Total expense for compensation during the calendar year 1938 amounted to $8,852,000, or an average of $6,533 per reporting association, and absorbed 13.3 percent of gross operating income. Expenditure for business promotion totaled $2,086,000, or an average of approximately $1,540 per reporting association, and equalled 3.13 percent of gross operating income. Special studies made during the fiscal year 1939 indicate that savings and loan associations are using the various media of advertising to an increasing extent, and that Federal savings and loan associations play a leading part in this development.2 The Federal Home Loan Bank Board, through the twelve Federal Home Loan Banks, exercises supervision over the accuracy and fairness of the advertising of Federal savings and loan associations as well as of State-chartered associations insured by the Federal Savings and Loan Insurance Corporation. Efforts have been made. to assist insured associations in the development of proper and effective methods of business promotion. As operating ratios vary considerably according to the size of institution, an analysis of such ratios, grouped as to size of association, is presented in Exhibit 40. On the basis of this analysis, local managements are able to compare the operations of an individual association with those of a representative number of associations in the same size group. The data may also serve as a yardstick for operating budgets. In the last few years, Federal savings and loan associations have made more intensive use of budgets as an instrument of business management and control. Through such budgets, associations are able to set definite goals to be attained in a given year, and to check the results of their operations in a more effective manner. Main factors in savings and loan budgets are the income obtained from mortgage loans and other sources, operating expenses-particularly compensation and advertising, an adequate dividend to attract capital, and the attainment of a strong reserve position. 3 As was pointed out in another section of this report, decreased earnings resulting from the competition in the mortgage market, and the decline of interest rates on home mortgages have caused savings and loan associations in some sections of the country to reduce their dividend rates-in line with the general reduction of investment yields and of the interest paid on savings by other financial institutions. Exhibit 41 shows the average annual dividend rates paid by Federal For a detailed survey of business promotion expenditure of savings and loan associations, see Federal Home Loan Bank Review, May, June, and July, 1939. Survey of Housing and Mortgage Finance, pp. 43 to 44. savings and loan associations, by Federal Home Loan Bank Districts and by States, for the calendar years 1937 and 1938. Of the 46 States for which comparable data are available, 23 showed decreases in the average dividend rates paid by Federal savings and loan associations, and of the 12 Federal Home Loan Bank Districts, 9 reflected reductions of such rates. The greatest decline was in the Boston District where average dividend rates fell from 3.53 to 3.29 percent. Combined balance sheet items of Federal savings and loan associations as of December 31, 1937, and December 31, 1938, are presented in Exhibits 30 and 31. Principal changes during the year were a decrease of real estate owned from 8.41 to 7.46 percent of total assets, an increase of first mortgage loans from 79.39 to 79.80 percent of aggregate assets, and improved liquidity in the form of larger cash holdings. The substantial flow of private money into Federal savings and loan associations is reflected in an increased ratio of private repurchasable capital to total resources; at the close of 1937, this ratio was 61.27 percent and a year later, 65.88 percent. Conversely, the ratio of Government investments to total resources declined from 19.65 to 16.58 percent. PROPOSED FEDERAL LEGISLATION As was mentioned in the preceding section dealing with the Federal Home Loan Bank System, the Bank Board has supported legislative proposals embodying a number of amendments to the laws governing the operations of its agencies. Among these amendments introduced in the Seventy-sixth Congress, the following main provisions refer to the operations of Federal savings and loan associations: 1. Extension of lending and investment powers.-Under the existing statute, mortgage loans made by Federal savings and loan associations are restricted to first liens of not more than $20,000 on one- to fourfamily homes or combination home and business properties, located within 50 miles of their home office. However, up to 15 percent of the total assets of a Federal savings and loan association may be loaned on first liens on "other improved real estate" without regard to the $20,000 and 50-mile limitations. The proposed legislation provides that the Federal Home Loan Bank Board shall be authorized to permit individual Federal savings and loan associations, because of their size or location, to lend within the 50-mile limit but without regard to the $20,000 limitation an additional 15 percent of their total assets on properties designed principally for residential use which may be for more than four families. The legislation as reported by the House Committee on Banking and Currency would place a $100,000 limit on the size of any loan made under this provision. Experience has shown that the present limitations on the character of mortgages which Federal savings and loan associations are allowed to make are too narrow for associations located in larger cities. In such cities a substantial portion of the existing dwelling units is in multi-family structures and the building and financing of such structures is an economic necessity. The proposed amendment would permit Federal savings and loan associations which have surplus funds to participate more fully in the financing of these multi-family structures. Apart from giving Federal savings and loan associations. in large cities an outlet for their funds, this provision will enable these associations to cooperate to a greater extent in the housing program of the Government. Furthermore, the proposed legislation would permit Federal savings and loan associations to participate more fully in the program under Title I of the National Housing Act (insured loans up to $2,500 for alterations, repairs, and improvements, and for new construction). Finally, it is proposed to liberalize the investment powers of Federal savings and loan associations by allowing such associations to invest in those types of securities which are legal investments for trust funds. The Home Owners' Loan Act of 1933 limits investments of this type to obligations of the United States and the bonds of the Federal Home Loan Banks. Under this limitation, they cannot invest idle funds for their reserves or for temporary return in other sound securities. The proposed amendment would place them in a position to make better use of funds which, because of any current low demand for mortgage loans, they are unable to invest in mortgages. Investment would also be permitted in obligations of the Federal Savings and Loan Insurance Corporation. 