

NATIONAL BANK REAL ESTATE LOANS

Mr. SAXON. The various limitations imposed under regulation Q,
on payment of interest on time and savings accounts.
Senator LONG. NOW small banks, in Missouri, they pay 4 percent
on certificates of deposits?
Mr. SAXON. Yes.
Senator LONG. It

is your thought that the ceiling should be removed
and you pay up to whatever the competitive figure might be'^
Mr. SAXON. Yes.
Senator LONG. Five percent or ten percent ?
Mr. SAXON. Yes.
Senator LONG. Even though we have in many

States a statutory
limit, I am not sure that would apply in this case.
But the thing I am particularly concerned about is small State banks.
Was it not the experience of bank systems—especially State banking
systems during the depression—that when they were in need of help,
they needed money badly, they went out and paid excessive amounts
for it when we didn't have this regulation ?
Mr. SAXON. That is sometimes alleged, but we know of no substantial support for that allegation that is made, Senator.
No, as a matter of fact, the trouble that developed in that period
hardly in our opinion can be attributed to mortgage loans held by the
commercial banking system.
At that period, trouble was encountered with a substantial part of
the total loan portfolio. The difficulties were incident to general deterioration of economic conditions throughout the country, indeed,
throughout the world, and as a result of that, a lack of confidence in
the banking system and capital markets generally, motivated primarily by the great deterioration in the stock market.
So, to me, we find little relevance in the allegation that the difficulties could be attributable to the price paid for money or to the investments in mortgages.
Senator LONG. Mr. Saxon, I fear that you are dealing on a worldwide or national basis, and we are losing sight of the problem we
would have in our States with our smaller banks in the rural areas
and so on.
There are situations, are there not, which do exist where a bank
doesn't need money for lending purposes at a particular time. The
banks 10 miles from there, may be in very difficult financial straits.
They may jump the price 4 or 5 percent higher than the present 4-percent rate. As a result, there will be a considerable flow of money from
the bank that doesn't pay the going rate, will there not ?
Mr. SAXON. There could be, and I think the answer to that is "Yes,"
but this is part of a question of how our economy should operate, and
particularly our commercial banking system and whether we should
attempt to protect it here by a limitation such as this or depend on
what, as we see it generally, is the good judgment and prudence of
the banks.
We don't see excessive rates paid by the smaller banks. In fact,
in cities like Columbus and Cleveland, and smaller areas, the rate is
still 3 percent. There is no requirement to go to 4.
We see great prudence on the part of banks, and a number of banks,
some larger as well as smaller, that went to the maximum limits, re30-698—64

22 ^

NATIONAL BANK REAL ESTATE LOANS

ceded. But this was a matter left to the prudence and judgment of
each individual institution.
Senator LONG. I wanted to be sure I understood your statement
the other day. Frankly, I am very apprehensive of—and I am speaking only of the smaller banks, and I mean smaller banks, $4, $5, $10
million. I know of a number of banks in Missouri of that size that
didn't pay any interest, anything at all and other banks would pay 3
percent. They had such an outflow of their funds, that they had to
go +o the 4 percent to meet competition.
Now, if there is another bank in the same town or the same community which goes to 6 percent, there will be such an outflow that
they will have to go to that same price to meet competition.
And if the other bank raises its rate, it looks to me like it gets into
a vicious circle. I think maybe we are speaking about different size
banks.
Mr. SAXON. I am speaking to the same areas as you, the smaller
banks, which we are as anxious about in our office since they are the
great bulk of banks. We watch this very carefully, and we don't see
excesses. We see smaller banks showing good growth, making better
profit, very profitably and efficiently employing their funds and not
at the risk of the accumulation of unhealthy assets. They are not
reaching out.
When regulation Q was raised at the beginning of 1962, initially
because of a demand for higher yielding securities, and the recourse to
the municipal market, the curve went up sharply. But by September
of that year, reflecting the good judgment of the banks in the country,
it moved down just as sharply as they pulled away from a market
which had pricewise gotten to such a point because of that demand,
that it was yielding insufficient returns and raised a risk for them.
Senator LONG. That is not taking into consideration the banker who
feels he could use a little more money, which is a typical attitude of
bankers, and if he raises his rate higher there is bound to be a flow of
funds into that bank.
Mr. SAXON. There could be, depending on distance and convenience.
As you know, Senator, as a banker, there are a number of factors
involved in accumulation of savings. One is the convenience factor
to the depositor, another is the attitude of the institution, and the third
is the rate differential, whether it is substantial enough to attract
funds.
We are seeing the same thing where S. & L.'s are not subject to any
ceiling, are able to and have been for many years attracting many
funds out of the available pool at a given point in time, and the growth,
even in these communities that you are speaking of, the small communities, the main competitor is usually an S. & L., not a bank. I
don't think there should be a ceiling, as a matter of fact.
Senator LONG. That has been very detrimental to some of the banks.
As far as the flow of funds is concerned, some have gone to the
S. & L.'s, who could pay a higher rate of interest until it was amended
to 4 percent, and then some of the S. & L.'s went up to 4% and 41/9Mr. SAXON. At the 41/4 level and even 41/o, the smaller banks in our
analysis, continued to do very well indeed, and were able to compete
very well.

NATIONAL BANK REAL ESTATE LOANS

We think the result looks good. Now, there are a lot of banks in
this country still paying 1, and
iy2 percent. This is their privilege,
as we see it. I don't think wTe should be judging. And some are at
2, and some have various other restrictive provisions, as you well
know, in their certificate-of-deposit contracts and in their savings
contracts on the computation of interest, and have many other provisions which, while the rate looks like Sy2 or 4, may be substantially
below that figure.
This, again, so long as it is plainly understood by the public, to which
appeal is made, as we would see it, is within the judgment of the
bank. We don't see any of these banks imperiled.
The peril that is coming to banks is not from this source today.
Senator LONG. Thank you, Mr. Saxon.
The CHAIRMAN. Mr. Bennett.
Senator BENNETT. Mr. Saxon, when we were meeting last on these
same bills, you and I had a little colloquy on private insurance.
Mr. SAXON. Yes.
Senator BENNETT.

I hold in my hand the March 9 issue of the private publication called Washington Financial Eeports, whose lead
article says:
Private insurance which covers the top 20 percent of the mortgages acceptable
to the comptroller for purposes of his recent ruling that national banks may
exceed normal real estate loan limits when they rely primarily on private
mortgage insurance.

Have you seen this ?
Mr. SAXON. I haveirt seen the issue. I know the ruling we made
in the form of a letter, of course.
Senator BENNETT. I would like either to give you this and let you
comment on it, or ask you if you will comment in writing to the committee, saying that this is a reasonably accurate report ?
Mr. SAXON. I will be glad to comment after reading it, Senator, if
I may.
(Mr. Saxon later submitted the following statement.)
STATEMENT BY JAMES J. SAXON, COMPTROLLER OF THE CURRENCY

At a hearing before the Subcommittee on Financial Institutions of the Senate Banking and Currency Committee, on March 10, 1964, Senator Bennett
requested that I supplement my remarks on the ruling- of the Office of the Comptroller relating to the use by nationl banks of private mortgage insurance.
This is submitted in response to that request.
The ruling represents a special application of a general principle evolved
from a careful examination of congressional action and administrative interpretation with respect to real estate loans. Federal law (12 U.S.C. 371) requires that loans made by national banks on the security of real estate meet
certain requirements with respect to the nature and value of the security, the
term of the loan and the manner of its repayment. The law recognizes, however, that in certain circumstances loans secured by real estate are not made
primarily on the security of real estate and are to be treated as ordinary
commercial loans. From these provisions, there may be developed a general
definition that a real estate loan within the meaning of the Federal law is any
loan secured by real estate where the bank relies upon such real estate as the
primary security for the loan. Where the bank in its judgment relies principally upon other factors, such as the general credit standing of the borrower,
guarantees or security
other than real estate, the loan does not constitute a
real estate loan wTithin the meaning of the Federal law, although as a matter
of prudent banking practice it may also be secured by real estate. This defini-

NATIONAL BANK REAL ESTATE LOANS

tion was tested through application to a variety of transactions during the
early part of 1963 and now appears as paragraph 2000(b) of the "Comptroller's
Manual for National Banks." This manual was distributed to all national
banks in June 1963.
It should be especially noted that the principle set forth in this definition
is by law applied to loans insured under the National Housing Act and other
Federal legislation and to loans fully insured or guaranteed where the insurance or guarantee is supported by the credit of a State (12 U.S.C. 371). It
is also by law applied to any loan at least 20 percent of which is guaranteed
by the Veterans' Administration (38 U.S.C. 1802(f)).
These provisions of law afford the immediate basis for paragraph 2150
of the "Comptroller's Manual" which provides that where a bank in its judgment relies principally on the insurance or guarantee of a governmental agency
in making a loan, the loan does not constitute a real estate loan within the
meaning of 12 U.S.C. 371 although, as a matter of prudent banking practice
or because such security is required by the insurer or guarantor, the loan may
also be secured by real estate. A cross-reference at the end of paragraph
2150 refers to paragraph 2000.
Counsel for a national bank, making the invited comparison, inquired whether
private mortgage guarantee insurance could be used in the same manner as
FHA and VA insurance and with the same result: that the loan would not
constitute a real estate loan within the meaning of the Federal law. This
Office replied that where a national bank makes a loan in primary reliance
upon private mortgage insurance or guarantee the loan does not constitute a
real estate loan within the meaning of section 371, title 12, United States Code.
The admonition was added, however, that where the bank relies upon private
insurance or guarantee as primary security for a loan, its files should contain
evidence to demonstrate that the bank is justified in placing such primary
reliance on the insurance contract. Accordingly, the terms and conditions in the
insurance contract issued by a financially responsible company must afford
adequate protection to the lending bank. The ruling does not represent an
endorsement of any insurance company, policy, or form of coverage. It places
in the lending bank the initial responsibility for evaluating the insurance company and policy on which it will primarily rely in making the loan. Our
examiners will review, regularly and in detail, the manner in which each bank
fulfills its responsibility in making these evaluations.
There has been some misunderstanding about the scope of the insurance
required. It is not necessary that such insurance eliminate all risk of loans.
The amortization, maturity, and other restrictions imposed by Federal law
(12 U.S.C. 371) on real estate loans made by national banks are designed to
reduce the risk of loss in making such loans. They do not purport and are not
intended to eliminate all risk of loss. Other financial institutions not subject
to these restrictions have developed other methods of minimizing losses. One
method, recognizing the usual salvage value of real estate security, is to insure
not the whole risk but the most important part—the top 20 percent. Where a
loan is made in primary reliance on insurance which adequately protects the
bank against the major risk in the loan, i.e., that part of the loan in excess of
what is recognized as the usual salvage value of the real estate security, the loan
satisfies the requirements of both prudent banking practice and the principle
contained in paragraphs 2000(b) and 2150 of the "Comptroller's Manual for
National Banks."

The CHAIRMAN. Senator Proxmire?
Senator PROXMIRE. NY).
The CHAIRMAN. He does not care to ask questions.
There being no more questions, Comptroller, we thank you.
Senator BENNETT. Thank you.
Senator SPARKMAN. May I ask this: Have you testified on both of
the bank bills?
Mr. SAXON. Yes, Senator.
Senator SPARKMAN. One relating to the increased percentage of
loans to value of ratio that might lend on real estate, and one relating
to timber tracts?
Mr. SAXON. Yes.

NATIONAL BANK REAL ESTATE LOANS

Senator SPARKMAN. I read that you had both included the last time,
but I wasn't sure that you covered both.
Mr. SAXON. Yes, I did, this morning, sir.
(The committee then proceeded to a consideration of other business.)
(The following material was later received for inclusion in the
record:)
REGULATION Q
STATEMENT BY JAMES J.

SAXON, COMPTROLLER OF THE CURRENCY

At a hearing before the Subcommittee on Financial Institutions of the Senate
Banking and Currency Committee, on March 4, 1964, Senator Javits requested
that I supplement my remarks on the effects of interest rate controls under
regulation Q. This is submitted in response to that request.
A cardinal principle of our free enterprise system is that government should
impose economic regulation only in those areas where free market forces lead to
results that are clearly not in the public interest. When the Federal Government intervenes to fix prices administrative decisions are substituted for those
of the marketplace: the decisions of one man or a very few men replace the
judgments of thousands. Clearly there may be instances in which this is a desirable course. However, unless there is a clear-cut case for such intervention on
social welfare grounds, it would be judicious to avoid the substitution of Government decisions for private decisions.
In my view, neither ceiling rates on deposits nor the standby authority to
impose them are likely to bring improvements in the social welfare. On the
contrary, they are likely to produce much damage.
Both the Commission on Money and Credit and the President's Committee
on Financial Institutions recommended that interest-rate ceilings be placed on
a standby basis, thus recognizing the fact that they are not normally desirable.
Remarkably little discussion and debate was generated on this point when the
Banking Act of 1933 was under consideration. What discussion there was rested
on the assumption that the banking troubles of the 1930's were the result of
imprudent banking practices. Such practices were forced upon the commercial banks, so the argument ran, by the severe competition for correspondent and
other deposit balances. This competition, it was said, led to high interest rates
on deposits, and impelled the banks to acquire very risky, high-yielding assets.
In oher words, in order to justify the payment of high rates on deposits, the
banks were forced to take risks that exposed them to the dangerous illiquidity
that led to the banking crisis of 1933.
This argument appears to be as a gross oversimplification! of the causes of
the banking problems of 1919-33. I find it extremely difficult to believe that
the troubles we experienced then could have been avoided by the prior existence
of ceiling rates on time and savings deposits. The forces at work were varied,
complex, and powerful. They suggest that the lack of interest-rate regulation
could have been only tenuously connected with the general collapse of the
banking system.
(1) For the most part, the crisis in the early 1930's was a liquidity crisis.
It consisted of two forces that were mutually reinforcing. First, the stock
market crash in 1929 destroyed public confidence in the workings of credit
and capital markets. Coming at a time when the economy had already moved
into the recession phase of the business cycle, the result was one of retrenchment, liquidation of debt, and a rapid decline in the supply of money., Currency drains on some banks put the latter in difficulty, and each failure generated
new fears concerning the safety of bank deposits, which led in turn to fresh
runs on other banks.
Because of existing central bank practices and authority, a second force
intruded on the situation: the Federal Reserves' power to act as a lender of last
resort was Severely restrained, and partly bcause of this the member banks were
kept under essentially tight money conditions throughout the period. With the
exception of one episode in 1932, the System's powers were never fully utilized
to meet the crisis.
(2) It should be recalled that, until 1932, the eligibility requirements for rediscounting at the Federal Reserve ibanks were extremely high. Only limited
kinds of commercial paper could be rediscounted to enable a bank to meet its
(fixed) reserve requirements in the face of deposit drains. Those banks that

