CREATION OF A SYSTEM OF FEDERAL HOME LOAN

BANKS

THURSDAY, JANUARY 14, 1932

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D. C.

The subcommittee met, pursuant to call, at 10 o'clock a. m., in the hearing room of the Committee on Interstate Commerce in the Capitol, Senator James E. Watson presiding.

Present: Senator Watson (chairman of the subcommittee), Couzens Townsend, and Morrison.

The subcommittee thereupon proceeded to the consideration of the bill (S. 35) to create Federal home loan banks, to provide for the supervision thereof, and for other purposes, and the bill (S. 2959) to create Federal home banks, to provide for the supervision thereof, and for other purposes.

[S. 2959, Seventy-second Congress, first session]

A BILL To create Federal home loan banks, to provide for the supervision thereof, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this act may be cited as the "Federal home loan bank act."

SEC. 2. As used in this act

DEFINITIONS

(1) The term "board" means the Federal home loan bank board.

(2) The term "Federal home loan bank" means a bank established by the board under authority of this act.

(3) The term "State" includes the District of Columbia and the Territories of Alaska and Hawaii.

(4) The term "member" (except when used in reference to a member of the board) means any institution which has subscribed for the stock of a Federal home loan bank, and includes any institution which has, in lieu of subscribing for stock, deposited cash or securities, as authorized in section 5 (e).

(5) The term "home-mortgage loan" means a loan made by a member upon the security of a home mortgage.

(6) The term "home mortgage" means a first mortgage upon real estate upon which there is located a dwelling for not more than three families, and shall include such classes of first liens other than mortgages as are commonly given to secure advances on real estate by institutions authorized under this act to become members, under the laws of the State in which the same are located, together with the credit instruments, if any, secured thereby.

(7) The term "unpaid principal" when used in respect of a loan secured by a home mortgage means the principal thereof less the sum of (1) payments made on such principal, and (2) in cases where shares of stock pledged as security for the loan may, to the extent they are paid, be applied toward discharging the principal of the loan, the amounts paid on such shares either directly or by credit of dividends, or otherwise.

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FEDERAL HOME LOAN BANKS

SEC. 3. As soon as practicable the board shall divide the continental United States and the Territories of Alaska and Hawaii into twelve districts. Such districts shall be apportioned with due regard to the convenience and customary course of business of the institutions eligible to and likely to subscribe for stock of a Federal home loan bank to be formed under this act but no such district shall contain a fractional part of any State. From time to time the board may adjust such districts and may create new districts, but the total number of such districts shall remain twelve. Such districts shall be known as Federal home loan bank districts and may be designated by number. As soon as practicable the board shall establish, in each district, a Federal home loan bank at such city as may be designated by the board. Its title shall include the name of the city at which it is established.

CAPITAL OF FEDERAL HOME LOAN BANKS AND SUBSCRIPTIONS THERETO

SEC. 4. (a) Such of the following as are duly organized under the laws of any State or of the United States, and are subject to inspection and regulation under the banking laws, or under similar laws, of the State or of the United States, shall be eligible to become a member of a Federal home loan bank:

(1) Building and loan associations, cooperative banks, and homestead associations;

(2) Any of the following whose time deposits and financial condition, in the judgment of the board, warrant their making such home-mortgage loans as, in the judgment of the board, are long-term loans: Savings banks, trust companies, and other banks; and

(3) Insurance companies.

(b) An institution eligible to become a member under this section may become a member only of the Federal home loan bank of the district in which is located the institution's principal place of business, or of the bank of a district adjoining such district.

SEC. 5. (a) As soon as practicable after the enactment of this act, the board, with the approval of the Secretary of the Treasury, shall determine the minimum capital of each Federal home loan bank which shall be not less than $5,000,000. The board shall, as soon as practicable thereafter, open books in each district established under section 3 for subscription to the capital stock of the Federal home loan bank of the district.

(b) The capital stock of each Federal home loan bank shall be divided into shares of a par value of $100 each. The minimum capital stock shall be issued Stock issued thereafter shall be issued at such price as may be fixed by

at par.

the board.

