APPENDIX (Following are excerpts from hearings on H.R. 258, "Federal Charter Legislation for Mutual Savings Banks," Subcommittee on Bank Supervision and Insurance, Committee on Banking and Currency, 88th Cong., 1st sess. :) HOUSING AND HOME FINANCE AGENCY, OFFICE OF THE ADMINISTRATOR, Subject: H.R. 258, 88th Congress (Representative Multer). Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: This is in reply to your request for the views of this Agency on H.R. 258, a bill to authorize the establishment of Federal mutual savings banks. The bill would authorize the Federal Home Loan Bank Board to issue charters for mutual savings banks which could be organized either with or without members. Any such bank would be authorized to accept deposits from savers, to invest in specified securities and loans, and to pay interest on deposits from net earnings and accumulated profits at rates and intervals approved by its directors. Among the investments which would be authorized for savings banks are various types of Government obligations, mortgages, and property improvement loans, corporate securities, and promissory notes. Provisions applicable to mortgage investments would allow savings banks to invest up to 80 percent of their assets in conventional mortgages, as well as authorizing investment in VA-guaranteed and FHA-insured mortgages. The bill would specify a ceiling investment (the greater of $25,000 or 2 percent of a bank's assets) in any one mortgage, and would establish a loan-to-value ratio for conventional loans of 10 percent for three- to four-family residences and 75 percent for other property. However, these limits would be subject to the power of the Federal Home Loan Bank Board to authorize the investment of greater amounts. Provisions applicable to other investments would, among other things, permit a savings bank to invest an amount equal to the greater of 5 percent of its assets or 100 percent of its reserve fund and undivided profits in corporate stocks. The bill also would authorize investments in any promissory note, secured or unsecured, which conforms with regulations prescribed by the Board reasonably to assure repayment. Chartered mutual savings banks would be required to become members of a Federal home loan bank and to qualify for insurance with a new Federal savings insurance corporation which would be established under the bill to replace the Federal Savings and Loan Insurance Corporation. As successor to the Federal Savings and Loan Insurance Corporation, the new corporation would also carry on functions now performed by the former corporation with respect to insurance of Federal and State chartered savings and loan associations. A more complete summary of the bill is enclosed. This Agency believes that legislation providing for the Federal chartering of mutual savings banks would be desirable. It is probable that the encouragement which Federal chartering would give to the organization of additional mutual savings banks, now operating under State charters in only 18 States, would attract a portion of the savings now placed in commercial bank time deposits. This would tend to enlarge the supply of mortgage funds, since mutual savings banks have traditionally invested more of their funds in mortgages than have commercial banks. Also, the anticipated geographically ex 255 panded operation should tend to improve the interregional flow of funds to FHA-insured and VA-guaranteed mortgages. Finally, by encouraging competition among different types of banking institutions, the bill may result in an increase in the total savings placed with major financial establishments, including those which customarily provide major sources of mortgage credit. There is, however, some reason to fear possible adverse effects upon the total supply of mortgage funds if care is not exercised to assure that the provisions of the bill do not result in existing thrift institutions, which presently invest the great bulk of their funds in residential mortgages, converting to chartered mutual savings banks and allocating greater portions of their assets to other investments which the bill would authorize for such banks. Presently, savings and loan associations invest their assets almost wholly in residential mortgages. In recent years they have accounted for more than 40 percent of the nonfarm mortgage recordings of $20,000 or less. At the end of 1962, they held 13 percent of all outstanding FHA-insured (one- to four-family) home mortgage debt and 24 percent of all VA-guaranteed home mortgage debt. Should a sizable number of these institutions convert to federally chartered mutual savings banks and invest a significant proportion of their assets in the permissible commercial type of lending activities authorized by the bill, a substantial reduction in the supply of mortgage funds and a serious adverse effect upon the homebuilding industry could result. In order to derive the potential benefits of the proposed legislation and minimize the danger discussed in the preceding paragraph, this Agency recommends that the total amount which any savings bank would be authorized to invest in corporate securities securities be made subject to an overall limitation reasonably consistent with the investment experience of State-chartered mutual savings banks, such as 15 percent of the bank's net assets. This limitation would be in addition to a specific limitation on investments in corporate stocks, such as is now provided under section 109 (10) (B) of the bill. We suggest, however, that this latter paragraph be modified to limit the investment in stocks to the lesser of 5 percent of net assets or 100 percent of the reserve fund and undivided profits, rather than the greater of these amounts as the bill now provides. In addition to modifications relating to permissible investment in corporate securities, the Housing Agency also recommends deletion of the authorization contained in section 109 (12) (C) of the bill for investment in secured or unsecured promissory notes containing terms conforming to regulations prescribed by the Federal Home Loan Bank Board. This provision would allow savings banks to engage in a type of personal loan activity which, in our view, should not be a function of thrift institutions holding long-term savings that should be invested in relatively safe, long-term securities, such as mortgages. Since the provision would divert funds from these investments, it would tend to restrict mortgage credit and thus make it more difficult to finance the housing required by American families. While modifications along the lines