NATIONAL BANK REAL ESTATE LOANS

were under severe strain found the discount window virtually closed. This
led them to meet further drains by sale of assets in a declining market and at
substantial losses. While an individual bank might meet deposit drains in this
way, it is impossible for a major segment of the banking system to meet the
problem in this manner. The result was a widespread liquidity crisis.
(3) Even more disastrous, however, was the tight-money policy pursued in
1931 by the Federal Reserve banks. This was motivated by a temporary loss
of gold and rigid adherence to the rules of the gold standard game. This was
surely a mistake, and the result of a misunderstanding of the central bank's
responsibilities in that worldwide crisis. Temporarily revived confidence and a
modest improvement in bank liquidity was struck down by the increase in the
Federal Reserve discount rate and concurrent sale of Federal Reserve assets.
In summary, the banking crisis of the early 1930's was the product of a general loss of confidence in the banking system, declining business activity, the
lack of a sound deposit insurance system, and the failure of the Federal Reserve
as a lender of last resort.
With this as a background, I should like to review briefly the costs and benefits of interest rate ceilings on deposits.
A. The costs
1. The imposition of ceiling rates on deposits distorts the market allocation
of savings between various financial intermediaries. By establishing prices and
jjegging the market in a discriminatory fashion—different rate ceilings being imposed on different classes of intermediaries—the regulatory authorities encourage the flow of savings into some kinds of institutions and discourage the
flow to others. Savers, while apparently insensitive to general rate levels in
determining how much to save out of a given level of income, are becoming
increasingly sensitive to differential rates offered by various financial intermediaries. In other words, while total saving is not substantially influenced by
the level of interest rates, individual savers allocate their funds to get the
highest return for any given level of risk.
Since consumers and savers consider the risks of bank savings and shares in
savings and loan associations, equal, or essentially so, the price control placed
on the former dicriminates against commercial banks.
2. The imposition of price control on a discriminatory basis distorts the flow
of investment funds to particular uses. If some intermediaries are allowed to
pay higher rates on deposits than others, then it follows that investment funds
will tend to be directed toward the specialized loan business of the favored institutions. In practical terms, this may mean that investment in some lines with
a high rate of social return will go begging for funds, while other kinds of investment with lowTer rates of social return are assured ample supplies of the
community's savings.
It can be shown that the maximum total return from a given level of investment expenditures is realized when the marginal returns of various kinds of
investment are equal. I am suggesting that, where the monetary authorities
distort the flow of savings by differential ceiling rates on deposits, the possibility exists that investment returns cannot be equalized; hence, the community
suffers.
(A hypothetical example to illustrate this possibility may illuminate this
further. Suppose we have two intermediaries X and Y. X specializes in making
loans to the oil industry, while Y makes only mortgage loans. Suppose further
that the rate of return on a marginal investment in oil-drilling machinery is
15 percent and the marginal return on housing investment is 10 percent. X
is a commercial bank subject to a ceiling savings deposit interest rate of 4 percent, while Y, a savings and loan association, has no ceiling imposed and is offering 4% percent. Savers, being sensitive to deposit rate differentials, divert their
funds from the commercial bank to the S. & L. Consequently, the savings of
the community are used to build more houses at a 10 percent rate of return, and
at the expense of investment in oil machinery at 15 percent.)
3. A final cost of ceiling rates is that they tend to subsidize inefficient banks,
while penalizing those that are well managed, vigorous, and efficient.
Some banks, because of their high efficiency, are able to pay more than the
existing ceiling rate without engaging in imprudent banking practices. Others,
less well organized, less cost conscious, and perhaps in a sheltered competitive
position, find the ceiling a convenient means of avoiding the rigors of competition
for deposits with their more resourceful counterparts in the banking community.

NATIONAL BANK REAL ESTATE LOANS

It is essentially unwise for regulatory agencies to impose price controls that
reward the slothful and discourage enterprise. Even if there were no other
costs of this control—and there most certainly are—I would regard this cost a
necessary and sufficient justification for its abolition.
B. Benefits
1. It is sometimes alleged that ceiling rates on commercial hank deposits will
prevent ruinous rate competition which leads to the acquisition by banks of risky
and unsound loans.
The restraints now imposed on such behavior through strict bank examination
standards and the generally higher quality of risk assets today (in comparison
with the period 1920-33) reduce the potency of this argument. Furthermore,
the danger of any such development today is infinitely smaller than it was in
the period that led to the Bank Act of 1933, because of our system of Federal
deposit insurance.
2. It is also argued that deposit rate ceilings improve domestic stabilization
iceapons in the hands of the Federal Reserve Board.
I find this assertion difficult to understand, except in the context of deep and
prolonged depression. Under such conditions it might be desirable to discourage
saving in order to raise consumption, assuming that net private investment
demand is very low. But this would require generally low ceilings on all liquid
assets—otherwise, savings would simply be diverted from low-paying assets to
higher. In any case, much more powerful tools exist to fight depression, including expenditure policy, and a vigorous policy of monetary ease.
The types of market distortions that result from the imposition of ceilingrates on deposits are well illustrated by the present situation with respect to
certificates of deposit. A very large volume of such deposits are presently
concentrated in money market centers. As yields on other market instruments
have increased in recent months, large banks have moved to offer 6-month
CD's at the maximum rate permitted by Federal Reserve regulation, 4 percent.
If yields on competitive instruments continue to increase in the next 6 months,
CD's will become increasingly unattractive, unless regulation Q is revised upward. If the present ceiling is maintained, we may look forward to a substantial churning in the location of deposits. This disruptive effect will result not
from competitive market forces but rather from the price-fixing policy of the
Federal Reserve.
FEDERAL HOME LOAN BANK BOARD,

Washington, B.C., March 21,
Hon. A. WILLIS ROBERTSON,

Chairman, Banking and Currency Committee,
U.S. Senate, Washington, D.C.
MY DEAR SENATOR ROBERTSON : On March 4 the Subcommittee on Financial

Institutions requested that the several agencies responsible for deposit-type
institutions submit their views on the current status of regulation Q. The
attached statement reflects our views on this issue at the present time. If we
can be of further assistance, please do not hesitate to let us know.
Sincerely,
JOSEPH P. MCMURRAY, Chairman.
COMMENTS ON REGULATION Q

The Federal Home Loan Bank Board strongly opposes the elimination of the
statutory authority for regulation Q. I t is the Board's view that complete elimination of that authority at this time would lead to serious undesirable consequences. The resulting competition, under present conditions, for savings accounts might lead to an excessive level of interest or dividend rates in relation
to that which can be earned on sound assets. I t is the Board's view that credit
quality is something less than desirable already. Nevertheless, we recognize that
there are those who consider some changes may be advisable, and we have several
points to offer in this connection.
Our first point involves the nature of the present control. Regulation Q, as
presently required by law, provides continuous regulation. It could be argued
that in periods when growth and earning opportunities for financial institutions
are favorable that the regulation is not entirely necessary. The efforts to acceler-

NATIONAL BANK REAL ESTATE LOANS

ate growth and strive for increased savings through interest or divident rate
competition become intense only after growth has slowed. It is then that regulation may be advisable since interest and dividend rates may be escalated in successive rounds to preserve a growth position. The escalation in rates presses
against the rate available on sound investments and thereby leads to a deterioration of credit quality as riskier investments are pursued. If the feeling that continuous regulation is not essential is valid, then we would favor the type of standby
control offered by the administration in S. 1799 and endorsed by the President's
Committee on Financial Institutions.
The second point involves competition among financial institutions. Obviously
if one group is restricted and others are not, there is a competitive disadvanage.
For this reason, too, we endorse the recommendation of the President's Committee on Financial Institutions for standby authority over all deposit-type institutions to be employed "either to prevent institutional practices in the payment of
interest and extension of credit that were inconsistent with the safety and liquidity of a significant number of institutions or to supplement other governmental
policies to promote the objectives of the Employment Act of 1946." We also
endorse the recommendation for different rates for different accounts as provided
for in the "Report of the President's Committee on Financial Institutions" on
page 23. The essence of these recommendations is included in S. 1799.
Since we obviously favor some change, the question might be raised wThy we do
not favor complete abandonment. Our reasons for this are stated, in part, in our
final point. The ordinary market rules have not always worked well in this area.
Senator Carter Glass, in recommending the amendment to section 19 of the Federal Reserve
Act, stated that this step was being taken to assure sound banking.
This wTas a clear recognition of a degree of market imperfection that cannot be
ignored.
Secondly, complete removal of controls over interest rates would have a very
disturbing effect on financial institutions by letting loose unrestrained competition
for savings at a time when there is a variety of signs of deteriorating credit
quality. We think such a step at this time would be ill advised.
Thirdly, allegations that regulation Q has prevented an adequate flow of
savings and has contributed to the balance-of-payments problem is a clear misreading of recent history and current fact. Since 1961 the net increase in time
and savings accounts has averaged over $25 billion a year or 167 percent of the
1960 level. In 1961 the flow was about $21 billion; in 1962, $28 billion; and last
year, $29 billion. Relative to gross national product, the total flow into time
savings accounts was 3 percent in 1960, 4 percent in 1961, and 5 percent in 1962
and 1963.
The effect of these flows was to create a downward pressure on mortgage
interest rates which continued in 1962 and early 1963 when most other rates
were rising. It also contributed to a decline in interest rates on municipal
securities during 19#2 and the latter part of 1963.
Insofar as the balance of payments is concerned even if regulation Q is too
restrictive, why don't investors buy Treasury bills or high-grade private open
market rather than send their funds abroad? When money has flowed out of
the country because of rate differentials, regulation Q cannot be blamed. Open
market rates have not been high enough, in these circumstances, to keep funds
here. Consequently, we doubt the wisdom of arguing that elimination of regulation Q would have helped. Unless banks would have been ready to pay an
uneconomically high rate in comparison with what they could have earned, the
funds would have flowed abroad in any event.
Finally, we believe that the meaning of competition and markets need some
clarification with reference to financial institutions.
The argument is frequently made that the control of interest rates on time
deposits is a form of price control. The point is made that it interferes with
the market and could cause serious misallocations in the flow of funds and in
the use of resources. Generally, we would be disposed not to favor a price
control mechanism. In most areas of our economic life, market forces, though
imperfect to varying degrees, do yield more desirable results than could be
achieved by administrative decisions about price.
It should be made clear, however, that competitively set prices in a free
market require certain preconditions for success. A pure market, according to
the conventional economic doctrine, is one in which there is perfect competition
among buyers and sellers. Such a condition requires that each of the economic
units be relatively small compared to the total market and thereby unable by
its own decision to affect the supply of or the demand for a commodity. The
market concept also requires a standard product, concentration on obtaining

NATIONAL BANK REAL ESTATE LOANS

the largest short-run profit, and long-run conditions consistent with the short-run
profit objective.
This type of market is almost conspicuous by its absence, but many markets
contain enough similarities to this model to pass the test of satisfactory performance. When this is not the case, the Government usually intercedes. Rates
for various utilities and other public services are subject to regulation and the
Government intervenes in other markets too.
Financial institutions, by the very act of Government control over chartering,
do not constitute a purely competitive structure. While there is a degree of
competition among them, the numbers are restricted. In any one locale or even
in broad areas, one or a few institutions can affect credit terms and interest or
dividends on savings accounts. Action by a few induces others to follow even
if the move is not justified.
Not only are financial institutions limited in number by legislative direction
and administrative action pursuant thereto, but financial institutions do not
deal in a standard product. Money is money, but not every loan is like every
other loan, or every investment like all others. The terms, conditions, and interest rates can be varied greatly so that a real estate loan from one lender can
vary greatly from that by another lender. Lenders can vary appraisals, downpayment ratios, maturities, type of security, and so on.
Financial institutions are keenly interested in their short-run profit position.
It should be noted, however, that short-run and long-run profit considerations can
be in conflict in a financial institution. A high yielding loan or investment improves the short-run profit position, but can damage the long-run position severely
if the loan proves too risky and there is a default. Consequently, another keystone essential to complete reliance on markets may be absent under some circumstances in the case of financial institutions.
One reason for the intense competition for savings deposits among various
types of financial institutions is a desire for growth. This is a long-run aim
which may prove invalid if the funds cannot be safely invested at high enough
yields to justify the rate on savings deposits that brings about the growth. Institutions seek this growth for reasons of market advantage over their competitors
and because the prospect that their earnings will ultimately expand to justify
their growth. The aim of growth for the sake of achieving size can be in serious
conflict with soundness of institutions.
In our opinion, most of the arguments made against rate control, on the basis
of market forces, have serious defects in the case at hand. In an industry where
competition is imperfect, the argument that market forces will lead to rational
results under all circumstances is misleading. All that happens, as we indicated
earlier, is that in certain phases of an expansion the type of competition that
exists drives interest and dividend rates up to a point where the only avenue open
for earning is the acquisition of undue risk. This is a potential that Congress
has seen fit to restrict in many ways in the course of legislating for financial
institutions.
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM,
OFFICE OF THE CHAIRMAN,

Washington, May 13,196Jh
Hon. A. WILLIS ROBERTSON,

Chairman, Committee on Bankmg and Currency,
U.S. Senate, Washington, D.C.
DEAR MR. CHAIRMAN : This is in reply to your letter of March 24, 1964, requesting the Board's views on the merits of regulation Q and on the general policy
of regulating the maximum interest rates payable on savings deposits at commercial banks. It is assumed that your inquiry relates also to the interest
rates paid on time deposits.
Under regulation Q of the Board of Governors, and parallel regulations of
the Federal Deposit Insurance Corporation, all member and insured nonmember
banks are restricted to a schedule of maximum rates that may be paid on time
and savings deposits. Currently, the limits are set at 3% percent for savings
deposits of under 1 year, 4 percent for such balances that have been on the
books 1 year or more, 1 percent for time deposits written to mature within 90
days, and 4 percent for such deposits carrying maturities of 90 days or more.
Some States have lower interest rate limitations on time and/or savings deposits,
and in these jurisdictions the lower limits apply to both National and Statechartered banks.

