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From: AMERICAN BANKERS ASSOCIATION Paul G. Collins, Assistant Director 730 15th St*, N*W., Washington, D*C* RELEASED at 10:00 a.m. Saturday, April 22, 1961 BANKING *S CURRENT LEGISLATIVE PROBLEMS Address by M. Monroe Kimbrel, chairman of the Federal Legislative Committee, The American Bankers Association, and chairman of the board. First National Bank, Thomson, Georgia, before the Independent Bankers Association at the Sheraton-Park Hotel, Washington, D. C. April 21, 1961 Members and friends of The Independent Bankers Association, I welcome this opportunity to be here in Washington with you, to meet many old friends and to make new friends* I always enjoy talking to people whose business is the same as my own, and whose interests are my interests, especially as we are about to share what I hope will prove to be some of the most productive years in the history of banking* In the past few years I have made a number of talks on the subject of Federal legislation, and many of them contained no small measure of pessimism about the relationship between banking and the Federal legislative process* At the present time, however, we have reason to be more opti mistic about this relationship. Banking is playing a more effective part in the legislative process, and the importance of Federal legislation to sound banking operations jls becoming more generally recognized by bankers throughout the country. We in the A.B.A. know also that this awareness of personal political responsibility on the part of bankers is nowhere more evident than in the membership of The Independent Bankers Association, and we commend you for it. 2 Some of the banking*s most able leaders in this field come from your own ranks. I have participated on behalf of the A.B.A. in many meetings with the officers of the I.B.A. and members of its Fair Tax Committee, Their appreciation of banking*s political role, as well as their cooperation in all matters of mutual interest to our respective associations, is of the highest caliber. Mr. Chairman and Gentlemen, I am glad to review for you recent developments in the field of banking legislation. It is my intention to cover only the major areas of interest, namely, tax uniformity among financial institutions, mandatory withholding on dividends and interest, the Douglas interest disclosure bill, and the proposed system of federally chartered mutual savings banks. I believe that these are the primary subjects with which bankers will be concerned in the 87th Congress, Before dealing with specifics, I would like to describe briefly the practical background against which all legislative interests must be considered. The national election last November gave us a new President who, for the first time in twelve years, has an overwhelming majority of his party in both Houses of Congress* of 1949-1951 to find a parallel. One has to go back to the 81st Congress In the light of political realities, however, the majorities lose some significance. While the Senate remained virtually unchanged in both party composition and political philosophy, the House recorded net gains for Republicans and conservatives alike. Thus, the so-called "coalition” of Republicans and Southern Democrats increased in strength, and is still operative as can be seen from the vote last month on the minimum wage proposal. 3 I mention this because we hear so much about the effect the "coalition” can have on any particular piece of legislation. But, it is my firm belief that the division between liberals and conservatives in the Congress will have no bearing on the future of banking legislation - no more than will the division in party allegiance. In the first place, the way a Member of Congress votes depends to a great extent on the nature of the issue before him. The conservative or "coalition" vote in the Senate during the last session of Congress ranged from a high of 51 per cent to a low of 16 per cent. In the House it was almost identical, scaling down from a high mark of 52 per cent to, again, a low of 16 per cent, based on the subject under consideration. Second, and more important, the nature of most banking legisla tion transcends political affiliations, both party and philosophical. Recall for a moment the votes over the past few years on some of these banking bills. During the 86th Congress laws were passed to revise Federal Reserve Board powers over member bank reserve requirements, to modernize the borrowing and lending powers of national banks, to vest final authority over insured bank mergers in the appropriate Federal bank supervisory agency, and to simplify the method of determining the assess ment paid by insured banks to the F.D.I.C. Most of this legislation was passed by both the Senate and House either by voice vote or under suspension of the rules. In other words, these banking issues were not measured by partisan political yardsticks. The cause of sound banking has been championed in Congress by Members from every bar of the political spectrum. Representative Brent Spence of Kentucky, former Representative Paul Brown of Georgia, - 4 - Representative Abraham Multer of New York, Senators Willis Robertson of Virginia and Prescott Bush of Connecticut - all of these able men have demonstrated effective leadership in behalf of sound banking legislation. The present Congress to date has taken little action on measures of interest to banking. President Kennedy assigned priority to 16 measures he said he hoped would be passed at the earliest opportunity. None of these is a banking measure, and only a few, such as aid for depressed areas, social security changes, and an increased minimum wage, affect banking substantially. This "must'* program has kept Congress occupied along with organizational matters, internal rules disputes, executive agency nominations, and the annual appropriations bills. The President's recent tax message, however, may provide the impetus for two proposals of great moment to banking - one favorable and one unfavorable. Taxation of Mutual Institutions We are most encouraged by the President's reference to the need for greater tax equity and removal of tax preferences now granted certain classes of taxpayers. This is an important step toward tax uniformity between financial institutions. From Section 5 of the