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invested therein by the Treasury be evidenced by an appropriate receipt therefor to be furnished to the Treasury. The amount of this receipt would be increased or decreased to reflect changes in the Government's investment in the enterprise. We are not proposing, at this time, that such a receipt form be used for RFC, pending possible cancellation of a portion (approximately 9 billion 300 million dollars) of its borrowings from the Treasury. Proposed cancellation of RFC notes payable to the reasury to this extent, representing the aggregate (to June 30, 1947) of net expenditures by RFC for national defense, war, and related purposes, is presently under consideration by a committee of the House of Representatives.
SECTION 3 (A) Section 3 (a) sets forth certain powers of RFC and its Board of Directors. The suggested language relating to determination by RFC, through its Board of Directors, of its necessary expenditures and the manner in which they shall be incurred, allowed, and paid, without regard to the provisions of any laws governingg the expenditure of public funds not specifically applicable to the Corporation or to Government corporations, is consistent with language we proposed last year in connection with Public Law 132 and is somewhat similar to that suggested for charters of certain other Government corporations.
The additional suggested language in this section would require the Corporation to reimburse the civil service retirement and disability fund for the Government's share of the cost of the retirement system applicable to the Corporation's employees and their beneficiaries, and the employees' compensation fund for the benefit payments made on account of the Corporation's employees.
The Corporation's employees are entitled to civil service retirement benefits. The required employees' contributions have been deducted from their pay and contributed to the civil service retirement and disability fund. However, the Corporation has not been charged with any portion of the Government's share of the cost of the system. It is believed that the Corporation should be required to contribute to the retirement fund in order that such cost to the Government of conducting the Corporation's activities be included in the Corporation's accounts.
The suggested language with respect to these contributions, or payments, in the case of the retirement fund and the employees' compensation fund, is provisional and will be submitted shortly to the agencies concerned for their comments.
Language is also suggested in section 3 (a) prohibiting the use of the Corporation's funds to carry on transactions or activities for any other agency of the Government unless such agency has authority in law and appropriations available to make reimbursement for such transactions or activities. This restriction was contained in the Government Corporation Appropriation Acts for 1947 and 1948. Inclusion of this restriction in the RFC Act would obviate the necessity of its being restated from year to year in the annual appropriation acts. Similar language has been proposed in the charters of other Government corporations.
PUBLIC LAW 132, EIGHTIETH CONGRESS, FIRST SESSION, SECTION 7
The new language in this section is suggested to conform with the language proposed for subsection (d) of section 1, as amended by S. 2287, relating to in. terest rate determinations. The new language also conforms with language proposed in charters for other Government corporations. Further comments on the borrowing authority provided by section 7 follow.
BYPASSING OF ORDINARY CONGRESSIONAL APPROPRIATION PROCEDURES
The General Accounting Office has informed the Congress of practices, involving corporations, which they believe constitute a circumvention of the ordinary congressional appropriation procedures.
In this connection reference is made to certain parts of a statement by Mr. Theodore Herz, then an Assistant Director of Corporation Audits in the Office, presented on December 3, 1947, during the hearings before the Procurement and Buildings Subcommittee of the Committee on Expenditures in the Executive Departments, House of Represenattives, reported in part 5 of the print covering those hearings.
"USE OF RFC TO AVOID THE NEED FOR MAKING APPROPRIATIONS OF PUBLIC MONEY
“Reconstruction Finance Corporation has been described from time to time as the back door to the Treasury of the United States. This means that access to public funds could be had through Reconstruction Finance Corporation in a way which avoided the ordinary Government processes for controlling the expenditures of cash resources.
One of the most important uses which has been made of Reconstruction Finance Corporation has been its use in transactions which avoided the Appropriations Committes of the Congress and the ordinary congressional procedures by which expenditures of public funds are reviewed, debated, modified, and approved, or disapproved, in advance.
"For the most part, the funds available to Reconstruction Finance Corporation during the course of its existence to this point were obtained by it through borrowings from the Treasury on the strength of obligations to repay; at the present time all of its resources are obtained in this way. The use of the Cor. poration as a so-called back door to the Treasury has been accomplished simply by permitting it to ignore the financial obligations arising from the borrowings.
“It already owes the Treasury of the United States about $9,000,000,000 which it is not able to repay. If Reconstruction Finance Corporation
borrows from the Treasury
it will never be able to repay the Treasury unless, through an appropriation, it receives another equal amount from the Treasury with which to make the repayment
the use of Reconstruction Finance Corporation for this and similar purposes perverts the character of that enterprise, and exposes the Government to unwarranted risks of financial loss through improperly divided management responsibilities.