NATIONAL BANK REAL ESTATE LOANS

Enabling legislation for regulation Q, first enacted in 1933, is contained in
section 19 of the Federal Reserve Act. The act (and the regulation) prohibits
any payment of interest on demand deposits, and the act further states that the
Board ''shall from time to time limit by regulation the rate of interest which
may be paid by member banks on time and savings deposits, and shall prescribe
different rates for such payment on time and savings deposits having different
maturities, or subject to different conditions respecting withdrawal or repayment, or subject to different conditions by reason of different locations, or
according to the varying discount rates of member banks in the several Federal
Reserve districts." The Board has interpreted the language of the statute as
requiring that some schedule of maximum rates be specified at all times.
Maximum rates permissible under regulation Q have in fact been raised from
time to time in recent years. Effective in January 1957, the limits were raised
from 2y2 to 3 percent on savings deposits and on time deposits written to mature
in 6 months or longer, and from 2 to 2% percent on time deposits payable in 90
days to 6 months. Effective in January 1962, the present 4-percent maximum was
established for time deposits maturing a year or more after the date of deposit,
and for savings deposit balances remaining for a year or longer; at the same
time, the rate permitted on savings deposits remaining for less than a year was
raised to Sy2 percent, as well as the rates permitted as time deposits payable in
6 months to a year. In July 1963, the Board increased to 4 percent the rate limit
on time deposits written for terms of less than a year but over 90 days, although
it then made no change in the 3%-percent maximum applicable to savings deposit
balances remaining for less than a year.
Many, but by no means all, commercial banks increased rates paid on some or
all time and savings deposit categories to the new regulatory limits shortly after
their establishment, and these higher rates doubtless have been a factor in the
rapid buildup of time and savings deposit balances in recent years. In the 3
years, 1961 through 1963, such deposits at all commercial banks grew by $40
billion, an expansion of 54 percent. The share of the public's total liquid assets—
deposits, share accounts, savings bonds, and U.S. Government securities maturing
within 1 year—held in the form of commercial bank time and savings deposits,
rose from 18.3 to 22.8 percent during the same period.
This faster rate of gain in commercial bank savings balances has had the effect
of further stimulating the competition for funds among financial institutions
generally. Other savings institutions have raised rates paid on savings too, and
both the mutual savings banks and the savings and loan associations have been
able to show record gains in savings balances despite accelerated commercial
bank growth. The additional savings flow which made this possible came in part
from an enlarged total of financial saving by the public, but also from a redirection of such saving to financial intermediaries in lieu of direct security investments. For example, a group of larger member banks now have more than $11
billion of negotiable time certificates of deposit outstanding in amounts of $100,000 or more; most such balances otherwise would have been invested directly by
their holders in the short-term money market.
The expanded flow of funds to commercial banks and other financial institutions also has increased the competition among such lenders for suitable investment outlets carrying relatively high rates of return. This competition has been
especially notable in the mortgage field, where the press of funds seeking investment has not only reduced interest rates but also has led to a competitive relaxation in lending terms and credit standards. Commercial banks also have promoted
their consumer installment lending and have acquired record amounts of State
and local securities, including intermediate and longer term issues. Reflecting
the need to maintain investment yields in the face of higher interest expenses on
savings, the tendency on the part of banks and others often has seemed to be toward giving up something in lending terms, credit standards, or asset liquidity
in order to place a larger volume of lending at relatively favorable rates.
At this time, the abandonment of interest rate ceilings on commercial bank
time and savings deposits might have unexpected effects. The competitive
situation is unusually fluid and appears still to be in the process of change. In
the absence of ceilings, some commercial banks might well elect to pay still
higher rates on at least some types of savings, and this might lead other banks
and nonbank savings institutions to respond in kind. The result could be a
competitive escalation of interest rates in some savings markets, accompanied
by substantial and potentially destabilizing shifts of funds. Given larger interest expenses, the pressures on institutions to obtain higher rates of return on
investments would be intensified. This could lead to further relaxation in credit

NATIONAL BANK REAL ESTATE LOANS

and investment standards, and any pervasive tendency toward lower quality
assets and lessened liquidity would be an added burden upon the examination
process.
The Board fully recognizes the desirability of moving toward freer markets for
savings. The very existence of interest rate regulation introduces rigidities
into the competitive situation, and in one sense it is patently inequitable to
restrict the commercial banks when other savings institutions, such as savings
and loan associations, mutual savings banks, and credit unions, are largely free
of rate regulation. But the Board also recognizes that unrestrained rate competition could, at times like the present, lead to undesirable consequences in terms
of the financial soundness and liquidity needs of our credit and savings structure and to unwanted pressures on prevailing interest rate levels.
For these reasons, a majority of the Board would favor enactment of legislation which would permit the regulatory authorities to move to a standby basis
on time and savings deposit interest rate limitations, without specifying the timing of such action. Furthermore, the Board strongly feels that such standby
authority over maximum rates should extend also to other major depositorytype savings institutions; the regulatory agencies in which this authority is
vested should consult with one another in its administration but should not be
bound by the others' views. The Board would urge that the prohibition of interest payments on demand deposits be continued, and that authority to establish
different rate ceilings on different classes of savings deposits be retained.
Standby controls of the sort envisaged by the Board were proposed by the
President's Committee on Financial Institutions in April 1963 and are contained
in sections 4, 5, and 6 of S. 1799, introduced on June 26, 1963. Should this or
similar legislation be enacted, the Board would anticipate moving toward a
standby arrangement as soon as this seemed practicable.
Sincerely yours,
W M . MCC. MARTIN, Jr.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

REGULATION Q
(12 CFR 217)
(As amended effective October 1, 1959, January 15, and October 15, 1962, and
July 17, 1963)
CONTENTS

Section 217.0—Scope of part.
Section 217.1—Definitions :
(a) Demand deposits.
(b) (Time deposits.
(c) Time certificates of deposit.
(d) Time deposits, open account.
(e) Savings deposits.
Section 217.2—Demand deposits :
(a) Interest prohibited.
(b) Exceptions.
Section 217.3—.Maximum rate of interest on time and savings deposits :
(a) Maximum rate prescribed from time to time.
(&) Modification of contracts to conform to regulation.
(c) Member banks limited to maximum rate for State banks.
(d) \Grace periods in computing interest on savings deposits.
(e) Continuance of time, deposit status.
(/) No interest after maturity or expiration of notice.
Section 217.4—Payment of time deposits) before maturity :
{a) Time deposits payable on a specified! date.
(b) (Time deposits payable after a specified period.
(c) Time deposits payable after a specified notice.
(d) Payment in emergencies.
(e) Loans upon security of time deposits.
Section 217.5—Notice of withdrawal of savings deposits :
(a) Requirements regarding notice.
(b) Requirements regarding change of practice.
(c) Change of practice for purpose of discrimination.
(d) Requirements applicable although no interest paid.
(e) Loans upon security of savings deposits.
Section 217.6—.(Supplement) Maximum rates of interest payable on time and savings
deposits by member banks :
(a) Maximum rate of 4'percent.
(b) Maximum rate of 3 % percent.
(c) Maximum rate of 1 percent.
Appendix.

NATIONAL BANK REAL ESTATE LOANS
PAYMENT OF INTEREST ON DEPOSITS *
SECTION 217.0

SCOPE OF PART

(a) This regulation is issued under authority of provisions of section 19 of
the Federal Reserve Act which, together with related provisions of law, are cited
in the note [appendix] preceding this section:
(&) This part relates to the payment of deposits and interest thereon by member banks of the Federal Reserve System and not to the computation and maintenance of the reserves which member banks are required to maintain against
deposits. The rules concerning reserves of member banks are contained in
part 204 of this chapter.
(c) The provisions of this part do not apply to any deposit which is payable
only at an office of a member bank located outside of the States of the United
States and the District of Columbia.
SECTION 2 1 7 . 1

DEFINITION S

(a) Demand deposits.—The term "any deposit which is payable on demand,"
hereinafter referred to as a "demand deposit," includes every deposit which is
not a "time deposit" or "savings deposit," as denned in this section.
(o) Time deposits.—The term "time deposits" means "time certificates of
deposit" and "time deposits, open account," as defined in this section.
(c) Time certificates of deposit.—The term "time certificate of deposit" means
a deposit evidenced by a negotiable or nonnegotiable instrument which provides
on its face that the amount of such deposit is payable to bearer or to any specified person or to his order ;
(1) On a certain date, specified in the instrument, not less than 30 days
after date of the deposit; or
(2) At the expiration of a certain specified time not less than 30 days
after the date of the instrument; or
(3) Upon notice in writing which is actually required to be given not less
than 30 days before the date of repayment; 2 and
(4) In all cases only upon presentation and surrender of the instrument.
(d) Time deposits, open account.—The term "time deposit, open account"
means a deposit, other than a "time certificate of deposit" or a "savings deposit,"
with respect to which there is in force a written contract with the depositor that
neither the whole nor any part of such deposit may be withdrawn, by check or
otherwise, prior to the date of maturity, which shall be not less than 30 days
after the date of the deposit,3 or prior to the expiration of the period of notice
which must be given by the depositor in writing not less than 30 days in advance
of withdrawal.4
(e) Savings deposits.— (1) The term "savings deposit" means a deposit—
(i) Which consists of funds deposited to the credit of one or more individuals, or of a corporation, association, or other organization operated primarily for religious, philanthropic, charitable, educational, fraternal, or
other similar purposes and not operated for profit; 5 or in which the entire
beneficial interest is held by one or more individuals or by such a corporation, association, or other organization; and
1
The text corresponds to the Code of Federal Regulations, title 12, ch. II, pt. 217 ; cited
as 212 CFR 217.
A deposit with respect to which the bank merely reserves the right to require notice of
not less than 30 days before any withdrawal is made is not a "time certificate of deposit"
within
the meaning of the above definition.
3
Deposits, such as Christmas club accounts and vacation club accounts, which are made
under written contracts providing that no withdrawal shall be made until a certain number
of periodic deposits have been made during a period of not less than 3 months constitute
"time deposits, open account" even though some of the deposits are made within 30 days
from
the end of such period.
4
A deposit with respect to which the bank merely reserves the right to require notice of
not less than 30 days before any withdrawal is made is not a "time deposit, open account."
within
the meaning of the above definition.
5
Deposits in joint accounts of two or more individuals may be classified as savings
deposits if they meet the other requirements of the above definition but deposits of a
partnership operated' for profit may not be so classified. Deposits to the credit of an
individual of funds in which any beneficial interest is held by a corporation, partnership,
association, or other organization operated for profit or not operated primarily for religious^
philanthropic, charitable, educational, fraternal, or other similar purposes may not be
classified as savings deposits.

NATIONAL BANK REAL ESTATE LOANS

(ii) With respect to which the depositor is required, or may at any time
be required, by the bank to give notice in writing of an intended withdrawal
not less than 30 days before such withdrawal is made.
(2) Subject to the provisions of subparagraph (3) of this paragraph, a member bank may permit withdrawals to be made from a savings deposit only
through payment6 to the depositor himself (but not to any other person whether
or not acting for the depositor), except—
(i) Where the deposit is represented by a passbook, to any person presenting the passbook;6
(ii) To an executor, administrator, trustee, or other fiduciary holding
the savings deposit as part of a fiduciary estate, or to a person, other than
the bank of deposit, holding a general power of attorney granted by the
depositor;
(iii) To any person, including the depository bank, that has extended
credit to the depositor on the security of the savings deposit, where such
payment is made in order to enable the creditor to realize upon such security ;
(iv) Pursuant to the order of a court of competent jurisdiction;
(v) Upon the death of the depositor, to any person authorized by law to
receive the deposit; or
(vi) With respect to interest paid to a third person pursuant to written
instruction or assignment by the depositor accepted by the bank, and placed
on file therein.
(3) Notwithstanding the provisions of subparagraph (2) of this paragraph,
no withdrawal shall be permitted by a member bank to be made from a savings
deposit after January 15, 1962, through payment to the bank itself or through
transfer of credit to a demand or other deposit account of the same depositor
(other than of interest on the savings deposit) if such payment or transfer
is made pursuant to any advertised plan or any agreement, written or oral—
(i) Which authorizes such payments or transfers of credit to be made
as a normal practice in order to cover checks or drafts drawn by the
depositor upon the bank; or
(ii) Which provides that such payments or transfers of credit shall
be made at daily, monthly, or other such periodic intervals, except where
made to enable the bank, on the depositor's behalf and pursuant to his written
instructions, to effect the payment of installments of principal, interest, or
other charges (including taxes or insurance premiums) due on a real
estate loan or mortgage.
(4) Where a savings deposit is evidenced by a passbook, every withdrawal
made upon presentation of the passbook shall be entered in the passbook at the
time of withdrawal, and every other withdrawal from such a deposit shall be
entered in the passbook as soon as practicable after the withdrawal is made.
SECTION 217.2 DEMAND DEPOSITS

(a) Interest prohibited.—Except as provided in paragraph (b) of this section, no member bank of the Federal Reserve System shall, directly or indirectly,
by any device whatsoever, pay any interest on any demand deposit.
Within this part, any payment to or for the account of any depositor as compensation for the use of funds constituting a deposit shall be considered interest.
(b) Exceptions.—The prohibition stated in paragraph (a) of this section
does not apply to—
(1) Payment of interest accruing before August 24, 1937, on any deposit
made by a savings bank as defined in section 12B of the Federal Reserve
Act, as amended (49 Stat. 706; 12 U.S.C. 264(c)(7)), or by a mutual
savings bank;
(2) Payment of interest accruing before August 24, 1937, on any deposit
of public funds 8 made by or on behalf of any State, county, school district,
or other subdivision, or municipality, or on any deposit of trust funds, if
the payment of interest with respect to such deposit of public funds or of
trust funds is required by State law when such deposits are made in State
banks.
6
Payment from a savings deposit on presentation of a passbook may be made over the
counter,
through the mails, or otherwise.
8
Deposits of moneys! paid into State courts by private parties pending the outcome of
litigation are not deposits of ''public funds," within the meaning of the above provision.

NATIONAL BANK REAL ESTATE LOANS
(3) Payment of interest in accordance with the terms of any certificate
of deposit or other contract which was lawfully entered into in good faith
before June 16, 1933 (or, if the bank became a member of the Federal Reserve System thereafter, before the date vipon which it became a member),
which was in force on such date, and which may not legally be terminated
or modified by such bank at its option or without liability; but no such
certificate of deposit or other contract may be renewed or extended unless
it be modified to eliminate any provision for the payment of interest on
demand deposits, and every member bank shall take such action as may be
necessary, as soon as possible consistently with its contractual obligations,
to eliminate from any such certificate of deposit or other contract any provision for the payment of interest on demand deposits.
SECTION 217.3

MAXIMUM KATE OF INTEREST ON TIME AND SAVINGS DEPOSITS

(a) Maximum rate prescribed from time to time.—Except in accordance with
the provisions of this part, no member bank shall pay interest on any time
deposit or savings deposit in any manner, directly or indirectly, or by any method,
practice, or device whatsoever. No member bank shall pay interest on any
time deposit or savings deposit at a rate in excess of such applicable maximum
rate as the Board of Governors of the Federal Reserve System shall prescribe
from time to time; and any rate or rates which may be so prescribed by the
Board will be set forth in supplements to this part, which will be issued in
advance of the date upon which such rate or rates become effective. During
the period commencing October 15, 1962, and ending upon the expiration of 3
years after such date, the provisions of this paragraph shall not apply to the
rate of interest which may be paid by member banks on time deposits of foreign
governments, monetary and financial authorities of foreign governments when
acting as such, or international financial institutions of which the United States
is a member.
(b) Modification of contracts to conform to regulation.—No certificate of deposit or other contract shall be renewed or extended unless it be modified to
conform to the provisions of this part, and every member bank shall take such
action as may be necessary, as soon as possible consistently with its contractual
obligations, to bring all of its outstanding certificates of deposits or other contracts into conformity with the provisions of this part.
(c) Member banks limited to maximum rate for State banks.—The rate of
interest paid by a member bank upon a time deposit or savings deposit shall
not in any case exceed (1) the applicable maximum rate prescribed pursuant to
the provisions of paragraph (a) of this section or (2) the applicable maximum
rate authorized by law to be paid upon such deposits by State banks or trust
companies organized under the laws of the State in which such member bank
is located, whichever may be less.
(d) Grace periods in computing interest on savings deposits.—A member
bank may pay interest on a savings deposit received during the first 10 calendar
days of any calendar month at the applicable maximum rate prescribed pursuant to paragraph (a) of this section calculated from the first day of such
calendar month until such deposit is withdrawn or ceases to constitute a savings
deposit under the provisions of this part, whichever shall first occur; and a member bank may pay interest on a savings deposit withdrawn during its last 3
business day of any calendar month ending a regular quarterly or semiannual
interest period at the applicable maximum rate prescribed pursuant to paragraph (a) of this section calculated to the end of such calendar month.
(e) Continuance of time deposit status.—A deposit which was a time deposit at the date of deposit continues to be such until maturity although it has
become payable within 30 days, and interest at a rate not exceeding that prescribed pursuant to the provisions of paragraph (a) of this section may be
paid until maturity upon such deposit. A time deposit or a savings deposit
with respect to which notice of withdrawal has been given continues to be
such until the expiration of the period of such notice, and interest may be paid
upon such deposit until the expiration of the period of such notice at a rate
not exceeding that prescribed pursuant to the provisions of paragraph (a) of
this section. Interest at a rate not exceeding that prescribed pursuant to the
provisions of paragraph (a) of this section may be paid upon savings deposits
with respect to which notice of intended withdrawal has not actually been

