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is any such member to remain a member of the system more than 42 months after the enactment of this act or later than the time when the State Legislature has enacted an act authorizing such institution to become a member of this system by stock subscription. Those members who become members in this manner are treated all the way through the act as if they were members regularly subscribing.

The banks are to be managed by a board of 11 directors, all of whom are to be citizens of the United States and residents of the districts in which the banks is located. Two of the directors are to be appointed by the board. There is also a provision made for staggering terms of the directors. Nine of the directors are to be elected by the member institutions. Those nine directors are divided into three classes, A, B, and C, and, correspondingly, of course, the members are divided into three classes, namely, A, B, and C. The member are divided into classes on the basis of their size, and their size is to be determined on the basis of their holdings in home mortgages, the holdings to be determined by reference to the unpaid principal to the home mortgages which the institution owns. As I say, these nine directors are elected by the members. All the directors elected by the members are to be chosen from persons connected with the home finance business. There is a provision by which, whenever the members of the bank hold less than $1,000,000 of the capital stock of the Federal home loan bank, the board will appoint directors who are next to be elected directors, because in such a case the interest of the members of the bank, of course, is diminished and, correspondingly, theoretically at least, the interest of the United States becomes greater.

I might speak next of the system by which members secure advances from the bank. When speaking here of members I am speaking only of the bank members. I speak of members not only as members becoming members by reason of subscribing for their stock, but also members who have become so by reason of their deposits of government obligations, short-term debentures, or cash.

A member, in order to obtain the privilege of receiving advances from the bank, must apply for permission to receive such advances. The bank may, in its decretion, deny the application, or, subject to the approval of the board, may grant the application under such terms as the bank may prescribe.

Now, the securities upon which the banks are to give advances, and on which the members are to receive advances are mortgages on real estate upon which is located a dwelling for more than three families. The mortgage must be a first mortgage. When a member of the system comes to the bank for the purpose of obtaining advances, it has to enter into a primary obligation to pay off the advances when due and to deposit additional security. The amount which the member can receive from the bank on its discount of the mortgage which the member owns is set out, the limitations are set out, in section 8 of the bill which is what we find here on page 15.

In the first place, no mortgage can be accepted for the purpose of making advances thereon if the loan secured by it has more than 20 years to run from the time the mortgage is sought to be discounted to its maturity.

The second condition is that the unpaid prinicipal sum of the home mortgage shall not exceed three-fourths of the value of the real estate secured if the loan is amortized, or shall not exceed 60 per cent of the value of the real estate if the loan is not amortized. The third limitation is that the unpaid principal of such home mortgage can not exceed $15,000. Now, in the case of an unamortized loan which would have an original term of eight years or more the banks may lend money not in excess of 60 per cent of the unpaid principal of the loan. I might explain that the theory of that is that eight years or more is the dividing line between longterm and short-term loans, and in addition, amortizing

means

a loan the principal obligation of which is discharged by regular payments substantially equal in amount, so that you have the situation by which the ordinary man makes the ordinary arrangement to pay over a number of years rather definite sum, or a rather equal sum, which will result in the loan being terminated and the obligation discharged at the time the maturity accrues.

Now, in the case of any other loan-that is, a loan which is not amortized or an amortized loan which has a maturity of less than eight years-advances can not be for more than 50 per cent of the unpaid principal of the mortgage.

The third limitation is that in no case may advances made by the bank to the member exceed 40 per cent of the appraised valuation of the real estate securing the home mortgage loan.

Provision is made for ascertaining the value of the real estate under regulations prescribed by the board. As I have said, advances may be made upon the note of members bearing such rate of interest as the board may prescribe.