“Reconstruction Finance Corporation has been used in this way before. In each case its use was duly authorized by the Congress and in each case the activities financed with its borrowed funds were necessary activities undertaken in response to an emergency
“Let us face facts. The Congress took the responsibility for the adoption of these extraordinary financial procedures. The Congress authorized the Corporation to engage in the activities which called for the expenditure of these public funds and, through its committees, it received reports from time to time of the progress of the activities; it was therefore advised that the activities were proceeding, from which it would normally follow that the funds were being expended despite the absence of appropriations.
At any rate, appropriations were not requested, nor were they made. Reconstruction Finance Corporation, in fact, functioned as the back door to the Treasury."
Unless authorized borrowings are made against funds appropriated in advance to the Treasury for a particular purpose, the Appropriations Committees of the Congress are bypassed, and the customary procedures of advance authorizations for the expenditures of funds from the Treasury are avoided. This leads to a situation in which the Congress finds itself unable to approve or place specific limitations in advance on programs or activities contemplated by them.
Under such a situation the Congress, at some later date, would have to authorize or appropriate funds, to the extent of such utilization of borrowings, long after the Treasury funds have been expended, and thus circumvent normal congressional appropriation procedures adopted to implement the basic concept expressed in the Constitution, which provides in article I, section 9: “No money shall be drawn from the Treasury, but in consequence of appropriations made by law
It is further provided by law that “No act of Congress passed after June 30, 1906, shall be construed to make an appropriation out of the Treasury of the United States,
unless such act shall in specific terms declare an appropriation to be made
(34 Stat. 764, 31, U. S. C. 627).
While the Congress has the power to cancel all or any part of the obligations representing borrowings utilized in lieu of appropriations, it is suggested that such action would of necessity occur after the Government's fund had been expended or obligated. It is believed, since consideration of such expenditures must be undertaken by the Congress at some point of time, that the Congress is in a much more desirable position to give its approval in advance, through the regular appropriation procedures. Such practice, coupled with the budget approvals, and later supplemented by the audit under the Government Corpora
tion Control Act afford positive control of, and accounting for, the operations and activities of the corporations.
It is emphasized that the device referred to is wholly legal since its authority stems from provisions in the basic legislation for certain corporations providing three things: (1) For the corporation to borrow from the Treasury, (2) for the Treasury to lend to the corporation, and (3).for the Treasury to use, for such purpose, the proceeds of public debt receipts from the sale of bonds. The result is that the public money is paid out without the authority or the benefit of an appropriation act. That there is need for the over-all budget control which only the appropriation act procedure provides is believed to be manifest; that control is not provided when certain large-spending agencies are exempted from it. Nor can it be said that the budgetary controls under the Government Corporation Control Act, in view of the limitations of that statute, can provide an adequate substitute.
If the committee should be of the view that the regular appropriation procedures should be used to supply further needs of the Corporation for United States Treasury funds, this could be accomplished by amending the last sentence of section 7 of Public Law 132 to read as follows:
“The Secretary of the reasury is authorized to purchase any ligations of the Corporation to be issued hereunder, to the extent of appropriations made for such purposes, and such appropriations are hereby authorized.”
Certain other technical changes in the act might be necessary if this proposal were adopted. The General Accounting Office will be glad to develop such changes upon request by the committee.
The CHAIRMAN. Are there further questions? (No response.)
The CHAIRMAN. We are very grateful to you for coming down to make this presentation. The entire matter will be before the committee, and if you care to make any supplemental statement for the record, we will be very happy to have you do so, in this as well as in all other respects.
I think the committee might consider the bill in executive session Monday, and your recommendations will be before the committee at that time.
Your presentation has been very helpful to us. Mr. WEITZEL. We appreciate the opportunity of being here, Mr. Chairman, and will be glad to help the committee in any way possible.
The CHAIRMAN. Thank you very much.
The committee will stand adjourned, to meet again Monday at 10 a. m., when we hope to conclude the public hearings and go into executive session,
(Whereupon, at 12:30 p. m., the committee recessed, to reconvene on Monday, April 26, 1948, at 10 a. m.)
RECONSTRUCTION FINANCE CORPORATION
MONDAY, APRIL 26, 1948
HOUSE OF REPRESENTATIVES,
Washington, D. C. The committee reconvened, pursuant to adjournment, at 10 a. m., Hon. Jesse P. Wolcott (chairman) presiding.
