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6. The whole proposal is bad psychology at this time. The member institutions are concerned and, without exception, to our knowledge, are opposed to a change. No demonstrated beneficial end or objective will be served at this time, while discouraging results, from the point of view of the banks, might

ensue.

7. The savings banks have not and will not join the Federal home-loan-bank system in consequential numbers. In the first place, there are only about 600 in the entire United States, as against 11,000 building and loan associations. Approximately 90 percent of their assets are in New York State, New Jersey, and New England, and approximately 75 percent of these assets are in the States of New York and Massachusetts, and in each of these States the savings banks have their own central or rediscount bank. As a matter of fact, to most of the originally appointed directors have been reelected and had the savings bank representatives on the original boards, particularly in the New England district, joined the system, they would probably have been reelected. REBUTTAL TO FEDERAL BOARD'S OPPOSITION TO SHARE PURCHASE IN STATE-CHARTERED INSTITUTIONS

1. Purpose of share purchase is to put substantial number of institutions in funds for immediate mortgage lending, in order to replace H. O. L. C. activities and finance the building, buying, and owning of homes. If share purchase is confined to Federally chartered institutions, it means that hundreds of Statechartered institutions will be forced or induced to convert into Federal institutions in order to have available public funds in the form of share purchase. The establishment of Federals and conversion of State-chartered institutions should turn on the merits and usefulness of the respective plans of operation and not upon the exclusive use of public moneys for Federal associations. State supervisory authorities and many others of us who have studied this whole situation strongly feel that this discrimination should not be created and institutions pressured into conversion. It is surprising to find a board, created by the Federal Home Loan Bank Act, to supervise a system which was to be based entirely on State-chartered institutions, as no others existed at the time of enactment, asking that Federal funds for the purpose of making mortgage loans, should be made available exclusively through Federal associations. 2. The amount provided in the bill is $250,000,000. The mortgage market will respond if this entire amount can be pushed out through private institutions in the next 6 to 12 months. This can only be accomplished through using sound, solvent, and well-managed State-chartered institutions, as well as Federals. There are thousands of them who have decades of mortgage lending experience behind them. Incidentally, the assets of the Federals are a little over $200,000,000, thus today they do 3 percent of the mortgage-loan business of the country, while State-chartered institutions have 97 percent of the business.

3. All admissions to the Federal home-loan-bank system are after investigation, query, examination of reports and, in many cases, actual examination. We have no objection to share purchase being confined to members of the Federal home-loan-bank system and to nonmembers who are insured. It should be noted that the housing legislation requires every Federal savings and loan association to take insurance. It is optional with State-chartered institutions. To date only 17 State-chartered institutions have insurance, while some 500 or 600 Federals are insured. We note, on page 257 of the House hearings, that Mr. Fahey indicates that the board will not be opposed to share purchase in State-chartered institutions, but urges insurance and bank membership as prerequisite.

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4. The statement of the Federal board that the "language of the statute would require investment in State-chartered institutions is erroneous. Full discretion remains with the board as to individual institutions. Of course, they would have to act within the policies established by Congress and act impartially as between State and federally chartered institutions. The vast majority of State-chartered institutions are entirely sound and in good condition, although there are, of course, discouraging conditions in those areas where industrial depression has not lifted and where there have been devastating bank failures.

5. Associations should not be required to give up their State charters and place their institutions in a form of organization which is determined, controlled, and changed from time to time by a Washington bureau, as contrasted to known statutes, under which they now operate. Obviously, the receipt of

funds on a share-purchase basis is a much more favorable arrangement than through borrowing and pledging collateral, and institutions will not hesitate to use such funds to expand their mortgage-lending activities.

6. Precedents for extending the privileges to State-chartered institutions have been established in connection with the purchase of preferred stock by the R. F. C. in banks. National banks, State banks and even mutual savings banks, are treated substantially alike. Incidentally, Government funds invested in a mutual building and loan association are probably safer, because the Government then has a participation on a pro rata basis, according to its interest, in all the assets of the institution, while in purchasing bank stock, its claim interest is subsequent to all the claims of depositors.

REBUTTAL RE SUGGESTION ON $200,000 (SEC. 17 OF H. R. 6021)

The House committee, in adding the last sentence of this section, was merely attempting to restate the policy of Congress set forth in section 6 of the Home Owners' Loan Act of 1933. To date, these funds have been used exclusively to promote and organize Federal savings and loan associations, or to convert State chartered institutions into Federals. The original intention of Congress was much broader and we believe that the Board should administer this additional money in a broader program. There are thousands of situations where the public interest can be served more fully and more immediately by assisting an existing institution in readjustments and in resuming normal operations than by putting the same amount of effort into starting a new Federal association, which will take years to become substantial in size and in volume of mortgage loans.

REBUTTAL RE ONE YEAR WITHDRAWAL PRIVILEGES

Senator Townsend inquired about an amendment changing the withdrawal penalty payments to 1 year. We presented a similar amendment in our original testimony and Senator Norbeck has introduced it and it is before the committee as a printed amendment.