message, entitled Cooperatives and Financial Institutions I quote the following paragraph: "Some of the most important types of private savings and lending institutions in the country are accorded tax deductible reserve provisions which substantially reduce or eliminate their Federal income tax liability. These provisions should be reviewed with the aim of assuring non-discriminatory treatment," 5 In a closing sentence to this section, which deals also with taxation of cooperatives and fire and casualty insurance companies, the President states: “Remedial legislation in these fields would enlarge the revenues and contribute to a fair and sound tax structure." Of course, we all know that the Ways and Means Committee has before it two identical bills which, if enacted, would not only provide increased Federal tax revenue but would also remove the present discrimi natory application of Federal income tax law among commercial banks, §avings and loan associations, and mutual savings banks. The bipartisan measures introduced by Representative Harrison, Democrat of Virginia, and Curtis, Republican of /Missouri, could provide the Treasury with about $350 million the first year after enactment, and also place these competing financial institutions on a more equal tax basis. The Harrison-Curtis proposal would simply repeal that provision in the Internal Revenue Code which establishes a reserve for bad debts for savings and loan associations and mutual savings banks. Such repeal would have the effect of making these institutions subject to the same statutory authority and regulatory procedures for the establishment of bad debt reserves that are now applicable to all other classes of taxpayers, in cluding commercial banks. I'm certain that your Association has kept you well informed on all the developments in this matter. Probably the most significant of these developments came last December when five commercial banker organizations agreed upon the principles of a tax equality program and began coordinating their efforts to secure the necessary legislation. - 6 - Since then The Independent Bankers Association, The Association of Reserve City Bankers, The Bankers Committee on Tax Equality, The Roth Committee, and The American Bankers Association have embarked on an intensive program which we hope will produce favorable results. I cannot emphasize too strongly that this is an endeavor which can be successful only through the operation of a united front such as we have been fortu nate enough to achieve. Members of Congress must be made aware of tax inequality as it now exists and the solution offered by the Harrison and Curtis bills. Once that is done I am sure that remedial legislation will follow. For we are dealing with rational men who will support what reason shows to be right and true, and we have both these qualities on our side. Withholding of Tax on Interest and Dividends The President’s tax message also includes a recommendation for withholding of taxes on interest and dividends. You are all familiar with the cooperative educational program which was undertaken in 1959 and 1960 by banks and other institutional payors of interest and dividends at the request of Treasury to inform individual taxpayers of their responsibility to report interest and divi dends on their tax returns. Treasury Department officials under the former Administration were opposed to withholding of taxes on interest and dividends because of the serious refund problem it would create. They were hopeful that through cooperative effort and by strengthening their enforcement pro cedures the gap in the unreported dividends and interest could be 7 substantially closed, and that withholding could be forestalled. The former Under Secretary of the Treasury reported as late as January of this year that the results of the 1959 effort to inform taxpayers of their responsibility were most encouraging. According to a sample survey by the Treasury of 1959 individual income tax returns, it was estimated that the unreported dividend gap had been closed by more than 50 per cent and the gap in unreported interest by slightly less than 50 per cent. Another reason that the former Treasury officials felt a. with holding system was unnecessary was their intention to convert the handling of all tax returns to automatic data processing. It was expected that such conversion would be started this year and be completed in all internal revenue districts within four or five years. The use of automatic data processing will greatly facilitate the matching of information returns with the regular income tax returns and thus enable the Treasury to easily determine which taxpayers are failing to report dividends or interest and to take appropriate action,, A series of meetings have been held with Stanley Surrey, Assistant Secretary of the Treasury, at his request. Mr. Surrey will have the responsibility in the Treasury for drafting legislation containing the Administration’s tax proposals, including withholding. These meetings have been attended by banking representatives who have expert knowledge of the operating problems that withholding would create in the savings departments, stock transfer departments and trust departments of banks. Every effort is being made to convince Mr. Surrey that it is virtually impossible to develop a workable withholding system which would not be unduly burdensome to banks and other interest and dividend payors - 8 - on the one hand or to widows, minors, charitable, educational and other tax exempt organizations, and foreign governments and nationals on the other hand. It was made clear to Mr* Surrey at these meetings that the A.B.A. was reserving its position on any withholding bill that might be introduced and intended to inform the Congress of the many problems and difficulties that would be created if a withholding system were to be imposed on interest and dividend income. Federal Mutual Savings Banks System Another proposal which concerns commercial bankers is the one to provide for a Federal System of Mutual Savings Banks, Bills to this effect have been introduced in this Congress by Representative Multer of New York, Rains of Alabama, and Addonizio of New Jersey, These banks would be privately managed, organized without capital stock, and insurance by the F.D.I.C. would be mandatory. They would be permitted to join the Federal Home Loan Bank System, though not required to do so, and would be supervised by a new three-member commission. The proposals authorize the voluntary conversion of Federal and State savings and loan associations and State-chartered mutual savings banks into Federal mutual savings banks, and the conversion of Federal mutual savings banks into similar thrift institutions. As you may know, The American Bankers Association went on record by resolution at its convention last September opposing in principle the establishment of a Federal Mutual Savings Banks System, 9 The Association took this position for the following reasons: 1. There are no satisfactory grounds upon which to base the need for additional savings facilities in those States that do not now have mutual savings banks. 