There is also a provision by which one bank can transfer to another bank the obligations which that bank holds with respect to mortgages. The banks themselves have the power to borrow money and to give security for that money and pay interest through the issue of bonds and debentures, having such maturities as may be determined by the board. The security which may be given by the banks for their borrowing is the mortgages which the banks have received from the members. Limitations are made upon the security which may be given to this extent; that is, in case a bank wants to borrow money and issue bonds therefor provision is made that the unpaid principal of the mortgage security for those bonds shall at no time be less than 190 per cent of the outstanding bond issue, and that security is to be, as I say, mainly mortgages which the bank has received from its members. Provision is made for cash being deposited in lieu of mortgage in certain limited classifications. The board is also given authority to require the bank to deposit additional and substitute collateral, of course, for the issue of its bonds.

The board is given power to determine the rate of interest which may be paid upon notes, debentures, and bonds which may be issued by the bank, but no bond or debenture issued within seven years after the enactment of the act shall bear a rate of interest in excess of 512 per cent per annum, and thereafter no bond or debenture shall bear a rate of interest in excess of 5 per cent per annum. The board is to provide such margins between interest rates received upon advances made to the members and interest paid upon obligations which

the Federal home land bank may issue sufficient to cover expenses of operations and reserves, and, under regulations provided by the board, some part of the reserves may be devoted to retirement of the stock subscribed by the United States. All of the banks are to be jointly and severally liable for payment when due of all bonds and debentures and notes and other obligations issued by all of the banks together with interest thereon, but there is provision made by which a particular bank can, with respect to a particular borrowing, which must be temporary in its nature, expressly state that in such a case the liability is limited to the borrowing bank.

Each bank is given power to accept deposits, but those deposits can be accepted only from members of such bank or from other Federal home land banks. Such deposits are not to be subject to check, and no rate of interest in excess of 3 per cent may be paid thereon. No Federal home loan bank shall transact any banking business or any business not expressly authorized by the act.

The board is given authority upon the affirmative vote of at least four of the members of the board, whenever an emergency exists, to require one bank to rediscount the discounted notes of members held by another bank or the bonds issued by another bank or to make deposits with another bank. In such cases the board is empowered to fix the price of the bonds, and if it requires a deposit to fix the security therefor, the board is also given authority to fix the rate of interest upon deposits.

A further provision provides that each bank shall at all times have invested in United States securities, interest bearing deposits in banks or trust companies and in advances with maturity not greater than one year made to members an amount equal to the sums paid in on outstanding capital subscriptions of its members, plus an amount, equal to the current deposits received by that bank from its members.

The bank has authority to invest part of its assets, except the sums of which I have just spoken in other securities, other than to members, and the board is given authority to regulate that. The banks themselves will be corporations having the usual corporate powers. The capital, surplus, and income of Federal home loan banks shall be exempt from taxation, both Federal, State, municipal, and local taxation, except, of course, real estate held, purchased, or taken by the bank is to be taxed. The bonds and debentures of the home loan banks shall be deemed and held to the instrumentalities of the Government of the United States, and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation. This provision is exactly the same as in the land bank law.

The bank may, when designated by the Secretary of the Treasury, become employed as a financial agent of the Government. Obligations of the home loan banks are to be lawful investments, and may be accepted as security for fiduciary, trust, and public funds.

The Federal reserve banks are also authorized to act as depositories or fiscal agents for Federal home loan banks as provided under this act.

The Federal loan banks shall carry to reserve account semiannually 50 per cent of their net earnings until the reserve account shows a credit balance equal to 100 per cent of the paid-in capital of the bank. After that reserve account has reached 100 per cent of the paid-in

capital, 25 per cent of its net earnings shall be added thereto semiannually. Provision is made, too, for the nonpayment of dividends during the time that the capital is impaired below 100 per cent.

The board is to consist of five members appointed by the President by and with the advice and the consent of the Senate. The salary of the members of the board is fixed at $12,000 per annum. The usual provisions are made in the bill for staggering the terms of the members, which terms, after the first appointments, are to be for six years. Provision is made by which any officer of the United States who is appointed as a member of the board shall not receive a combined salary of more than $12,000 per annum. The board is also given authority to control the officers and employees of the home loan banks by suspending or removing them.