NATIONAL BANK REAL ESTATE LOANS

required or given. No interest shall be paid by a member bank on any amount
which, by the terms of any certificate or other contract or agreement or otherwise, the bank may be required to pay
within 30 days from the date on which
such amount is deposited in such bank.8
(/) No interest after maturity or expiration of notice.—After the date of
maturity of any time deposit, such deposit is a demand deposit, and no interest
may be paid on such deposit for any period subsequent to such date. After the
expiration of the period of notice given with respect to the repayment of any
time deposit or savings deposit, such deposit is a demand deposit and no interest
may be paid on such deposit for any period subsequent to the expiration of such
notice, except that, if the owner of such deposit advises the bank in writing that
the deposit will not be withdrawn pursuant to such notice or that the deposit
will thereafter again be subject to the contract or requirements applicable to such
deposit, the deposit will again constitute a time deposit or savings deposit, as
the case may be, after the date upon which such advice is received by the bank.
SECTION 217.4

PAYMENT OF TIME DEPOSITS BEFORE MATURITY

(a) Time deposits payable on a specified date.—No member bank shall pay
any time deposit, which is payable on a specified date, before such specified
date, except as provided in paragraph (d) of this section.
(b) Time deposits payable after a specified period.—No member bank shall
pay any time deposit, which is payable at the expiration of a certain specified
period, before such specified period has expired, except as provided in paragraph (d) of this section.
(c) Time deposits payable after a specified notice.—No member bank shall
pay any time deposit, with respect to which notice is required to be given a
certain specified period before any withdrawal is made, until such required
notice has been given and the specified period thereafter has expired, except as
provided in paragraph (d) of this section.
(d) Payment in emergencies.—In an emergency where it is necessary to
prevent great hardship to the depositor, a member bank may pay before maturity
a time deposit or the portion thereof necessary to meet such emergency: Provided, That before making such payment the depositor shall sign an application describing fully the circumstances constituting the emergency which is
deemed to justify the payment of the deposit before maturity, which application shall be approved by an officer of the bank who shall certify that, to the
best of his knowledge and belief, the statements in the application are true.
Such application shall be retained in the bank's files and made available to the
examiners authorized to examine the bank. Where a time deposit is paid before
maturity the depositor shall forfeit accrued and unpaid interest for a period of
not less than 3 months on the amount withdrawn if an amount equal to the
amount withdrawn has been on deposit 3 months or longer, and shall forfeit all
accrued and unpaid interest on the amount withdrawn if an amount equal to
the amount withdrawn has been on deposit less than 3 months. When a portion
of a time certificate of deposit is paid before maturity, the certificate shall be
canceled and a new certificate shall be issued for the unpaid portion of the
deposit with the same terms, rate, date, and maturity as the original deposit.
(e) Loans upon security of time deposits.—A member bank may make a loan
to the depositor upon the security of his time deposit provided that the rate of
interest on such loan shall be not less than 2 percent per annum in excess of the
rate of interest on the time deposit.
SECTION 217.5

NOTICE OF WITHDRAWAL OF SAVINGS DEPOSITS

(a) Requirements regarding notice.—A member bank shall observe the requirements set forth below in requiring notice of intended withdrawal of any
savings deposit, or in waiving such notice, or in repaying any savings deposit, or
part thereof, without requiring such notice, whether such notice of intended
withdrawal is required to be given in each case by the terms of the bank's
9
Deposits, such as Christmas club accounts and vacation club accounts, which are made
under written contracts providing that no withdrawal shall be made until a certain number
of periodic deposits have been made during a period of not less than ?> mouths constitute
'"time deposits, open account" even though some of the deposits are made within .°>0 days
from the end of such period.

NATIONAL BANK REAL ESTATE LOANS

contract with the depositor or may, under such contract, be required by the bank
at any time at its option.
(1) If a member bank waive such notice of intended withdrawal as to
any amount or percentage of the savings deposits of any depositor, it shall
waive such notice as to the same amount or percentage of the savings deposits
of every other depositor which are subject to the same requirement.
(2) If a member bank pay any amount or percentage of the savings deposits
of any depositor, without requiring such notice, it shall, upon request and
without requiring such notice, pay the same amount or percentage of the savings deposits of every other depositor which are subject to the same requirement.
(3) If a member bank require such notice before the payment of any
amount or percentage of the savings deposits of any depositor, it shall require
such notice before the payment of the same amount or percentage of the savings deposits of any other depositor which are subject to the same requirement.
A member bank is not prevented from paying during the next succeeding interest period, without requiring notice of withdrawal, interest on a savings deposit
which has accrued during the preceding interest period: Provided, That it shall,
upon request and without requiring such notice, pay in the same manner interest
which has accrued during the preceding interest period on the savings deposits of
every other depositor.
(o) Requirements regarding change of practice.—No member bank shall change
its practice with respect to the requiring or waiving of notice of intended withdrawal of savings deposits except after duly recorded action of its board of directors or of its executive committee properly authorized, and no practice in this respect shall be adopted which does not conform to the requirements of paragraph
(a) (1), (2), or (3) of this section.
(c) Change of practice for purpose of discrimination.—No change in the practice of a member bank with respect to the requiring or waiving of notice of
intended withdrawal of savings deposits shall be made for the purpose of discriminating in favor of or against any particular depositor or depositors.
(d) Requirements applicable although no interest paid.—A member bank shall
observe the requirements of this section with respect to savings deposits even
though no interest be paid on such deposits.
(e) Loans upon security of savings deposits.—If it is not the practice of a
member bank to require notice of intended withdrawal of savings deposits, no
restrictions are imposed by this part upon loans by such bank to its depositors
upon the security of such deposits. If it is the practice of a member bank to require notice of intended withdrawal of savings deposits or any amount or percentage thereof, such bank may make loans to its depositors upon the security
of such deposits and, in each such case, the rate of interest on such loan shall be
not less than 2 percent per annum in excess of the rate of interest on the savings
deposit.
SUPPLEMENT TO REGULATION Q
SECTION 217.6
MAXIMUM RATES OF INTEREST PAYABLE ON TIME AND SAVINGS DEPOSITS BY
MEMBER BANKS

Issued by the Board of Governors of the Federal Reserve System, Effective July
17, 1963
Pursuant to the provisions of section 19 of the Federal Reserve Act and section
217.3, the Board of Governors of the Federal Reserve System hereby prescribes
the following maximum rates x of interest payable by member banks of the Federal Reserve System on time and savings deposits:
1
The
on time
payable
and the

maximum rates of interest payable by member banks of the Federal Reserve System
and s a vines deposits as prescribed herein are not applicable to any deposit which is
only at an office of a member bank located outside of the States of the United States
District of Columbia.

NATIONAL BANK REAL ESTATE LOANS

(a) Maximum rate of 4 percent.—No member bank shall pay interest accruing
at a rate in excess of 4 percent per annum, compounded quarterly," regardless
of the basis upon which such interest may be computed :
(1) On that portion of any savings deposit that has remained on deposit
for not less than 12 months ;
(2) On any time deposit having a maturity date 90 days or more after the
date of deposit or payable upon written notice of 90 days or more;
(3) On that portion of any postal savings deposit which constitutes a time
deposit that has remained on deposit for not less than 12 months.
(&) Maximum rate of Sy2 percent.—No member bank shall pay interest accruing at a rate in excess of Sy2 percent per annum, compounded quarterly,2 regardless of the basis upon which such interest may be computed :
(1) On any savings deposit, except as otherwise provided in paragraph
(a) (1), of this section ;
(2) On any postal savings deposit which constitutes a time deposit, except
as otherwise provided in paragraph (a) (3), of this sction.
(c) Maximum rate of 1 percent.—No member bank shall pay interest accruing
at a rate in excess of 1 percent per annum, compounded quarterly,2 regardless of
the basis upon which such interest may be computed:
(1) On any time deposit (except postal savings deposits which constitute
time deposits) having a maturity date less than 90 days after the date of
deposit or payable upon written notice of less than 90 days.
APPENDIX
STATUTORY PROVISIONS

Section 19 of the Federal Reserve Act (12 U.S.C., sec. 461), provides in part
as follows:
SEC. 19. The Board of Governors of the Federal Reserve System is authorized, for the purposes of this section, to define the terms •'demand deposits", "gross demand deposits", "deposits payable on demand", "time deposits", "savings deposits", and "trust funds", to determine what shall be
deemed to be a payment of interest, and to prescribe such rules and regulations as it may deem necessary to effectuate the purposes of this section and
prevent evasions thereof: * * *
*
*
*
*
*
(12 U.S.C., sec. 371a)
No member bank shall, directly or indirectly, by any device whatsoever,
pay any interest on any deposit which is payable on demand : Provided, That
nothing herein contained shall be construed as prohibiting the payment of
interest in accordance with the terms of any certificate of deposit or other
contract entered into in good faith which is in force on the date on which the
bank becomes subject to the provisions of this paragraph; but no such
certificate of deposit or other contract shall be renewed or extended unless
it shall be modified to conform to this paragraph, and every member bank
shall take such action as may be necessary to conform to this paragraph
as soon as possible consistently with its contractual obligations: Provided
further, That this paragraph shall not apply to any deposit of such bank
which is payable only at an office thereof located outside of the States of
the United States and the District of Columbia : Provided further, That until
the expiration of two years after the date of enactment of the BankingAct of 1935 this paragraph shall not apply (1) to any deposit made by a
savings bank as defined in section 12B of this Act, as amended, or by a
mutual savings bank, or (2) to any deposit of public funds made by or on
behalf of any State, county, school district, or other subdivision or municipality, or to any deposit of trust funds if the payment of interest with
respect to such deposit of public funds or of trust funds is required by State
law. So much of existing law as requires the payment of interest with respect to any funds deposited by the United States, by any Territory, District,
or possession thereof (including the Philippine Islands), or by any public
instrumentality, agency, or officer of the foregoing, as is inconsistent with
the provisions of this section as amended, is hereby repealed.
2
This limitation is not to be interpreted1 as preventing the compounding of interest at
other than quarterly intervals, provided that the aggregate amount of such interest so
compounded does not exceed the aggregate of interest at the rate above prescribed when
compounded Quarterly.

NATIONAL BANK REAL ESTATE LOANS
(12U.S.C, sec. 371b)

The Board of Governors of the Federal Reserve System shall from time
to time limit by regulation the rate of interest which may be paid by member
banks on time and savings deposits, and shall prescribe different rates for
such payment on time and savings deposits having different maturities, or
subject to different conditions respecting withdrawal or repayment, or subject to different conditions by reason of different locations, or according to
the varying discount rates of member banks in the several Federal Reserve
districts. No member bank shall pay any time deposit before its maturity
except upon such conditions and in accordance with such rules and regulations as may be prescribed by the said Board, or waive any requirement of
notice before payment of any savings deposit except as to all savings deposits
having the same requirement: Provided, That the provisions of this paragraph shall not apply to any deposit which is payable only at an office of a
member bank located outside of the States of the United States and the
District of Columbia.
Section 24 of the Federal Reserve Act (12 U.S.C., sec. 371), provides with
respect to national banking associations in part as follows :
Any such association may continue hereafter as heretofore to receive time
and savings deposits and to pay interest on the same, but the rate of interest
which such association may pay upon such time deposits or upon savings
or other deposits shall not exceed the maximum rate authorized by law to
be paid upon such deposits by State banks or trust companies organized under
the laws of the State in which such association is located.

FEDERAL DEPOSIT INSURANCE CORPORATION,
OFFICE OF THE CHAIRMAN,

Washington, July 24,196Jf.
Hon. A. WILLIS ROBERTSON,

Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
DEAR SENATOR ROBERTSON : I am responding further to your request of March 24,
1964, for my views on the merits of regulation Q and on general policy for regulating rates of interest paid on savings deposits.
The Banking Acts of 1933 and 1935 established statutory controls over the
rates paid on time and savings deposits by member banks of the Federal Reserve
System and by other banks participating in deposit insurance. These controls
were part of the basic banking reform legislation aimed at remedying conditions
that had brought on the financial debacle of the early 1930's.
From the early economic beginnings of the country, New York emerged as
the dominant financial center and a focal point for the concentration of large
liquid resources to which security market investors and speculators, through
the call loan mechanism, gained easy access. Interior banks soon discovered that
funds could serve as secondary reserves against deposits and notes equally well
in New York as at home and simultaneously constitute an important source of
income. High rates of interest paid by New York correspondents on deposits
during stock market booms were said to have attracted funds away from local
business and industry. But irrespective of whether that was true, businessmen
certainly had to compete with speculators for the available supply of loanable
funds. The system, led to abnormal swings in the volume of bank credit, waves
of excessive speculation, and periodic disruption of the whole financial structure.
So in the reconstruction of the financial system in 1933 and 1935, restrictions on
interest rates paid for time and savings deposits, as well as the prohibition of
interest on demand deposits, were cornerstones of banking reform legislation.
Other important considerations also lead to the restrictions on interest rates
paid to bank depositors. In the midst of the great depression of the 1930's, every
effort was made to assist banks in any way possible to regain profitable operating
status. The amount of interest paid to depositors was a substantial expense item,
and the limitations imposed on rates tended to alleviate this burden to some
extent.
Yet another major consideration in controlling interest rates was the desire
to restrain banks from engaging in excessive competitive and undesirable prac-

NATIONAL BANK REAL ESTATE LOANS

tices which had been so dramatically exposed to public censure. In order to
attract deposits, rates were often bid up to unrealistic levels. Funds so acquired
were costly and to meet the related interest expense banks often found it necessary to resort to risky loans or investments. The intense competition for deposits was blamed for much of the speculative management of bank funds.
Many of these depression era considerations leading to the initial imposition
of interest restrictions on time and saving deposits have disappeared. Fluctuations in the call loan market no longer predominate as a causal factor in the
movement of funds to and from New York. For the most part, banks now adjust
their reserves in the Government securities market rather than through the call
loan mechanism. Nor are banks any longer burdened with interest costs of
huge demand deposit balances. For these and other reasons, opinion is widespread that restrictions on time and savings deposits are no longer needed and
should be lifted.
Since the controls were initiated, the growth of savings and loan associations
has mushroomed. Complaints now are voiced that it is inequitable to impose
ceilings upon savings accounts in commercial banks and not on thrift accounts
in other institutions. Also, it is said that the controls aggravate our international balance-of-payments difficulties by preventing domestic banks from
competing for foreign deposits.
Ordinarily, banks intent upon attracting the funds of savers are discouraged
from raising interest rates on time and savings deposits so high as to result in
shifts from demand deposits. Such shifts have two effects operating in opposite
directions. In one direction, the lending capacity of the banks is increased in
consequence of lower reserve requirements on time deposits. In the other, there
are deposit costs in the form of interest payments not previously incurred. On
balance, the prohibition of interest on demand deposits tends to discourage increases in the rate of interest on time deposits.
At present, however, there is intense competition for savings among all financial institutions. In the 5-year period 1958 through 1963, time and savings deposits in insured commercial banks increased from $66 to $112 billion, an expansion of 70 percent. There is some evidence that the efforts of commercial
banks to keep these growing resources fully invested have resulted in a relaxation of credit terms and a deterioration in credit quality, particularly in the area
of real estate loans. The situation is by no means critical, but there is always
the possibility that competitive conditions of this nature can become more serious,
with accompanying undesirable consequences for the banking system.
In general, I favor a minimum of interference with the free interplay of competitive forces in the economy, and interest rate restrictions on time and savings
deposits are certainly one such interference. Furthermore, I think that under
normal circumstances regulation Q. continuously invoked, has less validity
now perhaps than in the past. Nevertheless, it is the overriding responsibility
of all of us to do everything we can to maintain order iu our monetary and
banking processes. Nothing can be gained by permanently discarding any instrument that has proved useful and that is likely to become useful again, simply
because its utility might seem inappropriate at some particular point in time.
Conditions will certainly again arise where regulation Q seems more appropriate
in influencing the flow of funds, for example, than an alternative. In addition it
may assist in our balance-of-payments problems.
Accordingly, I recommend legislation which would continue the prohibition
of interest on demand deposits and would authorize the Board of Governors
of the Federal Reserve System and this Corporation, in their discretion, to place
their regulations of interest on time and savings deposits on a standby basis.
This would permit either agency to move to a standby basis when such action
appeared appropriate. The legislation should provide similar authority for the
Federal Home Loan Bank Board over shares of insured savings and loan association. I also think that in exercising this power, such authorities should
be permitted discretion in establishing different rates for different accounts according to type, holder, maturity, or other characteristics. These changes should
remove existing inequities and give the authorities added flexibility in dealing
in a timely way with untractable monetary problems as they arise.
Sincerely yours,

JOSEPH W. BARR, Chairman.