2. In the past, the dual banking system has been extended only to institutions that had already been authorized in the several States. Forcing mutual savings banks upon States that had previously rejected or found no need for such facilities would seem to be a serious intrusion on States' rights. 3. Finally, the A.B.A. finds no grounds to substantiate the claim that the establishment of mutual savings banks would stimulate additional savings in the areas where they are to be located. The result probably would be to disperse existing savings rather than create new savings, Identical bills were introduced in the last Congress but, as the sponsors announced, they were advanced only for study purposes. Before the 87th Congress convened a number of Federal agencies had given their opinions on the measure. The Housing and Home Finance Agency endorsed the bill, expressing the belief that it would tend to enlarge the supply of mortgage funds and improve the flow of funds to FHA-insured and VA-guaranteed mortgages. The Board of Governors of the Federal Reserve System adopted a neutral position, questioning whether the giving of broad investment powers to Federal mutual savings banks was desirable. The Federal Home Loan Bank Board opposed the bill, fearing that the conferring of broad investment powers on Federal mutual savings banks might turn some of the funds now used for home financing into other channels 10 It is only fair to point out that these reports reflect the opinions of a previous Administration on a bill introduced in a prev ious Congress. However, unless there is a complete turnabout by the agencies who are doubtful of, or opposed to the idea, general accept ance of the proposal is unlikely. Douglas Finance Charge Disclosure Bill The last item I would like to discuss is the finance charge disclosure bill by Senator Douglas of Illinois. The Senator*s proposal would require all extenders of credit to furnish the recipient of credit a statement in writing disclosing the full dollar amount of the charges involved, and would also require that these charges be expressed in terms of simple annual interest. We under stand that some changes are contemplated in the new bill, but we do not know their extent. The basic objective of this bill is an admirable one - that is, the full disclosure of finance charges. We in the A.B.A, fully endorse this principle as do many others in the credit field. In fact, the Association 20 years ago promulgated an instalment credit creed which includes the recommendation "that banks should require that each customer be fully informed of all charges in connection with an instalment credit transaction." But our endorsement applies only to the requirement that fin ance charges be disclosed as dollar amounts. The expression of these amounts in terms of simple annual interest represents the most objectionable feature of the plan. 11 Even if such a requirement was necessary to enable people to compare the cost of credit, you can see the difficulties which would arise should the bill become law® First, it is virtually impossible to express certain finance charges in terms of simple annual interest® There is no set formula, or table whereby the neighborhood garage man, for example, can compute in terms of simple annual interest the cost of a battery over a 3-month period* And it is doubtful that any formulas or tables can be devised, since there are few constant factors involved in the great mass of credit transactions. Then there is the problem of coverage and administration of such a law. Should all commercial credit transactions be included, or should the law be limited to consumer and retail credit transactions as has been proposed by the Attorney General of New York State? Many States already have effective laws dealing with this sub ject® Would a Federal law supersede these, or would transactions covered by State laws be exempted from coverage? The A.B.A. feels that a disclos ure law, without a simple annual interest requirement, can best be admin istered and enforced entirely at the State level. Who would administer the law? At least two Federal agencies have expressed reluctance to act in this capacity. All things considered, the simple annual interest requirement would increase the expense of extending credit, both to the lender and to the customer, and would only serve to confuse the public. This completes my review of major banking legislation in the 87th Congress. 12 You can see that we have a few problems to be faced in the present Congress, but none that cannot be overcome by accepting the chal lenge with vigor and determination* As individual bankers, we have great responsibilities - within our banks, within our communities, and within the nation, But I believe our capacities are more than adequate to meet these responsibilities in whatever manner they are presented to us* Especially in the field of Federal legislation must we sustain the already manifest interest and active participation which are indis pensable to the achievement of sound banking laws. Our success depends largely upon the degree of understanding which bankers can establish with the legislators and with the public. Bankers must keep themselves informed about the issues and maintain a close relationship with their elected representatives. The same combination has proven that banking can play an effective role in the Federal legislative process, and is the key to the successes of the future
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