An appropriation is authorized for $500,000 for expenses of the board for the year 1932, and, thereafter, the expenses of the board are to come from proportionate assessments levied upon the banks semiannually to pay the expense of the board.

The board is given the usual powers to select its employees without regard to civil-service classification and the board is also given the authority of franking privileges of the mails. Examinations of the banks by the board is provided for under regulations prescribed by the board. An elaborate system of penalties is contained in the bill, which penalties relate to the ordinary unlawful acts in connection with banking business. There is a special provision contained in the bill by which an individual, partnership, or corporation which is not a Federal home loan bank may not use the words, "Federal home loan bank," or a combination of all such words as the name under which it is doing business, except if it is doing business before the enactment of this act under that name. In addition to that an institution which is not a member is not permitted to advertise that it is a member, and no institution that is not a Federal home loan bank may represent that it is a Federal home loan bank. Various provisions are made for enforcing the criminal penalties.

In order to carry out the provisions of the act, the Treasury Department, the Comptroller of the Currency, the Federal Reserve Board, and the Federal reserve banks, are authorized under conditions. which they may prescribe, to make available to the board for its use and for the use of any Federal home loan bank reports, records, or information, that may be available relating to the condition of institutions with respect to which the Federal home loan banks have, or contemplate, having transactions under this act, or relating to persons whose obligations are offered to or are held by any Federal home loan bank, or to make through their examiners, or employees, for the confidential use of the board, or any Bank, examinations of those institutions. Provision is also made by which obligations incurred under this Act are lawful obligations of national banks under the national banking act.

The board is given authority to authorize the Federal home loan bank to establish branches, but a branch may be established only in the district in which the bank is located. The board is also given authority to provide for the liquidation of any Federal home loan bank. The usual provision is made with respect to separability in

cases of unconstitutionality. As I understand it, under the law of the District of Columbia relating to building and loan associations and the cooperative banks and institutions of that sort, they do not now have the power to subscribe for the stock of an institution such as the Federal home loan bank. Specific provision is made which, in effect, is an amendment to the District of Columbia law by which those institutions can subscribe for this stock if they are otherwise eligible to subscribe. A similar provsion is made with respect to institutions organized under the laws of the United States. The right to alter, amend, or repeal the act is expressly reserved.

Mr. REILLY (presiding). If any members wish to ask Mr. O'Brien any question to clarify what the bill means, he will answer them, except as to the policy of the bill.

Mr. O'BRIEN. I might say, Mr. Chairman, that there are a good many minor details I have omitted in discussion, but I think I have touched the major points.

Mr. REILLY. You have given us a general outline of what the bill is, and it will help us in reading the bill to understand it. Thank you. Mr. O'Brien, if you can stay with us we will be very much obliged.

Mr. HANCOCK. Is it the intention of the committee to confine their attention to this bill at this time or will the committee consider other similar bills? I was wondering whether it would be wise to consider them jointly or separately or just what the committee would want to do about it.

Mr. CAMPBELL. I was talking to Mr. Crosser, and he has a similar bill of this character.

Mr. HANCOCK. I do not think he would insist on hearings on his bill, but he would like to be heard on the home loan bank proposition at this time.

Mr. REILLY. Yes, we can hear Mr. Crosser. If he has any ideas that may convince us that his ideas should be substituted, we will consider them.

Mr. WILLIAMs. Yes; invite him to come before the committee and present his views.

Mr. REILLY. Yes.

Mr. LUCE. Mr. Chairman, in order that we might have as wide a spread of judgment bearing on the features of this bill as possible, I asked the Department of Commerce to send out a questionnaire in the matter and this was done, and I have here photostats of the results as far as secured, which are of much importance. If it is inconvenient for you to take them to your office now, I will give them. to you later.

Mr. REILLY. The committee will adjourn until 2 o'clock.

(Whereupon, at 12.05 o'clock p. m., an adjournment was taken. until 2 o'clock p. m., of the same day.)

AFTER RECESS

The committee reconvened at 2 o'clock p. m., pursuant to the taking of recess.

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