(c) The original stock subscription for each institution eligible to become a member under section 4 shall be not less than $2,500, plus an amount equal to 1 per centum of the aggregate of the unpaid princpal of the subscriber's home mortgages. The board shall from time to time adjust the amount of stock held by each member so that, as nearly as possible, such member shall at all times have invested in the stock of the Federal home loan bank at least an amount calculated in the same manner as in the case of the member's original stock subscription.

(d) Stock subscriptions other than by the United States shall be paid for in cash, or by certified check, and shall be paid for at the time of application therefor, or, at the election of the subscriber, in installments, but not less than one-fourth of the total amount payable shall be paid at the time of filing application, and a further sum of not less than one-fourth of such total shall have been paid at the end of each succeeding period of four months.

(e) If the law of the State under which an institution described in section 4 operates does not permit such institution to subscribe for stock in the Federal home loan bank, the board may permit such institution, in lieu of subscribing for stock, to deposit with the bank an amount of cash, short-term debenture bonds issued by the bank, or Federal Government securities, equal to the amount of the required stock subscription of such institution had it been authorized to subscribe for stock. The board shall prescribe terms and conditions under which such deposits are made so that the obligations of the institution to the bank will be adequately secured. Upon such deposit such institution shall become a member for the purposes of this act. Upon the enactment of State legislation authorizing the subscription to Federal home loan bank stock by such member, the bank shall issue to such member an amount of stock equal to the value at

that time of the property deposited with the bank by such member under this subsection. In the case of any institution which has become a member under the provisions of this section, if the law of the State under which it operates does not at the end of forty-two months after the enactment of this act permit stock subscription by such institution, such institution shall cease to be a member, and the same provisions shall apply with respect to the termination of its relations with the Federal home loan bank as apply in the case of the withdrawal of members under subsection (i) of this section. The board shall not permit the acceptance of cash or securities in lieu of subscriptions to stock after State legislation has been enacted authorizing the institution to purchase Federal home loan bank stock, or after forty-two months after the enactment of this act, whichever is earlier.

The board shall prescribe regulations under which institutions enabled to become members under authority of this subsection shall, as nearly as practicable, have the same rights, privileges, powers, and benefits, and be subject to the same conditions, limitations, restrictions, and liabilities as institutions which have become members by reason of their purchase of capital stock of Federal home loan banks. For the purposes of the foregoing provision, whenever any reference is made in this act to amounts of capital stock subscribed for, amounts required to be deposited under this subsection shall be held to be included, and if the reference is to amounts of capital stock paid in, amounts deposited under this subsection shall be held to be included.

(f) The Secretary of the Treasury shall subscribe, on behalf of the United States, for such part of the minimum capital of each Federal home loan bank as is not subscribed for by members under subsections (c) and (e) of this section within thirty days after books have been opened for stock subscriptions as provided in subsection (a). Payments for stock subscriptions by the Secretary of the Treasury shall be subject to call in whole or in part by the board, with the approval of the Secretary of the Treasury, at such time or times as may be deemed advisable. The aggregate amount expended by the United States for the purchase of stock under this act shall not exceed $150,000,000, and such sums as may be necessary for such purpose are hereby authorized to be appropriated out of any money in the Treasury not otherwise appropriated. Each Federal home loan bank receiving such payments shall i sue receipts therefor to the Secretary of the Treasury, and such receipts shall be evidence of the stock ownership of the United States.

(g) After the amount of capital of a Federal home loan bank paid in by members equals the amount paid in by the Secretary of the Treasury under subsection (f), such bank shall apply annually to the payment and retirement of the shares of the capital stock held by the United States, 50 per centum of all sums thereafter paid in as capital until all such capital stock held by the United States is retired at par. Stock held by the United States may at any time, in the discretion of the Federal home loan bank, and with the approval of the board, be paid off at par and retired in whole or in part; and the board may at any time require such stock to be paid off at par and retired in whole or in part if in the opinion of the board the Federal home loan bank has resources available therefor.

(h) Stock subscribed for otherwise than by the United States, and the right to the proceeds thereof, shall not be transferred or hypothecated except as hereinafter provided, and the certificates therefor shall so state.