Present: Messrs. Wolcott, Kunkel, Talle, McMillen, Kilburn, Buffett, Cole, Banta, Nicholson, Spence, Brown, Patman, Folger, Riley, and Buchanan.
The CHAIRMAN. The committee will come to order.
We will continue the hearings on S. 2287, H. R. 5637, and H. R. 5129.
We have with us this morning Mr. Thomas Coogan, of Miami, Fla., chairman of the mortgage finance committee of the National Association of Home Builders.
We are very glad to have you here, Mr. Coogan.
Mr. Coogan. I want to thank the committee for allowing me to appear before you in support of the retention of the Federal National Mortgage Association. STATEMENT OF THOMAS COOGAN, SECRETARY, NATIONAL ASSO
CIATION OF HOME BUILDERS; CHAIRMAN, MORTGAGE FINANCE COMMITTEE, NATIONAL ASSOCIATION OF HOME BUILDERS
Mr. Coogan. My name is Thomas Coogan. I am an active builder of homes in Miami, Fla., and secretary of the National Association of Home Builders. I am also chairman of the mortgage finance committee of that association. The membership of our association consists of over 13,000 members operating in all large cities, as well as in all urban areas of the United States. We estimate that these men build approximately 80 percent of the homes constructed in those areas. We have 110 affiliated local builders' associations in the larger cities of the country.
Home builders are greatly concerned over the provision of Senate bill 2287, section 5, pages 12 and 13, which would dissolve the Federal National Mortgage Association, commonly known as "Fannie May. This agency has provided a much needed secondary mortgage market for Federal Housing Administration housing loans. It is at present providing the only outlet for 603 and 608 mortgages in many areas. It is only because of the Federal National Mortgage Association and its ability to issue a commitment to purchase Federal Housing Administration insured mortgages that the present level of construction is being maintained. During the present uncertain mortgage market
this agency is again filling the breach and providing an assured market that prevents any slowing down of the housing program.
The dissolution of Federal National Mortgage Association and the creation of a new secondary market, no matter how flexible, will result in a drastic reduction of our housing production volume. The setting up of a new agency always takes an appreciable length of time. The formulation of regulations and operating procedures will cause more delay and it will then be some time before banks and mortgagees are able to operate satisfactorily and with confidence under the new agency.
In Federal National Mortgage Association, we are in possession of a going agency of proven worth. Its operations and regulations are well known by the banks, mortgagees, and builders. It has branches throughout the country staffed with experienced personnel. There is no better way of supporting the secondary mortgage market for Federal Housing Administration loans and maintaining the present high production of housing than by giving this agency a secure future for a reasonable term of years and expanding it to include Veterans' Administration loans.
As Mr. Lockwood and I pointed out in our testimony before this committee on behalf of the association on March 16, in connection with the extension of title VI of the National Housing Act, we are experiencing extreme difficulty in most sections of the country in securing an adequate supply of mortgage money, as well as necessary interim construction financing. The present large volume of construction has produced more mortgages than the investment market can absorb in an orderly manner.
The influence of the existence of this secondary mortgage market has had a greater effect than the amount of mortgages actually sold to Federal National Mortgage Association would indicate. The availability of the secondary mortgage market has been a great help to builders in construction financing. Without this assured market most of our present starts would have been impossible.
In essence, therefore, we respectfully urge that this committee preserve the functions of the Federal National Mortgage Association. We are firmly convinced that the abolition of the Federal National Mortgage Association at this time would be a most serious mistake.
The CHAIRMAN. Mr. Coogan, do you prefer to have the secondary market in the Reconstruction Finance Corporation rather than in the public loan financing agencies?
Mr. COOGAN. We would much prefer it. The housing and home finance agency would have to set up a new organization. There would be an interval during which we would be unable to have a secure market. At the present time, during this uncertainty in the mortgage market, the fact that “Fannie May” is there, ready, willing, and able ,
. to buy the mortgages, is the one thing which makes it possible for the commercial banks to advance construction financing.
The banks are not able to take the ultimate mortgage. They have to be sure that there is an ultimate place where that mortgage can be sold. At the present time the insurance companies and the investment institutions do not issue firm commitments, before the construction is started, to buy the mortgage.
The Federal National Mortgage Association is still issuing those commitments. With that commitment in hand, our commercial banks