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87TH CONGRESS ) HOUSE OF REPRESENTATIVES (
8d Session
\
1

REPORT
No. 2048

REAL ESTATE AND CONSTRUCTION LOANS APPLICABLE
TO NATIONAL BANKS

JULY 27, 1962.—Referred to the House Calendar and ordered to be printed

Mr. SPENCE, from the Committee on Banking and Currency,
submitted the following

REPORT
[To accompany H.R. 7796]

The Committee on Banking and Currency, to whom was referred
the bill (H.R. 7796) to amend certain lending limitations on real
estate and construction loans applicable to national banks, having
considered the same, report favorably thereon without amendment
and recommend that the bill do pass.
PURPOSE OF BILL

The first section of H.R. 7796 would amend the first paragraph of
section 24 of the Federal Reserve Act. Under this paragraph a national bank may now make real estate loans secured by first liens in
an aggregate amount not in excess of its paid-in and unimpaired capital stock plus its unimpaired surplus funds, or not in excess of 60 percent of the amount of its time and savings deposits, whichever is
greater. The bill would increase the second alternative limit, i.e.,
60 percent of a national bank's time and savings deposits, to 70 percent
of its time and savings deposits.
The second section of the bill would amend the third paragraph of
section 24 of the Federal Reserve Act which regulates the making of
construction loans for industrial and commercial buildings and residential and farm buildings. Under existing law construction loans
on industrial and commercial buildings are limited to maturities of
18 months or less; construction loans on residential and farm buildings,
however, are limited to maturities of 9 months or less. The amendment would increase the limitation on maturities for construction
loans on residential and farm buildings to 18 months or less.

85006


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REAL ESTATE LOANS APPLICABLE TO NATIONAL BANKS
'

REAL ESTATE LOANS

The present aggregate limitation for a national bank with regard to
the amount of conventional real estate loans it may make has been
the law since 1935. Since that time many things have changed in
the field of real estate financing. The most notable change has been
the development of and almost universal use of the amortized loan.
An amortized loan is considered to be a much safer investment for
the bank and generally a much better form of repayment for the
borrower than what was available prior to the development of this
type of financing. Also the commercial banks' interest in residential
mortgages has increased greatly in recent years partly because
of the development and use of the amortized loan and partly because
of a need for banks, to be more effective in meeting the real estate
mortgage needs of their communities.
Your committee believes that the simple amendment contained in
the bill (which increases the aggregate real estate loan limitation from
60 to 70 percent of a bank's time and savings deposits) would add
substantially to the mortgage investment potential of national banks.
The witness for the American Bankers Association estimated such
increased mortgage investment potential at about $4 billion. Since
the three bank supervisory agencies have reported favorably on this
legislation and the hearings indicate that the proposed increase in the
aggregate limitation on real estate loans could be made without undue
risk to the banks and their depositors and because of the great need
for additional sources of mortgage credit, your committee believes the
amendment should be adopted.
CONSTRUCTION LOANS

As heretofore indicated, construction loans on residential and farm
buildings under existing law may not exceed 9 months and the bill
would increase this maximum maturity limitation to 18 months.
Testimony received by the committee disclosed that the proposed
change in the law is desirable since experience has shown that often
conditions beyond the control of the builder have delayed completion
of the construction beyond the now maximum limitation of 9 months.
Such testimony cited delays of 6 to 8 weeks in order to obtain a commitment for a governmental guarantee or insurance. The report of
the Chairman of the Federal Deposit Insurance Corporation states:
* * * in many instances the construction work financed by
residential and farm loans has, because of weather conditions
and other conditions which do not affect the risk of the loan,
not been completed within the 9 months limit * * *.
Each of the bank supervisory agencies, as well as the Federal Home
Loan Bank Board has reported favorably on the bill. The reports
are as follows:


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REAL ESTATE LOANS APPLICABLE TO NATIONAL BANKS

6

TREASURY DEPARTMENT,
July 31,1961.

Hon. BRENT SPENCE,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: Reference is made to your inquiry of June
23, 1961, requesting a report on H.R. 7796, a bill to amend certain
lending limitations on real estate and construction loans applicable
to national banks.
The bill would amend present law to enable national banks to make
real estate loans in aggregate sums not in excess of 70 percent of the
amount of time and savings deposits instead of the present limit of
60 percent, and to permit construction loans to be made on residential
or farm buildings for periods not to exceed 18 months instead of the
present limit of 9 months.
This Department has no objection to the passage of the proposed
legislation.
The Department has been advised by the Bureau of the Budget
that there is no objection from the standpoint of the administration's
program to the submission of this report to your committee.
Sincerely yours,
ROBERT H. KNIGHT, General Counsel.
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM,
Washington, July 14, 1961.
Hon. BRENT SPENCE,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: This is in response to your letter of June 23,
1961, requesting a report on the bill, H.R. 7796, which would amend
section 24 of the Federal Reserve Act in order to liberalize lending
limitations on real estate and construction loans by national banks.
Under the first paragraph of section 24 a national bank may now
make real estate loans in an aggregate amount not in excess of the
amount of the capital stock of the national bank paid in and unimpaired plus the amount of its unimpaired surplus funds, or not in
excess of 60 percent of the amount of its time and savings deposits,
whichever is greater. H.R. 7796 would increase the second alternative
to 70 percent.
Under the third paragraph of section 24 loans by national banks to
finance the construction of residential or farm buildings, maturing hi
not more than 9 months, are not subject to the limitations and requirements of that section applicable to "loans secured by real estate."
H.R. 7796 would increase the permissible maximum maturity on such
loans to 18 months.
This is to advise that the Board has no objection to favorable consideration of the bill.
Sincerely yours,
C. CANBY BALDERSTON,
Vice Chairman.


