and for other purposes, approved May 12, 1933, as amended, be amended by insertion of an "(a)" after the section number and at the beginning of said action, and by addition of a new subsection as follows:

"(b) In addition to making loans as has been heretofore provided by law, the Land Bank Commissioner is authorized to make loans from the funds heretofore made available to him to individuals who own and reside upon acreage property and whose income or subsistence is derived from the use of such property as farm land and from other sources, and such property shall be appraised at its sound value, but such loans shall not exceed 75 per centum of such appraisal.”

Senator TOWNSEND. May I place in the record a letter from a constituent of mine in my State and ask that Mr. Fahey comment on it later and not at the present time because I do not want to interrupt

now.

Senator BULKLEY. Would it not be better to put it in the record at the time he comments on it?

Senator TowNSEND. Yes.

Mr. RUSSELL. Mr. Catlett is the man who will comment on it. Senator TOWNSEND. Then I will read the letter in the record and have Mr. Catlett comment on it. This is from Charles Warner, from Wilmington, Del.:

In addition to the importance of retaining the present membership on the district bank boards of the Federal home-loan bank system, I want to >endorse the proposal to amend H. R. 6021 or S. 1771 by an additional section aimed to reduce the time for terminating the insured status of any institution and its obligations under this status.

Old section 407 of the Housing Act of the Seventy-third Congress provides for excessively long periods for these obligations to continue should conditions develop justifying an institution in withdrawing from its insured status. An additional paragraph is proposed for the new act to bring this period down to 1 year, and in my estimation this will overcome one of the frequent objections heard to going into the insurance scheme. It is like the old church fair; harder to get out than to get in.

I therefore urge the following:

"SEC.. Amend section 407 of title IV of the National Housing Act by striking out the words 'three', in the last line of subsection (a); 'five', in the third from the last line of subsection (b); and 'five' in the phrase '5-year period', in the last line of subsection (b), and inserting in lieu thereof in each instance the word 'one.'"

I hope the above will have your active support in the committee.

This gentleman is very much interested in this legislation and I would like to have comments on it.

Mr. CATLETT. Dr. Hoagland is prepared to comment in particular on that suggested amendment, so that I will refrain from commenting

now.

STATEMENT OF FRED W. CATLETT, MEMBER OF THE FEDERAL HOME LOAN BANK BOARD

Mr. CATLETT. Section 21 of the House bill liberalizes the reserve provision in the present act. The present act permits us to allow the Association up to 10 years to accumulate a 5-percent reserve within itself. The associations have felt that they required more time to secure that accumulation of the reserve. The proposed amendment is to extend that period from 10 years to 20 years. There is not, so far as I know, any opposition to that suggestion.

The second part of section 21 removes the last part of the present section, which reads now as follows:

For the payment of any dividends if any losses are chargeable to such reserves.. The associations have felt that the present provision is entirely too restrictive. It would prevent them from continuing the payment of their regular dividends if they had suffered an unusual loss and had to charge any portion of it to the reserve in their association.

The Board agrees with the suggested liberalization and I know of no opposition to the suggested change.

Now, when you come to section 22, that is for the purpose of correcting an error in the existing legislation. The present act provides that if an association applies during the second year, or after the first year, it shall make equitable contribution in addition to the premium. The President, however, says that that is to be based upon the reserve fund of the applicant. Now, the intent was to have it based upon the reserve fund of the corporation, because the purpose of it is to equalize things, so the association coming in the second year will be upon an equal basis with those that have come in the first year and have already made contribution, which has been carried to the reserve. It is merely a corrective amendment.

Section 23 reduces the premium rate from the present premium rate of one-fourth of 1 percent to one-eighth of 1 percent, and also removes the additional assessment which we have authority to levy from one-fourth of 1 percent per annum to one-eighth of 1 percent per annum. We believe that the reduction is proper and it is safe to make it. We can carry on under the reduced rate. I think this reduction has the approval of everybody concerned and there is no opposition to it. It is a provision in the interest of protecting those associations that have already insured and have paid the premium on the present basis. They will be given credit for what has been paid so that they will suffer no injustice through the change.

Senator STEIWER. Mr. Catlett, may I go back to section 23 for a minute?