suggested above would serve more nearly to assure that the bill would result in an expanded supply of mortgage funds, the Housing Agency also believes that the mortgage investment provisions of the bill should be modified in some respects. Specifically, we recommend against the provision in section 109 (7) (A) and (B), relating to maximum investments in any one mortgage and in mortgages of any single mortgagor, which would permit the Federal Home Loan Bank Board to authorize the investment of amounts greater than those specified in the proposed legislation. Under this provision, the Board could, for example, prescribe any maximum amount for a single mortgage, or establish any loan-to-value ratio above 90 percent, with no apparent statutory standard to guide it in establishing these limits. We see no reason why savings banks should be so relieved from all firm statutory ceilings governing permissible risks on this type of investment or why such banks should, in this respect, enjoy an advantage over other types of federally chartered institutions. The bill does not appear to confer any authority upon the Federal Home Loan Bank Board or any other agency to regulate the rate of interest which chartered mutual savings banks could pay on deposits. Rather, it appears to make the rate of interest, as well as the intervals for payment, a matter to be determined solely by the directors of such banks. This Agency believes that, as in the case of savings and time deposits of commercial bank members of the Federal Reserve System, specific provision should be made for the regulation of interest rates. Although competition for savings may, as indicated above, be advantageous and constitute a primary consideration supporting enactment of the bill, it is important that this competition not be reflected in a competitive escalation of interest rates paid on savings with the result of high rates of interest on mortgages and other types of loans. The Housing Agency of course expresses no view with respect to the many, often technical, aspects of the bill which are primarily the concern of other agencies having responsibilities for banking and fiscal matters. While there is no objection from the standpoint of the administration's program to the enactment of legislation authorizing Federal charters for mutual savings banks, important issues remain to be resolved on major features of such legislation and substantial amendments to H.R. 258 may subsequently be proposed when the review now in process is completed. Sincerely yours, ROBERT C. WEAVER, Administrator. Mr. MULTER. Without objection, we will make a part of the record the reports from the various agencies, Federal Government agencies, as they come in. Some of them have already been received. They will be made a part of the record. And the others will be made a part of the record when they come in. Have you had an opportunity to examine those reports, Mr. Crawford? I might say, initially, that we are certainly very gratified that the various agencies constituting the President's Committee on Financial Institutions have without exception endorsed the principle of this bill. We have studied the principal comments of the Federal agencies and have prepared in writing our responses to them. Many of the points, I think, have been covered in the question and answer session this morning. But we would like to submit for the record our formal responses to those statements, if we may. Mr. MULTER. When do you think they might be available? Mr. CRAWFORD. Some are available right now, sir. Mr. MULTER. We will be very happy to make those a part of the record. (The information referred to follows:) RESPONSE BY NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS TO COMMENTS BY HOUSING AND HOME FINANCE AGENCY ON H.R. 2581 HHFA comment Legislation providing for the Federal chartering of mutual savings banks would be desirable. Important issues remain to be resolved and substantial amendments to H.R. 258 may subsequently be proposed when the review now in process is completed. Response The renewed support of HHFA for Federal chartering of mutual savings banks is highly gratifying. While the present bill is the product of several years of study, the sponsors will, of course, give serious consideration to any changes proposed by HHFA. HHFA comment There is some danger of possible adverse effects on the total supply of mortgage funds, should a sizable number of savings and loan associations convert to federally chartered mutual savings banks and invest a significant portion of their assets outside the mortgage field. Response There is little reason to fear that conversion of savings and loan associations to Federal mutual savings banks would result in a reduced supply of mortgage funds. The converted institutions would undoubtedly continue to channel the bulk of their investible funds into mortgages, just as State-chartered mutual savings banks have done. 1 These comments were contained in a letter from Dr. Robert C. Weaver, Administrator, Housing and Home Finance Agency, to Congressman Wright Patman, chairman, House Committee on Banking and Currency. Since the end of World War II, savings banks have placed 96 percent of their total assets into mortgages, a higher proportion than for any other type of financial institution, including savings and loan associations. The emphasis on mortgages by savings banks in the postwar period is consistent with their fundamental orientation toward mortgage lending. Furthermore, it reflects heavy postwar housing demands and the relatively attractive mortgage yields available during most of the period. Additional factors were the widespread adoption of regular amortization, provision of Federal insurance and guarantees, and legislation permitting savings banks to acquire FHA and VA mortgage on properties located beyond their State boundaries. The forces underlying the postwar upsurge in savings banks mortgage lending are not likely to diminish in the future. Indeed, so long as mortgage demands continue large and mortgage yield relatively attractive, so long will savings banks continue to invest heavily in mortgages. While channeling the bulk of their funds into mortgages, savings banks have also varied their mortgage and security acquisitions in accordance with the economy's changing credit demands. Peaks in mortgage acquisitions have generally coincided with troughs in security purchases. Conversely, troughs in net mortgage investments have been complementary with peaks in security purchases. The flexible responsiveness of savings bank investment activity has contributed