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Richard B. Cheney Files
Richard Cheney's General Subject Files
subjects
President (1974-1977 : Ford). Economic Policy Board. 9/30/1974-1/20/1977
Banks and banking
Economics
Federal budget
Housing
Industries
Labor
Manpower policy
Public utilities
Taxation
Transportation
Unemployment
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The original documents are located in Box 4, folder "Economic Policy Review (2)" of the
Richard B. Cheney Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 4 of the Richard B. Cheney Files at the Gerald R. Ford Presidential Library
HOUS ING o.
March 10, 1975
HOUSING
I. Proposals submitted by the National Association of Home Builders.
These proposals are discussed in a paper prepared by HUD included
in this Tab,
Administrative Proposals
1. Set the interest rate and points charged under all programs,
both GNMA and FHLMC, at the same level and reduce this uniform
rate below the present 7 3/4 percent level. (NAHB)
2. Allow the interest rate on existing commitments to be converted
to a lower rate in effect at the time of conversion upon payment
of a 1/2 percent fee. (NAHB)
3. Release remaining $1.75 billion (new commitments) under the
Emergency Home Purchase Assistance Act, make available for re-
commitment funds returned under all programs, and keep programs
active until they are no longer needed. (NAHB)
4. Release and use immediately all frozen low and moderate income
housing subsidy funds (section 235 and 236). (NAHB)
5. Simplify and expedite the Section 8 Program (modify administrative
procedures) to make it more workable. (NAHB)
6. Initiate a positive program at HUD with adequate staffing to
encourage production of housing and full use of FHA and other
FORD
housing programs. (NAHB)
7. Lower FHA-VA interest rate substantially in order to lead all
interest rates downward. (NAHB)
2.
8. Reestablish the 1/2 percent differential on savings for thrift
institutions over commercial banks (now 1/4 percent). (NAHB)
9. Substantially reduce the maximum allowable interest rate on
certificates of deposit under $100,000. (NAHB)
10. Have the Federal Reserve institute a special advance program
for construction fiancing. (NAHB)
11. Have the Farmers Home Administration fully implement all pro-
visions of the 1974 Housing Act, with staff and funds necessary
to carry out administration and implementation. (NAHB)
12. Have FNMA initiate a program of construction loans for conventional
and FHA-VA single family homes. (NAHB)
13. Have FNMA establish a program for purchase of conventionally
financed multifamily mortgages. (NAHB)
Legislative Proposals
14. Expand Emergency Home Purchase Assistance Act to make conventionally
financed condominium units and multifamily projects eligible, and
support H.R. 2640 which would also extend the Act and increase
funding. (NAHB)
15. Enact H.R. 29, or similar legislation, to provide homeownership
FORD
mortgage loans at 6 percent. (NAHB)
G7V
16. Amend National Housing Act to permit no downpayment on the first
$25,000 of value under FHA to encourage construction of low-priced
homes. (NAHB)
3.
17. Provide for exemption from taxation of a portion of the
interest earned on savings in thrift institutions, or
alternatively accomplish the same purpose by means of a tax
credit for the saver. (NAHB)
18. Provide an incentive for investment in residential mortgages
through means of a variable tax credit. (NAHB)
19. Enact legislation requiring pension funds to invest a percentage
of their assets in residential mortgages. (NAHB)
20. Enact legislation that would mandate the Federal Reserve Board
to use its powers with respect to the growth of the money supply,
the purchase of government securities, and credit allocation to
assure that the general level of interest rates is brought down
to the point that mortgage interest rates do not exceed 6 percent.
(NAHB)
II. Other Proposals
21. Develop legislation to make interest income from thrift institutions
tax deductible to increase the flow of savings for home mortgages.
(Discussed in Treasury paper on tax policy)
22. Enact Temporary Tax credits for mortgage interest payments, designed
to phase into tax deductions over time, to stabilize the housing
sector. (Discussed in Treasury paper on tax policy)
23. Tax credit for new home purchases. (Discussed in Treasury paper
FORD
on tax policy)
4.
24. Provide incentives for rehabilitation of older homes. (HDL)
25. Provide short-term assistance to homeowners having difficulty making
mortgage payments because of unemployment or sharp income drop. (HDL)
26. Establish a "lender of last resort" government agency to meet the
construction needs of businesses and state and local government.
(AFL-CIO)
1020
HUD Paper
FORD
&
Civ
DEPARTMENT * OF HOUNING *
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
A
AND
WASHINGTON, D.C. 20410
UNITAN
ASSISTANT SECRETARY FOR
MAR 6 1975
POLICY DEVELOPMENT AND RESEARCH
IN REPLY REFER TO:
Dr. Marvin H. Kosters
Assistant to the Assistant to the
President for Economic Affairs
New Executive Office Building - Rm. 284
Washington, D. C. 20500
Dear Dr. Kosters:
We are enclosing our comments on the series of proposals
intended to stimulate the housing industry which were
submitted to Mr. Seidman by the National Association of
Home Builders. I don't think I need to say that no one
is more concerned with the troubles the housing industry
has experienced during the past year than is HUD. However,
we are equally concerned that the NAHB recommendations,
if implemented, could have serious, adverse side-effects
which would more than offset any positive contributions
they might make to the housing market. Moreover, we feel
many proposals have been put forth without any recognition
of the strong evidence that a housing recovery is already
well underway.