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FEDERAL DEPOSIT INSURANCE CORPORATION,
OFFICE OF THE CHAIRMAN,
Washington, August 18, 1961.
Hon. BRENT SPENCE,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: Receipt is acknowledged of your communication requesting a report from the Corporation on H.R. 7796, a bill
which you have introduced to amend certain lending limitations on
real estate and construction loans applicable to national banks.
Under present law the limit applicable to national banks relating
to the making of real estate loans secured by first liens upon improved
real estate is the amount of the bank's paid-in and unimpaired capital
stock plus its unimpaired surplus fund, or 60 percent of its time and
savings deposits, whichever is greater. The first section of the
proposal would increase the limit from 60 to 70 percent. We are
advised that a survey conducted by the American Bankers Association
has revealed that approximately 12 percent of the national banks
surveyed have reached or are approaching their present lending limitation, as it relates to the ratio to tune and savings deposits. It is
the view of the Corporation that the lending limits of national banks
may be increased as proposed in this section of the bill without undue
risk to the banks and their depositors.
Section 2 of the bill proposes to liberalize the rules in reference
to temporary construction loans for residential or farm buildings.
Under present law loans having maturities of 9 months or less to
finance the construction of residential or farm properties are not considered to be loans secured by real estate. The current proposal
would change the maturity limitation on such loans to 18 months.
We are advised that the basis for this extension is the fact that banks
have learned from experience that in many instances the construction
work financed by residential and farm loans has, because of weather
conditions and other conditions which do not affect the risk of the
loan, not been completed within the 9 months' limit and, therefore,
it is deemed appropriate that this extension be granted. An 18
months' provision is in the statute for construction loans on industrial and commercial buildings, provided that there is a "takeout"
agreement. Notwithstanding the proposal offers some hazard to the
soundness of insured banks, we, nevertheless, conclude that the proposal provides a flexibility to bank lending operations that will better
enable such lending institutions to provide funds for construction
operations throughout the country. The extension of time for
maturity of construction loans is reasonable and is justified by experience. The present and continuing prohibition against national
banks making construction loans in the aggregate, commercial as
well as residential and farming, in excess of the unimpaired capital
stock and the surplus of the lending bank provides a restriction against
an excessive volume of construction loans in any bank. The Corporation 1believes that the liberalization of the lending requirements in
the bih would not be detrimental to national banks or their depositors.
Accordingly, the Corporation would interpose no objection to the
enactment of this bill.


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REAL ESTATE LOANS APPLICABLE

TO NATIONAL BANKS

£>

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 report.
Sincerely yours,
ERLE COCKE, Sr., Chairman.

Hon. BRENT SPENCE,

FEDERAL HOME LOAN BANK BOARD,
Washington, D.C., July 26, 1962.

Chairman, House Banking and Currency Committee,
House oj Representatives,
New House Office Building, Washington, D.C.

DEAR CONGRESSMAN SPENCE: In accordance with the request of
your office, we are pleased to present our views on H.R. 7796. We
are fully in accord with the amendment to section 24 of the Federal
Reserve Act provided in the bill.
In our opinion, enactment of this legislation would make for more
effective participation by national banks in the mortgage market
without detracting from the safety or soundness of commercial banks.
Sincerely,
JOSEPH P. McMuRRAY, Chairman.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3 of rule XIII of the Rules of the House
of Representatives, changes in existing law made by the bill, 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 change is proposed is shown in roman):
THE FOURTH SENTENCE OF THE FIRST PARAGRAPH AND THE FIRST
SENTENCE OF THE THIRD PARAGRAPH OF SECTION 24 OF THE FEDERAL
RESERVE ACT (12 U.S.C. 371)
* * * No 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 [60J 70 per centum of the amount of its tune and
savings deposits, whichever is the greater. * * *


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6

REAL ESTATE LOANS APPLICABLE TO NATIONAL BANKS

Loans made to finance the 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 completion of the buildings and loans made to finance the
construction of residential or farm buildings and having maturities of
not to exceed [nine] 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. * * *


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