to efficiency in the allocation of resources and growth of the national economy. Acquisition of diversified powers through conversion of savings and loan associations to Federal mutual savings banks would not imply a departure from their basic emphasis on mortgage lending. Under the provisions of the Federal charter bill, the converted institutions would lose none of their present home financing capability, with respect to both volume and terms of lending. Nor would savings institutions be less willing to invest in mortgages, as long as housing demands remain strong and mortgage yields attractive. Should demands for housing and mortgage credit slacken, however, savings institutions with diversified powers could channel savings inflows exceeding these demands into other productive investments. This would reduce the temptation to "reach" for unsound loans, preserve the quality of credit and protect the soundness of savings institutions. The main impact of the conversion provisions of the Federal charter bill, therefore, would be to permit savings institutions to supplement their home mortgage lending with other investments in periods of slackened mortgage demands. At present, savings and loan associations are confined essentially to home mortgage lending. Conversion of savings and loan associations to Federal mutual savings banks would permit increased participation in financing multifamily residential and nonresidential construction and urban renewal. This is particularly important in view of the emphasis of Federal housing policies and since demand for funds in the multifamily area is likely to increase at a faster pace in the next few years than demand for home mortgage credit. The converted institutions could also diversify their security investments, shifting funds now held in low-yield U.S. Government obligations over and above liquidity requirements into corporate securities. HHFA comment An overall limitation, such as 15 percent of assets, should be placed on corporate security investments. In addition, investments in corporate stocks should be limited to the lesser of 5 percent of assets or 100 percent of reserves. Response Investment powers granted Federal mutual savings banks in the Federal charter bill are based on those curently available to State-chartered savings banks and conform with existing statutory patterns. Indeed, no powers are included in the Federal charter bill that are not now enjoyed by some State-chartered savings banks. The provision in the bill authorizing savings banks to invest in common stocks is more restrictive than those governing savings banks in some States, such as Maryland and Delaware. It parallels the power granted to New York savings banks, which are authorized to invest in corporate stock up to 5 percent of assets or 50 percent of reserve. HHFA comment Section 109 (12) (C) authorizing investment in secured or unsecured promissory notes should be deleted. Response Savings banks are now permitted to acquire promissory notes along the lines specified in the Federal charter bill in virtually all savings bank States. Nevertheless, their holdings of promissory notes are minute in relation to their total assets. At the end of June 1963, holdings of non-real-estate loans of all types represented only 1.2 percent of total savings bank assets. The suggestion that savings banks might shift funds significantly from mortgages to personal loans is unrealistic and ignores the historic orientation of mutual savings banks toward long-term mortgage lending. HHFA comment Section 109 (7) (A) and (B) permits the Federal Home Loan Bank Board to authorize mortgage lending on terms more liberal, with respect to loan-tovalue ratios and maximum amounts that may be advanced to a single borrower, than is prescribed elsewhere in the bill. This section should also be deleted. Response The mortgage investment provisions in the bill are derived from the New York statute and parallel the laws of most other mutual savings bank States. In Massachusetts and Connecticut, mutual savings banks are authorized to invest in mortgages up to 80 percent of appraised value. Savings and loan associations of course, are authorized to invest in mortgages up to 90 percent of appraised value. The power granted to the Federal Home Loan Bank Board to authorize mortgage lending on terms more liberal than those specified by statutes provides assurance that the mortgage lending powers of Federal mutual savings banks will conform to any changes that may occur in the future in the powers of other Federally chartered institutions. HHFA comment Specific provisions should be made for the regulation of interest rates paid on deposits. Response In considering the advisability of imposing ceilings on interest rates paid to savers, it is important to bear in mind the basic, distinguishing characteristics of savings banks. Savings banks, as mutual institutions without stockholders, pay out to depositors all earnings after expenses and necessary additions to protective reserves. This is basic to their mutual form of organization and fundamental objective of encouraging thrift. Indeed, some States require pay out of all earnings after expenses, once the bank's reserves reach a specified, maximum level in relation to deposits. To limit savings bank interest payments would be to undermine their essential thrift function. Although long empowered to impose ceilings on rates of interest paid by savings banks, FDIC has never found it necessary to do so, despite the wide variations in competitive conditions and numerous changes in deposit interest rates that have characterized the past three decades. Hon. WRIGHT PATMAN, FEDERAL DEPOSIT INSURANCE CORPORATION, OFFICE OF THE DIRECTOR, Washington, D.C., October 23, 1963. Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: You have requested our comments on H.R. 258, a bill which would provide a dual mutual savings bank system by authorizing the establishment of privately managed, federally supervised, savings banks. Such savings banks would be chartered by the Home Loan Bank Board and would be members of a Federal Savings Insurance Corporation under the jurisdiction of the Home Loan Bank Board, which Corporation would have the same powers as the present Federal Savings and Loan Insurance Corporation. As you are aware, since the expiration of the term of former Chairman Erle Cocke, Sr., Mr. James Saxon, Comptroller of the Currency, has been Acting Chairman of the Corportaion. Inasmuch as Mr. Saxon, as Comptroller of the Currency, will express his views on the subjects in which you are interested, I |