(i) Any member may withdraw from membership in a Federal home loan bank six months after filing with the board written notice of intention so to do, and the board may, after hearing, remove any member from membership if, in the opinion of the board, such member has failed to comply with any provision of this act or the regulations of the board made pursuant thereto. In any such case, the indebtedness of such member to the Federal home loan bank shall be liquidated, and the capital stock in the Federal home loan bank owned by such member shall be surrendered and canceled. Upon the liquidation of such indebtedness such member shall be entitled to the return of its collateral, and, upon surrender and cancellation of such capital stock, the member shall receive a sum equal to its cash paid subscriptions for the capital stock surrendered, except that if at any time the board finds that the paid-in capital of a Federal home loan bank is or is likely to be impaired as a result of losses in or depreciation of the assets held, the Federal home loan bank shall on the order of the board withhold from the amount paid in retirement of the stock a pro rata share of the amount of such impairment as determined by the board.

(i) A Federal home loan bank may, with the approval of the board, permit the disposal of stock to another member.

(k) No dividends shall be paid on stock subscribed for by the United States, but all other stock of any Federal home loan bank shall share in dividend distributions without preference.

MANAGEMENT OF BANKS

SEC. 6. (a) The management of each Federal home loan bank shall be vested in a board of eleven directors, all of whom shall be citizens of the United States and bona fide residents of the district on which such bank is located.

(b) Two of such directors shall be appointed by the board. The terms of such directors shall expire one year and two years, respectively, from the end of the calendar year 1932, and their successors shall be appointed by the board for terms of three years.

(c) Nine of such directors, three of whom shall be known as class A directors, three of whom shall be known as class B directors, and three of whom shall be known as class C directors, shall be first appointed by the board, and shall serve until the end of the calendar year 1932. Their successors shall be elected as provided in subsection (d), and of such successors first elected one of each such class shall serve for one, two, and three years, respectively. Thereafter all such directors shall serve for three years. Directors of classes A, B, and C, whether appointed or elected, shall be chosen from among persons connected with the home-financing business.

(d) The board shall divide the members of each Federal home loan bank into three groups which shall be designated as groups A, B, and C, which groups shall represent, respectively, and as fairly as may be, the large, medium-sized, and small members, the size of such members to be determined according to the net value of their holdings of home-loan mortgages. The board may revise the membership of such groups from time to time. Of the directors elected as hereinafter provided, each class A director shall be an officer or director of a member in group A, each class B director shall be an officer or director of a member in group B, and each class C director shall be an officer or director of a member in group C. Each member shall be entitled to nominate suitably qualified persons for election as directors of the class corresponding to the group to which such member belongs, and shall cast one vote for each director in its class. The directors of each class shall be nominated and elected in accordance with such rules and regulations as may be prescribed by the board.

(e) Any director appointed or elected as provided in this section to fill a vacancy shall hold office only until the expiration of the term of his predecessor.

(f) The board shall designate one of the directors of each bank to be chairman, and one to be vice chairman, of the board of directors of such bank.

(g) If at any time when nominations are required, members shall hold less than $1,000,000 of the capital stock of the Federal home loan bank, the board shall appoint a director or directors to fill the place or places for which such nominations are required until the expiration of the next calendar year or, in the case of a vacancy, until the expiration thereof, whichever period is the shorter. (h) Each bank may pay its directors reasonable compensation for the time required of them, and their necessary expenses, in the performance of their duties, in accordance with the resolutions adopted by such directors, subject to the approval of the board.

(i) Such board of directors shall administer the affairs of the bank fairly and impartially and without discrimination in favor of or against any member, and shall, subject to the provisions hereof, extend to each subscriber applicant such advances as may be made safely and reasonably with due regard for the claims and demands of other members, with due regard to the maintenance of adequate credit standing for the Federal home loan bank and its obligations, and with due regard to the orderly provision of credit to aid in the conduct of home financing in the various communities within its district, and within the district as a whole.

(j) The board shall cause to be made from time to time examinations of the laws of the various States of the United States and the regulations and procedure thereunder governing conditions under which institutions of the kinds which may become subscribers of banks hereunder are permitted to be formed or to do business, or relating to the conveying or recording of land titles, or to homestead and other rights, or to the enforcement of the rights of holders of mortgages on lands securing loans, or otherwise. If any such examination shall indicate, in the opinion of the board, that under the laws of any such State or the regulations or procedure thereunder there would be inadequate protection to a Federal home loan bank in making or collecting advances under this act, the board may withhold the establishment or prevent or limit the operation of any Federal home loan bank in