NATIONAL BANK REAL ESTATE LOANS

(Part 329 of the rules and regulations of the FDIC follow:)
PART 329—PAYMENT OF DEPOSITS AND INTEREST THEREON BY
INSURED NONMEMBER BANKS (12 OFR, PT. 329)
R U L E S AND

REGULATIONS

( R E V I S E D J U L Y 17,

1963)

FEDERAL DEPOSIT I N S U R A N C E CORPORATION, W A S H I N G T O N .

D.C.

Sec.
329.0 Scope.
32/9.1 Definitions.
329.2 Demand deposits.
329.3 Maximum rate, of interest on time and savings deposits.
329.4 Payment of time deposits before maturity.
3219.5 Notice of withdrawal of savings1 deposits.
3.29.6 Maximum rates of interest payable on time and savings deposits by insured nonmember banks.

AUTHORITY: §§329.0 to 329.6 issued under sec. 9, 64 Stat. 881; 12 U.S.C. 1819.
Interpret or apply sec. 18, 64 Stat. 891; 12 U.S.C. 1828.
SOURCE: §§ 329.0 to 329.6 appear at 15 F.R. 8640, Dec. 6, 1950, except as otherwise noted.
§ 329.0 Scope. The regulation contained in this part relates to the payment
of deposits and interest thereon by insured nonmember banks. This part is not
applicable to banks which are members of the Federal Reserve System. Regulation Q (Part 217 of this title), prescribed by the Board of Governors of the
Federal Reserve System for banks which are members of that System, is not
applicable to insured banks which are not members of the Federal Reserve System, except to the extent that the State law of a particular State provides otherwise. The provisions of this part do not apply to mutual savings banks, or to
guaranty savings banks operating in the State of New Hampshire so long as said
guaranty savings banks operate substantially under and pursuant to the laws of
the State of New Hampshire pertaining to mutual savings banks and do not
engage in commercial banking, or to any deposit in a bank located outside of, or
payable only at a bank's office which is located outside of, the States of the
United States and the District of Columbia.
[Last sentence amended, 20 F.R. 8949, Dec. 6,1955]
§329.1 Definitions—(a) Demand deposits. The term "demand deposits" includes every deposit which is not a "time deposit" or "savings deposit", as defined
below.
(b) Time deposits. The term "time deposits" means "time certificates of
deposit" and "time deposits, open account," as defined below.
(c) Time certificates of deposit. The term "time certificate of deposit" means
a deposit evidenced by a negotiable or nonnegotiable instrument which provides
on its face that the amount of such deposit is payable:
(1) On a certain date, specified in the instrument, not less than thirty (30)
days after the date of the deposit; or
(2) At the expiration of a specified period not less than thirty (30) days after
the date of the instrument; or
(3) Upon written notice to be given not less than thirty (30) days before the
date of repayment.1
(d) Time deposits, open account. The term "time deposit, open account"
means a deposit, other than a "time certificate of deposit" or a "savings deposit,"
with respect to which there is in force a written contract with the depositor that
neither the whole nor any part of such deposit may be withdrawn, by check or
otherwise, prior to the date of maturity,
which shall be not less than thirty (30)
days after the date of the deposit,2 or prior to the expiration of the period of notice
1
If the certificate of deposit provides merely that the bank reserves the right to require
notice of not less than thirty (3,0) days before any withdrawal is made, the bank must
require such notice before permitting withdrawal.
-Deposits, such as Christmas club accounts and vacation club accounts, which are mode
under written contracts providing that no withdrawal shall be made until a certain number
of periodic deposits have been made during a period of not less than three (3) months,
constitute "time deposits, open account", even though some of the deposits are made within
thirty (30) days from the end of such period.

NATIONAL BANK REAL ESTATE LOANS

which must be given by the3 depositor in writing not less than thirty (30) days in
advance of withdrawals.
(e) Savings deposits. (1) The term "savings deposit" means a deposit:
1i) which consists of funds deposited to the credit of one or more individuals,
or of a corporation, association, or other organization operated primarily for
religious, philanthropic, charitable, educational, fraternal, or other similar purposes and not operated for profit; 4 or in which the entire beneficial interest is
held by one or more individuals or by such a corporation, association, or other
organization; and
(ii) with respect to which the depositor is required, or may at any time be
required, by the bank to give notice in writing of an intended withdrawal not less
than 30 days before such withdrawal is made.
(2) Subject to the provisions of subparagraph (3) of this paragraph, an
insured nonmember bank may 5 permit withdrawals to be made from a savings
deposit only through payment to the depositor himself (but not to any other
person whether or not acting for the depositor), except
(i) where the deposit is represented by a pass book, to any person presenting
the pass book;5
(ii) to an executor, administrator, trustee, or other fiduciary holding the savings deposit as part of a fiduciary estate, or to a person, other than the bank of
deposit, holding a general power of attorney granted by the depositor;
(iii) to any person, including the depository bank, that has extended credit to
the depositor on the security of the savings deposit, where such payment is made
in order to enable the creditor to realize upon such security;
(iv) pursuant to the order of a court of competent jurisdiction;
(v) upon the death of the depositor, to any person authorized by law to receive
the deposit; or
(vi) with respect to interest paid to a third person pursuant to written instruction or assignment by the depositor, accepted by the bank, and placed on file
therein.
(3) Notwithstanding the provisions of subparagraph (2) of this paragraph,
no withdrawal shall be permitted by an insured nonmember bank to be made from
a savings deposit after January 15, 1962 through payment to the bank itself
or through transfer of credit to a demand or other deposit account of the same
depositor (other than of interest on the savings deposit) ir sucn payment or
transfer is made pursuant to any advertised plan or any agreement, written or
oral;
(i) which authorizes such payments or transfers of credit to be made as a
normal practice in order to cover checks or drafts drawn by the depositor upon
the bank; or
(ii) which provides that such payments or transfers of credit shall be made
at daily, monthly, or other such periodic intervals, except where made to enable
the bank, on the depositor's behalf and pursuant to his written instruction, to
effect the payment of installments of principal, interest, or other charges (including taxes or insurance premiums) due on a real estate loan or mortgage.
(4) Where a savings deposit is evidenced by a pass book, every withdrawal
made upon presentation of the pass book shall be entered in the pass book at the
time of withdrawal, and every other withdrawal from such a deposit shall be
entered in the pass book as soon as practicable after the withdrawal is made.
[Paragraph (e) amended, 26 F.R. 12032, Dec. 15, 1961, effective Jan. 15, 1962]
PRIOR AMENDMENTS

1955 : 20 F.R. 3328, May 14 ; 20 F.R. 8949, Dec. 6.
§ 329.2 Demand deposits—(a) Interest prohibited. Except as provided in
this part, no insured nonmember bank shall directly or indirectly, by any device
3
If a deposit be made with respect to which the bank merely reserves the right to require
notice of not less than thirty (30) days before withdrawal is made, the bank must require
such
4 notice to be given before permitting withdrawal.
Deposits in joint accounts of two or more individuals may be classified as savings
deposits if they meet the other requirements of the above definition, but deposits of a
partnership operated for profit may not be so classified. Deposits to the credit of an
individual of funds in which any beneficial interest is held by a corporation, partnership,
association, or other organization operated for profit or not operated primarily for religious,
philanthropic, charitable, educational, fraternal, or other similar purposes may not be
classified
as savings deposits.
5
Payment from a savings deposit or presentation of a pass book may be made over the
counter, through the mails, or otherwise.

NATIONAL BANK REAL ESTATE LOANS

whatsoever, pay any interest on any demand deposit. Within this part any
payment to or for the account of any depositor as compensation
for the use of
funds constituting a deposit shall be considered interest.0
(b) Exceptions. The prohibition stated in paragraph (a) of this section
does not apply to :
(1) Payment of interest accruing before August 24, 1937, on any deposit made
by a "savings bank" 7 as defined in the Federal Deposit Insurance Act, or by a
mutual savings bank;
(2) Payment of interest accruing before August 24, 1037, on any deposit of
public funds8 made by or on behalf of any State, county, school district, or other
subdivision or municipality, or on any deposit of trust funds, if the payment of
interest with respect to such deposit of public funds or of trust funds is required
by State law when such deposits are made in State banks;
(3) Payment of interest in accordance with the terms of any certificate of
deposit or other contract which was lawfully entered into in good faith before
February 1, 1936 (or, if the bank became an insured nonmember bank thereafter,
before the date upon which it became an insured nonmember bank), which was
in force on such date, and which may not legally be terminated or modified by
such bank at its option and without liability; but no such certificate of deposit
or other contract may be renewed or extended unless it be modified to eliminate
any provision for the payment of interest on demand deposits, and every insured
nonmember bank shall take such action as may be necessary, as soon as possible
consistently with its contractual obligations, to eliminate from any such certificate of deposit or other contract any provision for the payment of interest on
demand deposits.
(c) Deposits in saving banks. Deposits in "savings banks" 9 in specifically
designated deposit accounts with respect to which withdrawal by checking is
permitted in accordance with section 3(g) of the Federal Deposit Insurance
Act, shall for the purposes of this part be classed as demand deposits.
§ 329.3 Maximum rate of interest on time and savings deposits— (a) Maximum
rate prescribed from time to time. Except in accordance with the provisions
of this part, no insured nonmember bank shall pay interest on any time deposit
or savings deposit in any manner, directly or indirectly, or by any method, practice, or device whatsoever. No insured nonmember bank shall pay interest on
any time deposit or savings deposit at a rate in excess of such applicable maximum rate as the Board of Directors of the Federal Deposit Insurance Corporation shall prescribe from time to time; and any rate or rates which may be so
prescribed by the Board will be set forth in supplements to this part (see § 329.6),
which will be issued in advance of the date upon which such rate or rates become
effective. During the period commencing October 15, 1962, and ending upon the
expiration of three years after such date, the provisions of this subsection shall
not apply to the rate of interest which may be paid by insured nonmember
banks on time deposits of foreign governments, monetary and financial authorities of foreign governments when acting as such or international financial institutions of which the United States is a member.
(b) Modification of contracts to conform to regulation. No certificate of
deposit or other contract shall be renewed or extended unless it be modified
to conform to the provisions of this part, and every insured nonmember bank
shall take such action as may be necessary, as soon as possible consistently with
its contractual obligations, to bring all of its outstanding certificates of deposit
or other contracts into conformity with the provisions of this part.
6
The absorption of normal or customary exchange charges by an insured nonmember
bank, in connection with the routine collection for its depositors of checks drawn on other
banks,
does not constitute the payment of interest within the provisions of this part.
7
Section 3i(g) of the Federal Deposit Insurance Act provides: "The term 'savings bank'
means a bank (other than a mutual savings bank) which transacts its ordinary banking
business strictly as a savings bank under State laws imposing special requirements, on such
banks governing the manner of investing their funds and of conducting their business:
Provided. That the bank maintains, until maturity date or until withdrawn, all deposits
mzde with it (other than funds held) by it in a fiduciary capacity) as time savings deposits
of the specific term type or of the type where the right is reserved to the bank to require
written notice before permitting withdrawal: Provided further, That such bank to be
considered a savings bank must elect to become subject to regulations of the Corporation
with respect to the redeposit of maturing deposits and prohibiting withdrawal of deposits
by checking except in cases where such withdrawal was permitted by law on August 2?>.
1035, from specifically designated deposit accounts totaling not more than 15 per centum
of 8the bank's total deposits."
Deposits of moneys paid into State courts by private parties pending the outcome of
litigntion
ore not deposits of "public funds.", within the meaning of the above provision.
9
See footnote 7.

NATIONAL BANK REAL ESTATE LOANS

(c) Grace periods in computing interest on savings deposits. An insured nonmember bank may pay interest on a savings deposit received during the first ten
(10) calendar days of any calendar month at the applicable maximum rate prescribed pursuant to paragraph (a) of this section calculated from the first
day of such calendar month until such deposit is withdrawn or ceases to constitute a savings deposit under the provisions of this part, whichever shall first
occur; and an insured nonmember bank may pay interest on a savings deposit
withdrawn during its last three (3) business days of any calendar month ending
a regular quarterly or semiannual interest period at the applicable maximum
rate prescribed pursuant to paragraph (a) of this section calculated to the
end of such calendar month.
[Paragraph (c) amended, 17 F.R. 5187, June 7, 1952; 17 F.R. 5315, June 11,
1952; 24 F.R. 7062, October 1,1959]
(d) Continuance of time deposit status. A deposit which was a time deposit
at the date of deposit continues to be such until maturity, although it has become payable within thirty (30) days, and interest at a rate not exceeding
that prescribed pursuant to the provisions of paragraph (a) of this section may
be paid until maturity upon such deposit. A time deposit or a savings deposit,
with respect to which notice of withdrawal has been given, continues to be such
until the expiration of the period of such notice, and interest may be paid upon
such deposit until the expiration of the period of such notice at a rate not exceeding that prescribed pursuant to the provisions of paragraph (a) of this
section. Interest at a rate not exceeding that prescribed pursuant to the provisions of paragraph (a) of this section may be paid upon savings deposits with
respect to which notice of intended withdrawal has not actually been required
or given. No interest shall be paid by an insured nonmember bank on any
amount which by the terms of any certificate or other contract or agreement, or
otherwise, the bank may be required to pay within thirty (30) days from
the date on which such amount is deposited in such bank,10 except as to savings
deposits with respect to which the bank consistently continues to adhere to a
practice existing prior to January 23, 1936, of requiring notice of at least fifteen
(15) days before permitting withdrawal.
(e) No interest after maturity or expiration of notice; exception. No interest
shall be paid on any time or savings deposit for any period subsequent to maturity,
whether such deposit matures by its terms on a specific date or at the expiration
of a notice period pursuant to written notice actually given, except if a time
certificate
is renewed within ten (10) days after maturity, the renewal certificate 11 may draw interest from the maturity date of the matured certificate.
§ 329.4 Payment of time deposits before maturity—(a) Time deposits payable
on a specified date. No insured nonmember bank shall pay any time deposit,
which is payable on a specified date, before such specified date, except as provided
in paragraph (d) of this section.
(b) Time deposits payable after a specified period. No insured nonmember
bank shall pay any time deposit, which is payable at the expiration of a specified
period, before such period has expired, except as provided in paragraph (d) of
this section.
(c) Time deposits payable after a specified notice. No insured nonmember
bank shall pay any time deposit, with respect to which notice is required to be
given a specified period before any withdrawal is made, until such required
notice has been given and the specified period thereafter has expired, except
as provided in paragraph (d) of this section.
(d) Loans upon security of time deposits. An inured nonmember bank may
make a loan to the depositor upon the security of his time deposit, provided that
the rate of interest on such loan shall be not less than 2 percent per annum in
excess of the rate of interest on the time deposit.
Where a loan to the depositor upon the security of his time deposit upon terms
satisfactory to the insured nonmember bank and the depositor cannot be arranged,
and where the depositor signs a written statement to be kept in the files of the
bank that he is in need of money represented by the time deposit before the
maturity thereof, stating the definite amount needed, the time deposit may be
10
Deposits, such as Christmas club accounts and vacation club accounts, which are made
under written contracts providing that no withdrawal shall be made until a certain number
of periodic deposits have been made during a period of not less than three (3) months,
constitute "time deposits, open account" even though some of the deposits are made within
thirtv
(30) days from the end of such period.
11
Where a time certificate is renewed within ten (10) days after maturity, the renewal
certificate may be dated back to the maturity date of the matured certificate.