We cannot see why the penalty payment should be more than 1 year. After all, if a $10,000,000 institution pays an annual insurance premium each year of one-eighth of 1 percent (one-twelfth of 1 percent is proposed in the new banking act for banking institutions), at the end of 10 years they will have paid into the Insurance Corporation $125,000. Probably 10 percent of this will have been used by the corporation for expenses. It seems to me that the corporation has been helped, rather than harmed, if this institution desires to forego this insurance protection and thereby forfeit all the premiums which it has paid to the common fund. This is a simple insurance principle and parallels life and fire insurance in theory.

The 1-year withdrawal penalty would prevent any captious withdrawals and would permit the board to levy a one-eighth of 1 percent assessment, in case some shocking situation arose that urged wholesale withdrawal from the insurance corporation. I do not think that managers or directors or investors will withdraw in the face of disturbing failures or business conditions. They may wish to withdraw if the rules, regulations, and policies of the Federal board make insurance tantamount to Federalization or complete Federal control.

Mr. Wood has called my attention to the fact that the Townsend-Norbeck amendment needs minor perfecting in order to carry out our proposal.

COMMENT ON ROBINSON AMENDMENT RE FIFTY-MILE LIMIT

The amendment introduced by Senator Robinson permitting a State-chartered institution which converts into a Federal to continue to lend its funds over the territory in which it loaned while a State-chartered institution is of considerable interest to associations in some parts of the country. It will not affect a large number of associations, but there are institutions that will want to convert who have demonstrated their capacity to lend over a little broader area than the present statute permits and it would seem that they should be permitted to continue to do business as in the past. This amendment merely puts into the Federal savings and loan statute the same principle which was written into the

insurance of savings and loan share title of the Housing Act regarding institu-. tions now lending over wider area.

Our leaders see no objection to this amendment, and we would be very pleased to have it included in the reported bill.

CONCLUDING COMMENT

If you desire, there is no objection to making this memorandum a part of the. record. I am attaching also a communication from our president, Mr. Friedlander, to Mr. Fahey, copies to each member of the board, which might be useful for the record. It brings out some additional points in the three major controversial items.

We have cooperated with and helped the Federal savings and loan program in every way. We merely want the administration in this new legislation to carry on that program, but also assist as generously and helpfully the thousands of State-chartered institutions. Respectfully submitted.

MORTON BODFISH,

Executive Vice President United States Building and Loan League.

WASHINGTON, D. C., March 22, 1935.

Hon. JOHN H. FAHEY,

Federal Home Loan Bank Board, Washington, D. C.

DEAR MR. FAHEY: I regret that I am obliged to leave the city prior to the completion of your testimony before the Senate Banking and Currency Committee on matters of common interest.

There seem to be three items in the legislative program about which there is a difference of opinion. I am writing you in the hope that these differences between the Board and the organized building and loan industry can be. eliminated.

The matter of share purchase in State-chartered institutions is of great importance in the transition period from the situation where the H. O. L. C. lending has dominated the mortgage market to the time when private capital again will be the dominant factor. The Home Loan Bank Board was created as a supervisory authority for the Federal home-loan-bank system, which, in its original intent and statute, was built exclusively by State-chartered institutions and which is still dominantly supported by State-chartered institutions. I strongly feel that your Board should seek the same privileges for State-chartered institutions, which have been admitted to that system, that are proposed for Federals in connection with share purchase. In the banking legislation, and in the R. F. C. activity, precedents have been established for similar treatment of all institutions, regardless of charter authority. Of course, as in the banking field, the discretion and decision in individual institutions must rest with the Federal Board, there being no compulsion to invest in any individual institutions any more than the Board and the Secretary of the Treasury are obligated to make share purchases in Federals.

Although I was not present at the House hearings, I have studied them closely and was very encouraged at your clear-cut statement that "there is no prejudice whatever against State associations", and the further position that, with adequate safeguards, your Board would not object to share purchase in Statechartered institutions. On pages 256-257 you stated that you felt that insurance and bank membership should be required in case of share purchase. It occurs to me that insurance might be a proper requirement with regard to institutions unaffiliated with the home-loan-bank system. A general requirement of insurance would probably defeat the usefulness of share-purchase legislation, there being only 17 State-chartered insured institutions at the present time. Membership in the bank system should be sufficient when one considers the data and supervisory powers which membership places in the banks and the Board.

I sincerely feel that it is extremely important that you and your Board avoid the position that you are willing to favor federally chartered institutions as regards share purchase to the exclusion of all State-chartered institutions. The thought has been expressed that, as your Board is confining new Federal char

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ters to communities not adequately served at this time, an exclusively Federal share-purchase policy would either deprive communities with existing institutions of share-purchase money, or force conversion of State-chartered institutions in order to obtain funds on this basis. I am sure that we should avoid giving any validity to the possible charge that the Board was using sharepurchase funds as a major inducement to conversion.