2. Conversion from Federal to State charter.-There is no express provision in the existing law by which a Federal savings and loan association may abandon its Federal charter and convert into a State-chartered institution. Many of the State statutes authorize a Federal savings and loan association to obtain a State charter by this process of reconversion. The proposed amendment would expressly permit Federal savings and loan associations to reconvert into Statechartered institutions and would thus declare the principle of reciprocity between the respective States and the Federal Government in the matter of the conversion of home-financing institutions. The amendment also expressly provides that State-chartered institutions may not convert to Federal charter if conversion would be in contravention of the State law. This provision merely gives statutory recognition to the decision in Hopkins Federal Savings and Loan Association v. Cleary, 296 U. S. 315 (1935). STATE LEGISLATION At the beginning of the fiscal year 1939, laws specifically permitting conversion of locally chartered member associations of the Federal Home Loan Bank System into Federal savings and loan associations had been enacted in 40 States and the Territory of Hawaii. During the fiscal year such laws were enacted in Vermont and Wisconsin. Legislation to permit the reconversion of Federal savings and loan associations into State-chartered institutions was enacted during said period in nine jurisdictions, including the two last named. In the reporting period, legislation was enacted in eighteen jurisdictions relative to investment by savings and loan associations, fiduciaries, banks, savings banks, insurance companies, or public corporations in the shares of Federal savings and loan associations. In one State (New York) a provision authorizing State-chartered associations to subscribe to shares of Federal savings and loan associations was repealed. Since many of the legal relations which attach to Federal associations and their shares and accounts depend upon local rather than Federal law, it is considered desirable, for purposes of clarification, that it be expressly provided in the local statutes that such associations and the holders of their shares and accounts shall have the same rights, powers, privileges, exemptions, and immunities as locally chartered associations and their shareholders. Legislation on this point, which was regarded as adequately covered in only four jurisdictions at the beginning of the 1939 legislative sessions, was enacted in six additional jurisdictions during the reporting period. The example of the Federal savings and loan associations has been an important factor in shaping the course of State legislation in the savings and loan field since 1933. To an increasing extent the trend of State laws has been toward the modernization of the structure and operations of State-chartered savings and loan associations through the permissive or required use of the direct-reduction loan, through specific statutory authorization of optional-payment shares, through prohibitions or restrictions on the issue of securities creating a debtorcreditor relation or having a definite maturity or rate of return, through mandatory provisions for adequate reserves, and through the reduction or abolition of fines, penalties, and forfeitures. All these are, and from the beginning of the program have been, features of the Federal savings and loan associations by virtue of provisions of the Home Owners' Loan Act of 1933 authorizing the organization of such associations, or by virtue of the charters, bylaws, and regulations prescribed by the Federal Home Loan Bank Board. Their adoption for the Federal savings and loan associations was the first instance of their general use throughout the Nation, though each of them had previously been used in particular localities. The reception of these features into the system of Federal savings and loan associations was also an important factor in bringing about their incorporation into the Uniform Savings and Loan Act. The Uniform Savings and Loan Act is designed to serve as a model for State legislation, and through this channel the practices adopted for the operations of Federal savings and loan associations will play a further part in molding the pattern of State legislation. CONSTITUTIONALITY OF FEDERAL SAVINGS AND LOAN ASSOCIATIONS On January 16, 1939, in the case of Martin et al. v. First Federal Savings and Loan Association, 305 U. S. 666, the United States Supreme Court, upon the motion of the Attorney General of Wisconsin and the members of the Banking Commission of that State, dismissed the writ of certiorari to the United States Circuit Court of Appeals for the Seventh Circuit in First Federal Savings and Loan Association of Wisconsin v. Loomis et al., 97 F. (2d) 831 (1938). With this dismissal, the decision of the Circuit Court of Appeals, upholding the constitutionality of the provisions of Section 5 of the Home Owners' Loan Act of 1933 for the chartering and operation of Federal savings and loan associations, has become final. The origin of the case dates back to July 1936, when the State Attorney General and the members of the Banking Commission petitioned the Supreme Court of the State for leave to file in that court an original proceeding in the nature of quo warranto against the association and its directors, alleging that the defendants were illegally conducting a building and loan business in the State without complying with the Wisconsin laws in regard to the organization, incorporation, and operation of building and loan associations. Thereupon, the association filed suit in the United States District Court for the Western District of Wisconsin against the Attorney General and the members of the Banking Commission, reciting, among other things, that defendants had threatened to bring suit and had made public assertions that the association was unlawfully operating in Wisconsin and that Section 5 of the Home Owners' Loan Act of 1933 was unconstitutional and void. The bill prayed an injunction to restrain defendants from interfering with the association |