NATIONAL BANK REAL ESTATE LOANS

paid before maturity to the extent required to meet such need, but the depositor
shall forfeit accrued and unpaid interest for a period of not less than three
months on the amount withdrawn. When a portion of a time certificate of
deposit is paid before maturity, the certificate shall be canceled and a new
certificate shall be issued for the unpaid portion of the deposit, with the same
terms, rate, date, and maturity as the original deposit.
§329.5 Notice of withdrawal of savings deposits—(a) Requirements regarding notice. An insured nonmember bank shall observe the requirements set
forth as follows in requiring notice of intended withdrawal of any savings deposit
or part thereof or in permitting withdrawal without requiring such notice:
(1) If an insured nonmember bank pay any amount or percentage of the
savings deposits of any depositor without requiring such notice, it shall, upon
request, and without requiring such notice, pay the same amount or percentage of
the savings deposits of every other depositor, subject to the same notice reqiurement, except if the bank changes its practice in accordance with paragraph (b)
of this section.
(2) If an insured nonmember bank requires such notice before the payment
of any amount or percentage of the savings deposits of any depositor, it shall
require such notice before the payment of the same amount or percentage of the
savings deposits of any other depositor, subject to the same notice requirement,
except if the bank changes its practice in accordance with paragraph (b) of this
section. Even though the bank's practice is to require notice, an insured nonmember bank is not prevented by this part from paying during the next succeeding
interest period without requiring notice of withdrawal interest on a savings
deposit which has accrued during the preceding interest period.
(b) Requirements regarding change of practice. No insured nonmember bank
shall change its practice with respect to the requiring or not requiring of notice
of intended withdrawal of savings deposits, except after duly recorded action
of its board of directors or of its executive committee properly authorized, and
no practice in this respect shall be adopted which does not conform to the requirements of paragraphs (a) (1) and (a) (2) of this section.
(c) Change of practice for purpose of discrimination. No change in the practice of an insured nonmember bank with respect to the requiring or not requiring
of notice of intended withdrawal of savings deposits shall be made for the purpose of discriminating in favor of or against any particular depositor or
depositors.
(d) Requirements applicable although no interest paid. An insured nonmember bank shall observe the requirements of this section with respect to savings
deposits even though no interest be paid on such deposits.
(e) Loans upon security of savings deposits. An insured nonmember bank
may make a loan to any of its depositors upon the security of his savings deposits, provided that if the bank's practice is to require notice before permitting
withdrawal of any amount or percentage of the savings deposits of any depositor,
the rate of interest on such loan shall not be less than 2 percent per annum in
excess of the rate of interest on the savings deposit.
§ 329.6 Maximum rates ** of interest payable on time and savings deposits by
insured nomncmber banks—(a) Maximum rate of Jf percent. No insured nonmember bank shall pay interest accruing at a rate in excess of 4 percent per
annum, compounded quarterly,13 regardless of the basis upon which such interest
may be computed:
(1) On that portion of any savings deposit that has remained on deposit for
not less than 12 months,
(2) On any time deposit having a maturity date 90 days or more after the date
of deposit or payable upon written notice of 90 days or more,
(3) On that portion of any postal savings deposit which constitutes a time
deposit that has remained on deposit for not less than 12 months.
(b) Maximum rate of 3y2 percent. No insured nonmember bank shall pay
interest accruing at a rate in excess of 3 ^ percent per annum, compounded quarterly,13 regardless of the basis upon which such interest may be computed:
12
The maximum rates of interest payable by insured nonmember banks on time and
savings deposits as prescribed herein are not applicable to any deposit which is payable
only at an office of an insured nonmember bank located outside of the States of the United
States
and the District of Columbia.
13
This limitation is not to be interpreted as preventing the compounding of interest at
other than quarterly intervals: Provided, That the aggregate amount of such interest so
compounded; does not exceed the aggregate amount of interest at the rate above prescribed
when compounded quarterly.

NATIONAL BANK REAL ESTATE LOANS

(1) On any savings deposit, except as otherwise provided in paragraph
(a) (1) of this section.
(2) On any postal savings deposit which constitutes a time deposit, except as
otherwise provided in paragraph (a) (3) of this section.
(c) Maximum rate of 1 percent. No insured nonmember bank shall pay interest accruing at a rate in excess of 1 percent per annum, compounded quarterly,13
regardless of the basis upon which such interest may be computed, on any time
deposit (except postal savings deposits which constitute time deposits) having
a maturity date less than 90 days after the date of deposit or payable upon
written notice of less than 90 days. [28 F.R. 7423, July 20, 1963, effective July
17,1963.]
THE SECRETARY OF THE TREASURY,

Washington, D.C., April 1,19$^.
Hon. A. WILLIS ROBERTSON,

Chairman, Committee on Banking and Currency,
U.S. Senate, Washington, D.C.
DEAR MR. CHAIRMAN : Your letter to Secretary Dillon of March 24 requests his
views and those of the Treasury Department on the regulation of interest rates
on time and savings deposits. This general matter has been considered within
the administration upon a number of occasions in recent years, most extensively
by the Interagency Committee on Financial Institutions that reported to President Kennedy on April 9, 1963. The relevant conclusion of that Committee, in
which Secretary Dillon participated, remains the view of this Department and
the administration generally, and was also incorporated in one section of S. 1799
which you introduced in the Senate on June 26, 1963, at the Secretary's request.
Essentially, we believe that it is no longer necessary to have continuous regulation of interest rates on savings and time deposits. Under the Banking Act of
1935, the Federal Reserve's regulation Q and related FDIC regulations have been
required to establish maximum interest rates for the purpose of assuring sound
banking practices. Other supervision of banking performance has now been sufficiently developed, however, to make it possible in ordinary circumstances to
leave the determination of these rates to the free play of market forces. This
would be in accord with a basic presumption that freedom from regulation will
ordinarily facilitate the allocation of scarce loanable funds to their most rewarding use, encourage effective competition between savings institutions, and
achieve an equitable distribution of the returns between the ultimate saver and
the savings institution.
However, past experience has suggested that, in some circumstances, unbridled
competition for deposits through payment of successively higher rates of interest
on savings and time deposits—which rates in turn become deeply imbedded in
the whole structure of interest rates and, in many given market circumstances,
cannot be quickly and flexibly reduced as credit demands slacken—can contribute
to unsound banking practices. In particular, in the search for high-yielding assets providing a return sufficient to justify payment to savers of rates ratcheted
upward by unusual competitive pressures, some institutions may be tempted to
sacrifice unduly the quality and marketability of their investments. While these
dangers are mitigated by effective supervision and examination, and both the
Federal Reserve and Federal deposit insurance provide protection against a
liquidity crisis, total abandonment of all possibility of interest rate regulation
would not be justified. Instead the possibility of reestablishing such regulation,
at least for periods of particular pressure, might appropriately be retained on a
standby basis. Knowledge that such authority remained available for use if
required would, in itself, help to prevent excesses in banking practices that could
become dangerous.
Moreover, there are occasions in which flexible use of interest rate ceilings—
perhaps applied only to certain types of deposits—can assist the implementation
of general economic policies, including the reconciliation of domestic aims with
balance-of-payments considerations. For instance, certain other countries have
recently found it helpful, in the interests of international monetary stability, to
limit interest rates paid foreign depositors, and the United States should retain
a similar authority for use if needed. In other circumstances, use of standby
authority to impose maximums on other limited types of deposits could exert a
useful marginal influence on the flow of funds through savings institutions, without making necessary implementation of a full range of regulations.

NATIONAL BANK REAL ESTATE LOANS

Consequently, the position of the Department and the administration is that,
while continuous regulation of interest rates on time and savings deposits is no
longer necessary, standby authority to impose maximum rates should be retained,
and the supervisory authorities should be provided discretionary authority to
invoke this authority in a flexible manner, as among classes of deposits, when
required to assure the continued safety of the banking system and to promote
the stability of the economy. Moreover, the Committee on Financial Institutions
also concluded that standby authority to impose maximum rates should be extended to nonbank financial institutions, such as savings and loan associations,
that accept deposits or shares.
Sincerely yours,

ROBERT V. ROOSA, Acting Secretary.

NATIONAL BANK REAL ESTATE LOANS

COMPILATION OF STATE LAWS CONCERNING REAL ESTATE LOANS BY BANKS

(By the Office of the Comptroller of the Currency)
PART 1. REAL ESTATE LOANS

NOTE.—The laws summarized in part 1 hereof cover "conventional" mortgage
loans and deal with real estate lending limits, maximum permissible terms of
loans, and restrictions on the kinds of real property which may be taken as security- Such laws may also, in some instances, specify various kinds of real
estate loans authorized (residential, industrial, etc.) as well as certain technical
or administrative requirements in connection with such loans and geographical
limitations on lending areas. Statutes authorizing leasehold loans are summarized in appendage E. Laws relative to total or aggregate limits on all real
estate loans, taken together, are tabulated in part 2 hereof. Laws permitting
VA or FHA loans or other Government-guaranteed loans or loans in connection
with activities of small business investment companies are not summarized.
Many States exempt such loans from limitations applicable to "conventional"
mortgage loans. In some States, there are no express statutory limits or restrictions on real estate loans except as given in laws restricting loans to one
borrower. Certain State laws relating to construction loans or to commercial
loans where a mortgage constitutes additional security are summarized here.
Alabama.—No statutory restrictions.
Alaska.—No statutory restrictions except that loans to finance out-of-State
enterprises are prohibited (sec. 34-1-134 Alaska Comp. Laws, Ann.).
Arizona.—Requires written application, financial statement, appraisal of
property, abstract of title together with attorney's opinion and either title insurance or an unlimited certificate of title. Buildings shall be insured. First
mortgage required and loans on real estate outside United States prohibited
(sees. 6-251 E and F and 6-256A).
Arkansas.—No statutory restrictions.
California.—Requires first lien. Limitations include (a) 10-year term not
over 60 percent market value; (b) 20-year term not over 75 percent market value,
repayable in equal monthly installments; (c) 20-year term on productive agricultural lands not over 75 percent market value, repayable in equal monthly
installments; (d) 6-month term not over 85 percent market value; and (e) 18-month
term on construction loan (under plan for repayment or takeout commitment)
not over 85 percent market value. Market values shall be determined by appraisal. Above limitations inapplicable to loan to facilitate sale of real property
owned by banks (Financial Code, sec. 1227).
Colorado.—Requiresfirstlien on improved real estate, including improved
farmland and business or residential property. Permits banks to purchase
authorized loans. Limitations include 5-year term not over 50 percent appraised
value, or 10-year term not over 60 percent appraised value, repayable in installments sufficient to amortize 40 percent or more of principal within such term.
Such loans may be renewed or extended. Improvement loans are permitted.
Provision is made for loans on forest tracts. In addition, a bank may make any
real estate loan authorized to be made by national banks. Exceptions are given
from above loan limitations for loans to provide working capital to industrial or
business enterprise and 18-month construction loans (sees. 14-16-3 and 14-16-4).
Connecticut.—State banks may make mortgage loans on real estate in State.
Limitations include (a) not over 50 percent of appraised value or (6) 25-year term
not over 66% percent of appraised value and not over $20,000, or 1 percent of
capital and surplus, whichever is greater, if repayable in installments sufficient
to amortize in full. In connection with latter class of loans, real estate shall be
unencumbered, certificate of title or title insurance policy shall be obtained,
appraisal is required, and financial statement shall be obtained; 18-moBth construction loans not over 66% percent of the "then" value are permitted. A bank
may also service mortgages. Above limitations inapplicable to loans to established industrial or commercial business where repayment out of operations is
contemplated but where mortgage is taken. Savings banks and.savings departments of State banks may make additional mortgage loans, including 25-year

NATIONAL BANK REAL ESTATE LOANS

installment loans or residential property in State or certain areas of adjoining
States, not over 80 percent of appraised value and not over $20,000, in amount,
and certain home improvement loans (sees. 36-65, 36-70, 36-73, 36-99, and
36-100).
Delaware.—No statutory restrictions.
Florida.—No statutory restrictions but 1st mortgage required, with certain
exceptions (sec. 659.17 (5)).
Georgia.—With certain exceptions, loans shall not exceed 50 percent of appraised
value or, if provision is made for regular amortization, 75 percent of appraised
value. Limitation inapplicable to temporary loans or commercial transactions
secured in whole or in part by real estate, or to real estate loan of $3,500 or less
repayable in 3 years or less (sec. 13-2015).
Hawaii.—Requiresfirstlien and loan shall not exceed 75 percent of appraised
value. Supervisory authorities may require appraisal, evidence of merchantable
title, and insurance. Loans of savings department funds shall not exceed 75
percent appraised value (sees. 178-66 and 178-86 (e)).
Idaho.—Requires first lien on improved real estate, including improved farmland and business or residential property. Bank may purchase mortgages.
Limitations include (a) 5-year term not over 50 percent appraised value, (6) 10year term not over 66% percent appraised value, repayable in installments sufficient to amortize 40 percent or more of principal within such term, (c) 20-year
term not over 75 percent appraised value, repayable in installments sufficient to
amortize in full. Such loans may be renewed or extended. Above limitations
inapplicable to 6-month construction loans. Section 26.601.
Illinois.—Real estate loans meeting following conditions are execpt from limits
on loan to one borrower: where there is first lien on productive real estate after
valuation by two independent appraisers. Loan not to exceed 50 percent of
appraised value, and first lien shall be evidenced by title insurance policy registrar's
certificate of title or attorney's opinion. Certain charges on title, including
leases, do not negative first lien. There is no express prohibition of real estate
loans not meeting cbove conditions. Chapter 16}f section 132(3).
Indiana.—Requiresfirstlien on real estate in State or within 50 miles of lending
bank. Limitation is 20-year term and not over 75 percent of appraised value.
Certain periodic principal payments are required if loan is not over 10-year
term and exceeds 50 percent appraised value. If loan is over 10-year term and
exceeds 50 percent appraised value, repayment in periodic installments sufficient
to amortize in full over term of loan is required. Otherwise, loan may not exceed
5-year term or 50 percent of appraised value. Appraisal required. Bank may
buy and sell lonns. Section 18-1307.
Iowa.—Permits loans on unencumbered farmlands in State not over 50 percent
of value. Permits loans on unencumbered real estate in State or certain areas of
adjoining States. Loans may not exceed 50 percent of value or may not exceed
75 percent of appraised value and not over 20-year term, repayable in installments
sufficient to amortize 40 percent or more of principal within such period. Renewal is permitted. Sections 526.25(5), 526.28, and 528.14.
Kansas.—No statutory restrictions except that first lien is required and mortgage
may be open end permitting subsequent advances up to original amount. Section
9-1101(4).
Kentucky.—No statutory restrictions. Mortgage may be open and permitting
additional loans to the extent authorized by the mortgage. Section 382.520.
Louisiana.—No statutory restrictions.
Maine.—No statutory restrictions applicable to mortgage loans by a trust
company except that mortgaged real estate shall be insured. Separate and rather
detailed laws govern mortgage loans by savings banks. Chapter 59, sections
18, 19-H(I).
Maryland.—No statutory restrictions.
Massachusetts.—Trust company may make, acquire by purchase, participate
in or service first mortgage loans (a) on improved farmland in State or within
50 miles of bank's main office for not over 3 years on 50 percent appraised value,
or not over 5 years if certain periodic principal repayments are required, (b)
on improved real estate in United States for not over 5 years or 50 percent of
appraised value, (c) on improved real estate in State or within 50 miles of bank's
main office for not over 3 years or 60 percent of appraised value, or not over 5
years if certain periodic principal repayments are required, (d) on improved real
estate in United States for not over 10 years on 75 percent of appraised value,
if repayable in installments sufficient to amortize 40 percent or more of principal
within such period, or not over 20 years if repayable in installments sufficient