Mr. CATLETT. Yes.

Senator STEIWER. I noticed that at the top of page 14 there is a reference to a premium that would have been paid at the rateMr. CATLETT. Oh, yes.

Senator STEIWER. In this language, "what its premium would have been at the rate provided in this amendment." Now, that is in the nature of an amendment to the Housing Act, isn't it?

Senator TOWNSEND. Are you reading from the House bill?
Senator STFIWER. I am reading from the House bill; yes.

Mr. CATLETT. Yes; you are reading from that. That was put in to protect the associations that have already paid, and have paid us on the basis of one-fourth of 1 percent.

Senator STEIWER. I was wondering if you had given any consideration to the defining of that which you are trying to define by referring to the provision "in this amendment." Remember, that the amendment becomes a part of the act, and it occurs to me that you ought to give consideration to that, and I was wondering if there was any objection to that being defined in terms of dates? You could use the date of the approval of the act, if you wanted to.

Mr. CATLETT. No; there would be no objection. Mr. Russell prepared this suggested amendment.

Mr. RUSSELL. Senator

Senator STEIWER. Is there any particular reason for using this phrase, "at the rate provided in this amendment "?

Mr. RUSSELL. Mr. Wood and I have discussed that, and he has suggested that instead of the language used we use language which in effect would say that each insured institution which has paid an insurance premium at a higher rate than one-eighth of 1 percent ought to have the rate adjusted instead of, as this says, based on the rate "provided in this amendment." That is the effect of it.

Senator STEIWER. Probably, Mr. Chairman, I should not detain the committee, then, if these gentlemen have given consideration to that language.

Senator BULKLEY. Yes: I think that is sound.

Senator STEIWER. I didn't want to let this language pass unnoticed.

Mr. RUSSELL. Mr. Wood and I have discussed that and we will make the change.

Mr. CATLETT. Section 24 of the House bill is also a corrective amendment with reference to the proceeding in case of liquidation. The amendment, I may say briefly, is in accordance with the construction which we gave to the original act in our regulations. It was suggested by the United States Building and Loan League, but it meets our entire approval.

Then section 25 is a provision to give us a little more leeway in assisting an institution which is about to default or has defaulted, by making loans to or purchasing from it the assets of the institution or making some advances to it. In other words, the thought behind that provision is that occasion may easily arise where it may be better from the standpoint of the Insurance Corporation to give some assistance to an institution which was approaching default, apparent default, so as to prevent default, then it would be to let it go over the line and have to take it in liquidation. I believe there has been no opposition made to that suggestion.

Senator BULKLEY. There is a difference between the language of Senate 1771 and H. R. 6021?

Mr. CATLETT. Yes; in the text of the Senate bill the word "contribution" was used, and I think perhaps Mr. Russell, who suggested the use of the word "contribution " and the reasons behind it, would better explain it. You might do that briefly, Mr. Russell.

Mr. RUSSELL. The reason for that suggestion, Mr. Chairman, was that of course the Insurance Corporation recognizes that when it is compelled to take the institution in liquidation that even though its assets be taken over it is an expensive proposition, even though the assets be of substantial value. Therefore, if there is a defalcation in one of these institutions it reduces the surplus and reserves and impairs the capital. It may be in the amount of $25,000 in a $10,000,000 institution. That would be a great deal cheaper and better for the Insurance Corporation to make a $25,000 contribution and enable it to stay open and avoid a default than to have it taken over by a State department in default and the corporation be therefore compelled to take over the $10,000,000 worth of assets and pay

off the shareholders. So the language in the Senate bill was intended to give the Insurance Corporation power to make contribution. Senator BULKLEY. That would be wholly discretionary?

Mr. RUSSELL. That would be wholly discretionary, just to givethem the power.

66

Senator BULKLEY. And the Board recommends that that word contribution" be kept in there?

Mr. RUSSELL. That is the language the Board approved right in the beginning; and it was intended to be in there before, as the Insurance Corporation finds it to be better to make a contribution.. If I may explain it this much further, if the institution is impaired, you could bring it out of imparity by loaning it money better than by buying its assets.

Senator BULKLEY. I understand that. Do you think we ought to put in a limit as to the amount of contribution, perhaps state it in proportion to the size of the operation?