The second item of importance is the number and selection of home-loanbank directors. Frankly, I think, aside from the psychological reaction and the unfriendly feeling that would develop among our institutions if such a program were carried out, that we would lose something that is very practical and important in building up and maintaining the bank system. The directors are leaders in this thrift and home-financing business and their efforts and participation have been a major factor in developing the membership of the system and will be a major factor in credit expansion in the banks the minute H. O. L. C. operations cease flushing cash into the associations. Your remark in this connection in the course of the discussion following your address at our Southeastern Group Conference, in response to Mr. Hazen's question, was very encouraging to a number of us. You recall that you indicated, after stating the judgment of the Board, that it was not a matter of major import, and I urge that the Board acquiesce in the decision of the House of Representatives in this connection. A storm of opposition will arise if 36 directors, representing member institutions and elected by the entire membership, are summarily eliminated upon the recommendation of the Federal Board. I do not believe that such an action would accomplish any substantial good and it might further be noted that there is considerable question as to the interest and contribution of some of the so-called " public-interest" directors.

The third item on which there is difference of opinion is that of the Federal Savings and Loan Advisory Council. I certainly see no objection to the Board continuing its present advisory council and it is natural that it should have close relationships with its appointed board chairmen. Our conception of an advisory council, however, is one not necessarily composed exclusively of building and loan men, but one which is selected by the member institutions and charged with the duty of constructively and courageously presenting their point of view. The duties of the Board being both administrative and legislative, it would seem to me especially desirable that the point of view of the membership be formulated and presented to the Board through a body created by statute and selected by the membership or their representatives.

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The question of additional cost has been raised, but, as no more meetings are required under the proposed amendments than have been provided in the bylaws of the present council, the matter of cost, which is borne in either case exclusively by the banks, cannot be a factor in the matter. As a matter of fact, our statutory proposal requires the members to serve without compensation", other than traveling expenses, whereas, the present advisory council, created and chosen by your Board, receives, in addition to traveling expenses, $20, plus $5, per day, not only for the meeting time, but for time spent en route to and from meetings.

Our executive committee has taken a definite stand upon these three matters, which we consider of major importance. Personally and speaking as the president of the United States Building and Loan League, I hope that you and your associates will accept these suggestions. We must, however, take a determined stand in the advocacy of these important matters in the legislation before the committee and in the Senate consideration of the reported bill.

As stated, I regret exceedingly that the hearings have been prolonged throughout the week, necessitating my leaving before you have completed your testimony.

With best wishes, I am,

Sincerely yours,

I. FRIEDLANDER, President.

FURTHER STATEMENT OF JOHN H. FAHEY, CHAIRMAN FEDERAL HOME LOAN BANK BOARD

Mr. FAHEY. Mr. Chairman, I think there is very little that needs to be added in comment on the suggestions of Mr. Bodfish. One suggestion which he offered this forenoon, however, we think indicates undue

apprehension as to the effect of the Federals. We certainly do not think that the limited development of Federals which is possible under the assistance provided in this act can be regarded as a threat to the entire State situation. If all of the $250,000,000 provided for in this act were made available for Federals-as it is not-it would represent but a very small part of the entire situation. Through the bank system alone such associations have available to utilize a sum very much greater than $250,000,000, and at no greater cost, presumably, than the payment of dividends if shares were taken. The other side of it is that there are many sections of the country in which Federal facilities are needed, where there are no facilities at all today, practically. We feel that it is very important to give attention to the necessity of that development.

It is agreed that Federals are not needed where the community is adequately served.

Senator BULKLEY. In fact, you cannot under the law set them up. Mr. BODFISH. It is entirely discretionary with the Board here. Senator BULKLEY. It is not an absolute discretion. It is a discretion based upon a test that is specified in the act.

Mr. FAHEY. Certainly. And if the community is adequately served, that assumes that the associations are in a position to serve them and have the funds or the ability to get the funds to serve them. Consequently they would not need more funds if they are in a position to adequately serve, beyond those that are already at their command.

It is agreed by Mr. Bodfish that there are several thousand associations that are not now meeting adequately the needs of their communities, but our opinion is that if they took full advantage of the opportunities presented to them that difficuly would be overcome.

For example, in the matter of insurance alone there can be no doubt of the public confidence established and the consequent reaction in the flow of public funds made available. That of itself is indicated by the survey which was made on the part of the United States Building and Loan League by the J. Walter Thompson Advertising Agency, and covered in a report some months since. That report brought out the fact that of some 2,000 individuals whom they contacted and from whom they obtained opinions, 89.9 percent of them indicated that what they most desired was the guarantee represented by Federal insurance.

The other conclusions, which were summarized in that survey, as bearing upon this particular question were:

(1) That the majority of the public is not building and loan minded.

(2) That building and loan compares unfavorably, in the minds of most people, with other types of investments.

(3) That the public regards safety of principal, including Federal guarantee and liquidity, as the prime requisites of its investments. (4) That building and loan is better known, and more favorably regarded, as a lending than as an investment institution.

As I stated this morning, our view is that the three ways in which to develop greater public confidence are, first, in obtaining insurance; second, in having membership in the bank system, so that there is recourse, not only in time of trouble, but ability to tap funds for the need of the community at reasonable rates; and, third, that another most important factor in restoring and maintaining public

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