NATIONAL BANK REAL ESTATE LOANS

to amortize in full. Application and appraisal are required. Commissioner has
power to regulate loans on certain out-of-State real property and participation
loans and servicing arrangements. Certain loans permitted by savings banks
are also permitted by trust companies, including certain 25-year installment loans
at 80 percent of appraised value, residential development loans, construction loans,
improvement loans, and housing projects. Real estate loan limitations do not
apply to 18-month construction loans for industrial or commercial buildings
where there is takeout commitment. Chapter 172, sections 55 and 57. See
also, chapter 168, sections 34-36 for savings bank loans which may be made by
trust companies.
Michigan.—Requires first lien on improved real estate, including improved
farmland and business or residential property. Requires appraisal in form prescribed by Commissioner. Bank may purchase mortgages. Limitations include
(a) 5-year term not over 50 percent appraised value, (6) 10-year term not over
66% percent appraised value, if repayable in installments sufficient to amortize
40 percent or more of principal within such period, or (c) 20-year term not over
75 percent appraised value if repayable in installments sufficient to amortize in
full. Renewal and extension permitted. Appraisal is required in accordance
with regulations of Commissioner. Above limits do not apply to 18-month construction loans or to loans to a business which include a real estate mortgage but
where repayment out of operations is contemplated. Participation loans permitted. Section 23.823.
Minnesota.—Requires first lien and appraisal. Permits loan on improved real
estate in State or within 20 miles of bank. Conventional loans limited to 40 percent cash value of security covered by mortgage. Sections 48.19 and 48.24 (subdivision 2).
Mississippi.—No statutory restrictions.
Missouri.—No statutory restrictions except that a trust company not receiving
demand deposits may lend on first mortgage not in excess of capital and surplus,
or 66% percent appraised value. Section 363.260(11).
Montana.—Requires first lien on improved real estate, including improved
farmland and business or residential property. Limitations include (a) 5-year
term not over 50 percent appraised value, (6) 20-year term not over 60 percent
appraised value, repayable in installments sufficient to amortize 40 percent
within term of loan, (c) 6-month construction loans. Loans may be renewed or
extended. Bank may purchase loans. Section 5-506.
Nebraska.—No statutory restrictions.
Nevada.—Mortgage loan limits governed by laws relating to such loans by
savings and loan associations. Purchase of loans is permitted. Lending area
restricted to State or 100-mile radius of lending office but certain loans outside
lending area are permitted. Loans on improved real estate are permitted not
over 30-year maximum term and repayable in installments sufficient to amortize
in full in such term. Certain loans not over 25-year maximum term and not
over 80 percent appraised value on residential or combined residential and business
property or not over 75 percent appraised value on other improved property
are also permitted. Short-term loans on unimproved real estate also permitted.
One-year construction loans and certain $5,000 limit improvement loans permitted.
Appraisal is required. Sections 662.270, 673.028, 673.279, 673.317, and 673.323673.329.
New Hampshire.—Trust company may lend on first mortgage on New England
real estate not over 70 percent of value. Separate laws govern mortgage loans
of funds of savings bank and savings department of trust company. Savings
funds loans on real estate in State or contiguous State may not exceed 70 percent
of value. Savings funds loans on one- to four-family dwellings in State may
not exceed 20-year term and 80 percent value and scheduled installment repayments shall include estimated taxes. Application and appraisal are required and
property shall be revalued every 5 years. Provision is made for other savings
funds mortgage loans, including loans on property anywhere in United States,
participation loans and purchase, and sale and servicing of loans. Sections
387:4, 387:21-a, 390:9, and 392:33.
New Jersey.—A bank may avail itself of any lending activities authorized by
Federal legislation if authorized by general order of commissioner. Bank may
lend on property in State or within 50 miles of border of State, may participate in
loans, and may purchase loans. Loans shall be on improved real estate or farmlands unless made to finance improvements. First lien certified by qualified
attorney or approved by title insurance company is required. Appraisal is also
required. Loan may not exceed (a) 66% percent appraised value, (6) 20-year

NATIONAL BANK REAL ESTATE LOANS

term and not over 80 percent appraised value and $25,000 on single family dwelling, (c) 80 percent of first $30,000 appraised value and 50 percent of excess on
two- to four-family dwelling. Provision is made for installment repayments at
rates depending on ratio of loan to appraised value. Certain loans may be
repaid in equal periodic installments sufficient to amortize loan in full within
certain time. Eighteen-month construction loans permitted. Certain 9-month
construction loans and loans based on borrower's financial condition and/or
other security are exempted from real estate limitations. Sections 17:9A-25(12),
17:9A-64 through 17:9A-67, 17:9A-69D, and 17:9A-70B.
New Mexico.—Bank may make or purchase first mortgage loans on improved
real estate for not over 5-year term or over 50 percent of appraised value, or not
over 20-year term or over 66% percent of appraised value if provision is made for
full amortization within such term. Appraisal required. Section 48-3-7.
New York.—Limitations are {a) on unimproved real estate 66% percent appraised value, (b) on real estate improved (or to be improved) by building or
buildings used for residential, business, manufacturing or agricultural purposes,
75 percent appraised value, or (c) on real estate improved by one or two family
residence, 80 percent appraised value. Appraisal required. Mortgage shall be
Tecorded. Bank may service mortgages. Limitations inapplicable where real
-estate security is less than 15 percent of amount of loan, where loan is for improvement purposes and not over $5,000 or 61-month term, or where there is
takeout commitment. Real estate security shall not include assignments of
rents under a lease, leasehold loans, loans secured by assignments of rents, or
royalties from oil, gas, minerals, lumber, or other products, certain commercial
loan where a real estate mortgage is taken as additional security, or other loans
involving liens on property exempted by banking board regulation. Banking
law sections 96-a and 103(4).
North Carolina.—No statutory restrictions.
North Dakota.—First mortgage and appraisal required. Loan may not exceed
5 years and 50 percent cash value or 10 years and 66% percent of cash value, if
repayable in installments sufficient to amortize 40 percent within such period or
20 years and 66% percent cash value, if repayable in installments sufficient to
amortize in full within such term. Mortgage may include open-end terms permitting additional advances to original amount not over $2,500 for improvement
purposes. Bank may sell loans. Sections 6-03-05, 6-03-05.1 and 6-03-06.
Ohio.—Requires first lien on improved real estate in State or in contiguous
State. Appraisal is required. Advance on construction loans may not exceed
expenses incurred. Improvements (unless of fireproof construction) shall be
insured if over 10 percent of security. Loan may not exceed 5-year term and 50
percent appraised value, 20-year term and 66% percent appraised value, if repayable in installments sufficient to amortize 5 percent a year or sufficient to amortize
in full at maturity, or 20-year term and 75 percent appraised value, if repayable
in equal installments sufficient to amortize in full at maturity. Certain loans or
unimproved farm lands at 40 percent apprajsed value are also permitted. Real
estate loan limitations do not apply to certain 9-month construction loans for
residential or farm buildings or to 18-month construction loans for residential
or farm buildings or to 18-month construction loans for industrial or commercial
buildings or certain apartment houses, where there is takeout commitment.
Other real estate loans where there is takeout commitment are also not within
limitations. Other exceptions to limitations include loans to established industrial
or commercial businesses where repayment out of operations is contemplated and
loan secured by assignment of rents. Section 1105.19.
Oklahoma.—Requiresfirstlien on unimproved real estate, including improved
farmland or residential or business property, in State or within 50 miles of lending
bank. Purchase of loan permitted and participation with other banks permitted.
Loan may not exceed 3-year term and 50 percent appraised value, or 10-years
term and 70 percent appraised value, if amortized by installment payments
sufficient to amortize 40 percent of principaj within that period. Loans may be
renewed or extended. Real estate loan limitations do not apply to certain 9month construction loans or to 18-month construction loans for industrial or
commercial buildings where there is takeout commitment. Title 6, section 108b.
Oregon.—Requiresfirstlien on improved real property. Loan may not exceed
(a) 5-year term and 50 percent appraised value, (6) 10-year term and 66% percent
appraised value, if repayable in installments sufficient to amortize 40 percent
within such term, or (c) 20-year term and 75 percent appraised value, if repayable
in installments sufficient to amortize in full within such term. A purchase
of a contract of sale is a real estate loan subject to above limits. Restrictions

NATIONAL BANK REAL ESTATE LOANS

do not apply to mortgage taken to facilitate sale of real estate owned by bank.
Certain loans on forest tracts permitted. Bank shall have such evidence of
title and insurance as required by superintendent. Eighteen-month construction
loans not over 70 percent market value of real estate and planned improvements
are permitted but limit on amount is inapplicable if there is takeout commitment.
Restrictions do not apply to commercial loans secured by real estate where repayment from borrower's operations is contemplated. Sections 708.030 and
708.032.
Pennsylvania.—Requires first lien on improved real property including improved farmland in State or within 50 miles of border. Loan may not exceed
10-year term and 66% percent actual value, or 20-year term and 75 percent
actual value, if repayable in installments sufficient to amortize in full within term.
Appraisal required. All expenses of making loan shall be paid by borrower.
Buildings shall be insured for fire in company authorized to do business in State.
Loans or judgments which are first liens are also permitted. Entry of judgment
on installment loan note before default where bank looks to repayment from
borrower but where lien is also secured on real estate is not within real estate
limitations. Certain investments in mortgages in foreign countries or in dependency or insular possession of United States also permitted. Title 7, sections
819-1OO1A(4) (e) and 819-1012A, B and D.
Rhode Island.—The following statutory restrictions are applicable only to real
estate loans of savings banks and savings departments of banks: Requires first
mortgage and appraisal. Reappraisal required if mortgage loan continues for 5
years without being reduced in amount. Loan may not exceed 60 percent of
value (40 percent of value on unimproved real estate). Loans on improved residential real estate may not exceed 70 percent of value for 21-year maximum term,
repayable in installments. Loans on improved real estate used for one- to fourfamily dwellings, within 50 miles of principal office of bank, repayable in installments, may not exceed 25-year term and 80 percent of first $25,000 value plus 70
percent of value exceeding $25,000. Such one- to four-family residential loans
may not be made unless a certificate is submitted that borrower is able to make
required repayments. U.S .-guaranteed portion of loans are excluded in computing
maximum amounts which may be loaned. Above restrictions inapplicable to
loans to enable purchase of real estate from lending bank. Other real estate loans
permitted include participation in loans on real estate in State, open end mortgages, and loans for residential development. Sections 19-9-1, 19-9-8, 19-9-9,
and 19-9-10.
South Carolina.—Requiresfirstlien on improved real estate for 10-year term
not over 60 percent appraised value with required amortization of at least 5 percept
of principal a year. Section 8-222.
South Dakota.—No statutory restrictions.
Tennessee.—No statutory restrictions.
Texas.—Requires first lien. Limitations include: (a) loan may not exceed
50 percent appraised value, (6) loan may not exceed 60 percent appraised value, if
repayable in installments sufficient to amortize 40 percent of principal in 5 years,
or (c) loan on one- to four-family dwelling may not exceed 66% percent appraised
value, if repayable in monthly installments sufficient to pay loan in full in not over
240 months, such payments to include insurance premiums and taxes. Mortgage
loans require attorney's opinion or title insurance, evidence of payment of all
but current year's taxes, written appraisal, and adequate insurance if improvements constitute a substantial portion of security. Above restrictions do not
apply to 18-month construction loans with takeout commitments, or to 9-month
loans for construction of residential or farm buildings. Certain mortgage loans
to manufacturing or industrial businesses where repayment from business operations is expected and certain 36-month loans for construction of buildings to be
occupied by U.S. agencies are not governed by above restrictions. Another law
permits any loan or investment which may be made by a national bank. Articles
342-504 and 342-511.
Utah.—No statutory restrictions.
Vermont—Requiresfirstlien on timberland in State or on improved real estate
in U.S. loans are permitted on timberland; mines, quarries, or industrial plants for
5-year term not over 40 percent appraised value. Other real estate loans are
permitted for 1-year term or on a demand basis not over 60 percent appraised
value. Still other such loans are permitted for 20-year term not over 66Ji percent
appraised value, payable in installments sufficient to amortize in full in such term.
Certain loans on 1- or 2-family dwellings are permitted, subject to above limitations, except that they may not exceed 80 percent appraised value. All loans

NATIONAL BANK REAL ESTATE LOANS

require evidence of marketable title or title insurance (except for loans under
$1,000), evidence of payment of all but current year's taxes, written appraisal,
and certain certifications. Dwelling loans not over 80 percent appraised value
require additional certification including a financial statement, information as to
borrower's earning capacity, and certain information as to the character of the
neighborhood, etc. Such loans may be renewed or extended if based upon reexamination of facts and reappraisal within 3-year period. Certain open-end
provisions are authorized and banks may service mortgages (title 8, sees. 754,
756, and 757).
Virginia.—Permits real estate loans not over 50 percent appraised value. Loans
are permitted not over 75 percent appraised value, if repayable in installments
sufficient to amortize 4 percent of principal a year for 10-year term, or sufficient
to amortize 5 percent of principal a year for 20-year term. Appraisal is required
if loan over $1,000, and appraisal by two appraisers if required if loan is over
$5,000. Above limits do not apply to 18-month construction loans with takeout
commitments, construction loans with takeout agreements of insurance companies
authorized to do business in State. Above limits also do not apply to loans to a
business which include a real estate mortgage but where repayment out of operations is contemplated (sees. 6-78 and 6-79.1.)
Washington.—No statutory restrictions.
West Virginia.—No statutory restrictions.
Wisconsin.—No statutory restrictions except that loans are limited to mortgages
on real estate in State and adjoining States (sees. 221.32 and 223.03(11)).
Wyoming.—Requires first lien on improved real estate, including improved
farmland and business or residential property. Bank may purchase mortgages.
Loan may not exceed 5-year term and 50 percent appraised value or 10-year term
and 75 percent appraised value, if repayable in installments sufficient to amortize
40 percent within such term. Loans may be renewed or extended. Certain 6month construction loans are not subject to above restrictions. Another law
permits trust company loans on unencumbered real estate worth double the amount
loaned.
TABLE 1.—Conventional real estate loans
Term

Loan-to-value ratio

State
Alabama *_.
Alaska *
Arizona
Arkansas i
California

Colorado8
Connecticut..

Delaware1
Florida i
Georgia
Hawaii...
Idaho.

Geographical limits
Out of State prohibited.
Out of United States prohibited.