Mr. RUSSELL. It seems to me that the section would be, the provision would be very valuable even if that were limited to the amount of insurance premiums that particular institution had paid into the insurance fund, for instance, or some fixed amount. I am satisfied that it would not be used to any large extent. It would only be used when the institution is just on the edge and to prevent it from being taken over.

Senator MCADOO. I think it would be safer to give the Board discretion without the limitations. You might find it would be inoperative as to some institutions if there were a limitation. The Board should have the discretionary power to deal with it..

Senator STEIWER. Is there any requirement for security for the loan?

Mr. RUSSELL. As it is written, it leaves it entirely open for the Corporation to exercise its discretion in those cases.

Senator STEIWER. There is no requirement here for security?
Mr. RUSSELL. No; not for any specific security; no, sir.

Senator STEIWER. I don't know that it would be necessary that there should be any requirement. What has been the thought in the development of the idea, that the Corporation would take security for its loans?

Mr. RUSSELL. Yes, sir.

Senator STEIWER. Or that the institution would be able to provide security? Has that been considered?

Mr. RUSSELL. Undoubtedly that type of an institution is able in many cases to give security. They have almost an unlimited amount of mortgages on hand which they can pledge for any amount of money they may borrow. Ordinarily they owe very little and they can ordinarily give security, and I think without any question, if it were a loan on an advance, that it would be a secured loan or advance. I don't think there would be any opposition to putting in the section the provision that the loan or advance may be made on adequate security, if you prefer that. But the one question as to whether the Insurance Corporation is to be permitted to make a contribution is a question which seems to be of some importance to a mutual institution of this type if it has become slightly impaired. You can't take away the imparity by lending it money or making an advance. The only way

you can take away that imparity would be by a contribution, and the contribution might be a great deal cheaper for the Corporation than to take the individual mortgage note of the institution, or other security.

Mr. CATLETT. I think, perhaps, it ought to be stated that the Insurance Corporation steps into the picture as soon as any supervisor or any court takes over an institution. Now, of course, they can take it over in practically all of the States if the capital is impaired. It might be impaired very slightly, and making a loan to that institution wouldn't save that, because you would be putting the obligation on the other side of its ledger, whereas a small contribution might bring the thing to parity and avoid the taking over of the institution and the liquidation by a court or through the Insurance Corporation.

Senator STEIWER. Does the Board believe it would be practicable to purchase assets of defaulting institutions?

Mr. CATLETT. They do at times, because they might have perfectly good assets, but what they might need was money and we might be able by purchasing the good assets to save the situation.

Senator STEIWER. Does the Board administer the assets?

Mr. CATLETT. Yes; I think the Insurance Corporation would have to be prepared to administer assets, and we doubtless will have to in time.

Mr. RUSSELL. Just exactly as the F. D. I. C. has to administer assets. We are in exactly the same spot when we have default. We don't think we are going to have many defaults, but when we do have one we will be in the same spot as they are, exactly.

Mr. CATLETT. Now, there is one question I want to direct your attention to. It is behind the section Mr. Fahey mentioned. It is section 20 in the House bill and section 14 in the Senate bill. That section is much more important to our operation than it might seem at first sight. The present legislation did not contain express authority to use United States mails. However, that authority was found in other United States statutes. We desire that placed in the bill. That appears in both bills. However, that is not the point I am just about to make, but Mr. Russell and the Board are concerned about the situation, so that when we are compelled to administer these institutions and liquidate them at a distance, we can actually do so without being so hampered by the regulations here in Washington, as we are now. As those of you who are lawyers recognize the fact that when we have to handle these liquidations in times of emergency in the different States, we are going to be decidedly hampered if we have to comply with all the regulations thrown around the operation here in Washington. And that is the reason behind this suggestion which appears in the Senate bill. We much prefer the provision as it is in the Senate bill to the provision as it now appears in the House bill. Mr. Russell, I think, might want to supplement my statement.

Senator BULKLEY. The House struck out this language?

Mr. CATLETT. Yes; the House struck out the language in that amendment which is most important from the standpoint of our operation.

Senator MCADOO. How do you get around the restrictions and limitations and the red tape you have in mind?