_— A. 60 percent
B. 75 percent
C. 75 percent productive
farmlands.
D. 85 percent
E. 85 percent construction loan.
A. 50 percent
B. 60 percent
A 50 percent
B. 66H percent, not over
$20,000 or 1 percent
of capital and surplus, whichever
greater.
C. (Xfti percent, construction loan.
D. 80 percent, not over
$20,000 (savings departments of State
banks).
A. 50 percent
B. 75percent..
75 percent
A. 50 percent
B. 66?6percent..
C. 75percent..

50 percent.
Illinois'
See footnotes at end of table, p. 54

A. 10 years
B. 20years, equal monthly
installments.
C. 20years, equal monthly
installments.
D. 6 months
E. 18 months
A. 5-years
B. 10 years, 40 percent to
be amortized within
such period.
B. 25 years, fully amortized.
C. 18 months
D, 25 years, installments. _

A
B. Regular amortization. _
A. 5 years
_ B. 10 years, 40 percent to
be amortized within
such period.
C. 20 years, fully amortized.

In State and certain areas
of adjoining States.

NATIONAL BANK REAL ESTATE LOANS

TABLE 1.—Conventional real estate loans—Continued
State

Loan-to-value ratio
A. 75 percent
B. 60 percent or more

Indiana..

C. 50 percent or more
D. 50 percent.
A. 50 percent.
B. 75percent.

Iowa..
Kansas1
Kentucky^
Louisiana i
Maine i
Maryland i
Massachusetts

Michigan..

Minnesota...
Mississippi i.
Missouri«___.
Montana

Term

A. 20 years, fully amor- In State or 60 miles of lending bank*
tized.
B. 10 years or less, amortized at not less than
2 percent per year.
C. Over 10 years but not
over 20 years, fully
amortized.
D. 5 years, or amortization.
In State or certain areas of
A.
B. 20 years, 40 percent to
adjoining States.
be amortized within
such period.

A. 50 percent, farmland. __ A. 5 years, amortized at A. In State or within 60
not less than 2 permiles of main office.
cent per year.
B. Improved real estate in
B. 5 years
_
B. 50 percent,.
United States.
C. 5 years, amortized at C. Improved real estate in
C. 60 percent..
State or within 50
not less than 2 permiles of main office.
cent per year.
D. 10 years, 40 percent D. Improved real estate in
D. 75 percent,
amortized within
United States.
such period.
E. 20 years, fully amor- E. Improved real estate in
E. 75 percent .
tized.
United States.
F. 80 percent....
F. 25 years, installments..
A. 50 percent...
A. 5 years
B. 66^ percent.
B. 10 years, 40 percent
amortized within
such period.
C. 20 years, fully amorC. 75 percent.
tized.
In State or within 20 miles
40 percent
of bank.
66% percent...
A. 50 percent..
B. 60 percent..

A. 5 years
B. 20 years, 40 percent
amortized within
such period.

Nebraska »
Nevada

A. 30 years, full amortized.
B. 80 percent, residential B. 25 years, fully amoror combined resitized.
dential and business
property.
C. 75 percent other im- C. 25 years; fully amorproved property.
tized.
A..
New Hampshire.... A; 70percent*
B. 70percent«
C. 80 percent,* 1 to 4 C. 20 years, fully amorfamily dwellings.
tized.
D. 50 percent«..-___
New Jersey K.

New Mexico
New York..

Geographical limits

A. 66% percent.
B. 80 percent, not over
$25,000, on 1 family
dwelling.
C. 80 percent of first
$30,000 and 50 percent of excess, 2 to
4 family dwelling.
A. 50 percent
B. 66% percent.
A. 66% percent, unimB. 75 percent, improved
real estate.
O. 80 percent, 1- or 2-family dwelling.

North Carolina i_.
See footnotes at end of table, p. 54

A
B. 20 years .

In State or 100 miles of
bank.

A. New England real estate.
B. In State or contiguous
State.
C. In State.
D. Anywhere in United
States.
In State or within 50 miles
of State border.

A. 5 years
B. 20 years—fully amortized.
Statute silent (by impliStatute silent
cation, in or out of State).

NATIONAL BANK REAL ESTATE LOANS

TABLE 1.—Conventional real estate loans—Continued
State

North Dakota.—.. A. 50 percent
B. 66% percent.
C. 66% percent.
Ohio

A. SOparcent--.
B. 66% percent.
0 . 76 percent.

Oklahoma
Oregon

D. 40 percent, unimproved farmlands.
A. 50 percent
B. 70 percent.
A. 50 percent
B. 66$ percent
C. 75 percent

Pennsylvania

D. 70 percent, construction loans.
A. 66% percent
B. 75 percent

Khode Island ?.

South Carolina
South Dakota 1
Tennessee l
Texas*

Utah*
Vermont

Virginia

Geographical limits

A. 5 years
B. 10 years, 40 percent
amortized within
such period.
C. 20 years, fully amortized.
A. SyeaTs
B. 20 years, 5 percent
amortization per
year.
C. 20 years equal installments, fully amortized.

In State or in contiguous
State.

A. 3 years
B, 10 years, 40 percent
amortized
within
such period.
A. 5 years
B. 10 years. 40 percent
amortized within
such period.
C. 20 years, fully amortized.

In State or withinJSO miles
of bank.

A. 10 years

In State or within 50 miles
of State border.

B. 20 years, fully amortized.

A. 40 percent, unimproved real estate.*
B. 60 percent, improved
real estate.
C. 70 percent, improved C. 21 years, installments..
residential real
estate.
D. 80 percent of 1st $25,000 D. 25 years
D. Within 50 miles of
plus 70 percent of
principal office.
excess, on 1- to 4family dwellings.
60 percent
10 years at least 5 percent
amortization per year.
A. 50percent-B. 60 percent
C. 66% percent, 1- to 4family dwelling.

B. 5 yeai's, 40 percent amortized within such
period.
C. 20 years, fully amortized.

A. 40 percent, on timberland, mines, quarries, or
industrial plants.

A. 5 years

B. 60 percent.
C. 66% percent

B. lyear
_
C. 20 years, fully amortized.
D. 20 years, fully amortized.

D. 80 percent, 1- or 2family dwellings.
A. 50 percent
B. 75 percent
C. 75 percent

B. 10 years, amortized 4
percent per year.
C. 20 years, amortized 5
percent per year.

A. 50 percent
B. 75 percent

A. 5 years.—
B. 10 years, 40 percent
within such period.

Washington *
West Virginia *
Wisconsin i.
Wyoming

Term

Loan-to-value ratio

Timberland^in State, or
improved 5 real estate
anywhere in the United
States.

In State »nd all ioining
States.*

1
No statutory restrictions.
s May also make loans authorized to national banks.
»Exempt
from limits on loans to 1 borrower; not other statutory restrictions.;
4
Restrictions applicable to trust company not receiving demand deposits.
• Trust company.
*7 Savings departments of trust company.
Restrictions applicable only to savings departments of banks.

NATIONAL BANK REAL ESTATE LOANS
PART 2. REAL ESTATE LOANS

OTHER LIMITATIONS

NOTE.—Part 1 of this statutory summary deals with State laws limiting
amounts of individual real estate loans on the basis of the kind of real estate taken
as security, the appraised value of such real estate, or the nature 6f the loan transaction. Laws summarized herein deal with limitations of the aggregate amounts
which a bank may lend on real estate or on certain kinds of real estate. Such
aggregate limitations are often based on factors such as the capital and surplus of
the lending bank or the amount of deposits or savings deposits of the bank. This
summary also includes laws limiting the aggregate amount of construction loans
or other special kinds of loans. In addition, the summary includes laws of some
States which expressly limit the amount which may be loaned to one borrower or
real estate loans or on secured or collateral loans. Such limitations are based on a
factor, such as capital and surplus, other than the appraised value of the real
estate security. Where no limitation on real estate or collateral loans to one
borrower is given herein it is possible that the general limitation of loans to one
borrower (see table 5, appendage J) would apply in the particular State. The
summary herein does not, except in a few instances, refer to laws concerning Government-guaranteed real estate loans (such as VA and FHA loans). In many
instances, the guaranteed portions of such loans are exempt from general or
aggregate real estate limitations. For convenience, this summary has been set up
in the form of a table, referred to as table 2.

TABLE 2.—Appendage D
State and statute

Aggregate real estate loan limits

Alabama (title 5, sec. 82) _
Alaska._
_.
Arizona (sec. 6-251E).
California Financial Code (sees. 1221
(b) and 1230).
Colorado (sec. 14-16-8 (b) and (d)).___
Connecticut (sees. 36-70 and 36-99)

Delaware (title 5, sec. 909(a)(3)_.

No provision
_
25 percent demand deposits, other than public deposits.
Applies to loans on and investments in real property.
35 percent total assets
_
100 percent capital and surplus, 60 percent time deposits
or 25 percent interest-bearing securities, whichever is
greater (including real estate other than office premises
owned by bank).
Commercial department: 10 percent capital and surplus
or 10 percent commercial deposits, whichever is greater.
Savings banks and savings departments of banks: 70
per ent assets of savings department (including real
estate other than office premises owned or under contract of purchase).

Florida (sec. 659.17(2) (a))
Georgia (sees. 13-2013 and 13-2015)
Hawaii (sees. 178-66 and 178-86)
Idaho (sec. 26-601)
Illinois (ch. 16^, sec. 132) _
Indiana (sees. 18-103(p) and 18-1307).
Iowa (sec. 528.14)
Kentucky (sec, 287.280) _
Louisiana (sec. 6:259)
Maine j(ch. 59, sec. 112)..

100 percent capital and surplus, or 100 percent savings or
time deposits, whichever is greater.
Commercial department: 25 percent capital, surplus, and
commercial deposits. Savings department: 75 percent
savings deposit in real estate loans, together with certain
other classes of loans and investments.
100 percent capital and surplus, or 60 percent time and
savings deposits, whichever is greater.
100 percent total sound capital. 35 percent total deposits,
or 60 percent time deposits, whichever is greater.

Limits on real estate or secured loans
to 1 borrower (if different from
general limit)

Other provisions of State law relating
to real estate loans

20 percent capital, surplus, and undivided profits where loan is secured.

15 percent capital and surplus. Aggregate limit on certain construction
loans, 100 percent capital and surplus.
Certain classes of savings department
real estate loans are also limited,
both in the aggregate and as respects
1 borrower.
25 percent capital and surplus and undivided profits where loan is secured.
25 percent capital and surplus where
loan is secured.
20 percent capital and surplus where
loan is secured.

Certain real estate loans exempted
from general limit of loans to 1
borrower.
Certain farmland loans: 50 percent
capital and surplus.
30 percent capital and surplus
....
50 percent capital and surplus where
loan is secured.
20 percent capital and surplus where
loan is secured.

%
F

W
>

i
Aggregate limit on certain construction
loans, 50 percent capital.

Massachusetts (ch. 172, sec. 56).
Michigan (sec. 23.823)

Minnesota (sec. 48.22 (Subd. 2))
Missouri (sees. 362.170(1) (b) and
363. 260(1) (b)).
Montana {sec. 5-506)
New Hampshire (sees. 387:3(IV) and
390:9).

Commercial departments: 15 percent deposits other than
savings deposits. Sayings departments of trust companies: 70 percent savings deposits.
100 percent capital and surplus, or 60 percent time and
savings deposits, whichever is greater.

100 percent capital and surplus, or 60 percent time and
savings deposits, whichever is greater.
Applies to loans by savings banks and savings departments
of trust companies: 75 percent savings deposits on
"conventional" mortgage loans.

Certain classes of real estate loans are
also limited in the aggregate.

25 percent capital and surplus
25 percent capital and surplus where
loan is secured.

New Jersey (sec. 17:9A-69).

100 percent capital and surplus, or 60 percent time deposits, whichever is greater (including real estate other
than office premises owned by banks).
New Mexico (sec. 48-3-7)__
On mortgages not over 5-year term, 30 percent total deposits, or 75 percent savings deposits (banks), or 75 percent deposits of trust funds (trust companies). No
aggregate limit on mortgages of longer term than 5 years.
New York banking law (sec. 103(4))... 15, 25, or 40 percent of total assets (depending on place of
location of bank's principal office), or 60 percent time and
savings deposits, whichever is greater.
North Dakota (sec. 6-03-05)

100 percent capital and surplus, or 66% percent time and
savings deposits, whichever is greater.
Ohio (sees. 1105.19 and 1105.21(C)(6)).. 100 percent capital and surplus, or 60 percent time and
savings deposits, whichever is greater (or 70 percent of
such deposits if they total ji or more of total deposits and
banking board authorizes increase in aggregate limits).
Oklahoma (title 6, sec. 108(b))
100 percent capital and surplus, or 60 percent time and
savings deposits, whichever is greater.
Oregon (sees. 708.030 and 708.365)
25 percent capital, surplus, and demand deposits plus 75
percent savings deposits.
Pennsylvania (title 7, sees. 819-1006B 100 percent capital and surplus or 60 percent time deposits,
and819-1012C).
at bank's option.
Rhode Island (sees. 19-9-1 and 19-9-8). Appliesto loans by savings banks and savings departments
of banks: 80 percent savings deposits with certain exceptions.
South Carolina (sec. 8-234).

50 percent capital plus 50 percent deposits_.

Aggregate limit on certain construction
loans, 50 percent capital. Aggregate
limit on certain leasehold loans, 100
percent capital plus 50 percent surplus.

Aggregate limit on certain construction
loans, 50 percent capital.
Aggregate limit on "conventional"
mortgage loans on real estate outside
New England, 10 percent savings
deposits.
Aggregate limit on certain construction loans, 50 percent capital and
surplus.

I
w

10 percent capital, surplus, and undivided profits (specified for real estate
loans with other limits governing
other kinds of secured loans).
Loans on improved farm property
exempted from limit of loans to 1
borrower.

10 percent capital and surplus (specified for real estate loans).
25 percent capital and surplus where
loan is secured.

Aggregate limits on certain classes of
construction loans, 100 percent capital and surplus.
Aggregate limit on certain construction
loans, 100 percent capital and surplus.

1
F
O

Not over half of permitted aggregate
"conventional" loans may be on
out-of-State real estate. Also limits
aggregate of certain other real estate
loans.

TABLE 2.—Appendage

State and statute
Texas (art. 342-504).
Virginia (sec. 6-78)
Washington (sec. 30.04.110).

Limits on real estate or secured loans
to 1 borrower (if different from
general limit)

Aggregate real estate loan limits
Aggregate of loans on residential real estate: 100 percent
capital and surplus. Commissioner may authorize
higher aggregate limit.
100 percent capital and surplus or 70 percent time and
savings deposits, at election of bank.

60 percent capital, surplus, and deposits, but loans exceeding aggregate limits may be authorized by directors of
bank under certain conditions.
Wyoming (sees. 13-21 and 13-98 100 percent capital and surplus or 60 percent deposits,
whichever is greater but uninsured loans may not exceed aggregate of 20 percent capital, surplus, and
deposits.
Wisconsin (sec. 221.32)

D—Continued
Other provisions of State law relating
to real estate loans
Aggregate limit on certain construction loans, 100 percent capital and
surplus.
Do.
Secured loans exemptedfromlimits of
loans to 1 borrower.
Aggregate limit on certain construction
loans, 50 percent capital. Aggregate
of mortgage loans, together with
certain other loans and investment
trust companies. Banks may not
exceed 80 percent deposits.

Full text of National Bank Real Estate Loans : Hearings Before a Subcommittee of the Committee on Banking and Currency, United States Senate, Eighty-Eighth Congress, Second Session, on S. 2576, March 4 and 10, 1964

FRASER