Although our detailed analysis of each proposal is attached,
we have several general observations on the major issues
the home builders seek to address.
First, we expect significant improvements in the housing
sector during 1975. Savings inflows to thrift institutions
were at near record levels in January, and preliminary
figures for February support a prediction that the record
for that month will be surpassed. Indicators for mortgage
interest rates on new homes have been stable or falling
over recent months, and further reductions are expected.
FORD
2
A casual reading of any newspaper shows that developers with
completed, but unsold homes are now able to offer significantly
better financing than was the case a short time ago. This
type of evidence has lead forecasters to predict an annual
rate of housing starts of 1.6 to 1.8 million by the fourth
quarter of this year.
Additional Federal spending, whether for housing or any
other activity, will only add to the already large anticipated
deficit. Such expenditures would require even more Treasury
borrowing which would, in turn, add to the serious risk that
Federal borrowing will drive up market interest rates signifi-
cantly. Should that happen, an entirely new round of disinter-
mediation would begin, thereby reversing the favorable mortgage
market trends which have been developing. It would be ironic,
indeed, if a program designed to aid housing were to instead
help choke off the recovery already underway.
The NAHB has also neglected to emphasize the unprecedented
amount of Federal aid already extended to the housing industry
over the past fourteen months. Since the beginning of 1974,
over $20 billion in subsidized credit has been made available
to mortgage lenders. This compares with only $3 billion of
such support in 1966 and $8 billion in the 1969 credit crunch.
However, since more than $14 billion of this $20 billion in
subsidized commitments still remains in the hands of lenders,
we are understandably reluctant to make additional injections
of funds at this time.
Finally, we have become increasingly concerned that the major
obstacle to a full recovery of the housing industry will not
be mortgage credit, but rather lack of consumer confidence
in the economy and the concomitant unwillingness to make the
new, long-term financial commitment required to purchase a
home. This problem is, of course, far more difficult to deal
with, and one which can certainly not be addressed by any
"housing" program as such.
I trust the attached material will be helpful to you, and hope
you will let me know if there is anything more we can do.
Sincerely,
FORD
5
Michael H Moskow
Enclosure
ENCLOSURE
Administrative Actions
1.
Special Assistance Programs
a.
Uniform GNMA/FHLMC Interest Rate Below 7 3/4 Percent
This proposal would substantially increase Federal
subsidies in order to sustain rates below market
determined levels. The increased cost to the
government would not appear to be justified given
the marginal additional stimulus to demand provided.
Available data suggest that a very high level of
demand and production can be sustained with interest
rates in the 7.5 percent to 8 percent range. For
example, in the first quarter of 1973, when the
average effective interest rate on conventional
new homes was 7.69 percent, housing starts were
at an annual rate of 2,392,000; in the second
quarter, when rates were 7.74 percent, starts
were at a 2,212,000 level. These interest rates
are comparable to those already provided under the
Emergency Home Purchase Assistance Act of 1974.
The attractiveness of a 7 3/4 percent rate was
demonstrated in January when the entire $3 billion
in commitments at that rate were sold by FNMA and
FHLMC within the first two days it was made avail-
able.
b.
Interest Rate Conversion on Existing Commitments
HUD is currently considering proposals to permit
lenders to convert their existing commitments to
lower interest rates. This would have the advantage
of insuring that more commitments would be utilized
rather than having some go unused due to the fact
lower rates are available in the market. However,
there are drawbacks to this approach, especially
with those commitments made under the Emergency
Home Purchase Assistance Act since the rate must
2
be adjusted monthly to reflect recent yields in the
Treasury bond market. As a result, if we were to
allow the commitments now outstanding at rates above
7 3/4 percent to be converted, the March rate would
probably be below 7 3/4 percent, thereby starting a
new clamor from mortgagees holding commitments at
that rate to allow them to convert to the lower March
rate. However, until this legislative requirement is
changed, there is no way to avoid the rush to swap
commitments every month the rate goes lower.
C.
Release $1.75 Billion in Emergency Home Purchase Act
Funds
At present there are $14 billion in commitments and
in unused authorizations in the hands of potential
lenders out of the $20 billion in subsidized credit
that has been made available during the past eleven
months (including $5.9 billion of the $6 billion
made available under EHPA). Since there is significant
subsidized credit still available for lending,
consideration of the utilization of the additional
subsidized credit authority should be deferred
until currently available sources have been exhausted.
2.
Use Housing Subsidy Funds
Apart from the fact that the Administration has released
the great percentage of funds that were frozen in early
1973, we feel that the old subsidized housing programs
were inequitable and inefficient as well as incapable of
accomplishing the objectives for which they were designed.
Accordingly, Congress and the Administration collaborated
to draft a new program, Section 8, which now is being
implemented. This NAHB proposal conveniently neglects the
fact that HUD has released $900 million for Section 8 which,
when added to the funds previously allocated, will be
sufficient to provide housing assistance to approximately
385,000 lower income families. In short, the Administration
has not frozen subsidized housing but instead has made a
massive commitment to it over the next year.
FORD
3
3.
Simplify Section 8
The Department is devoting maximum resources to make
Section 8 a simple and direct means for providing decent
housing, and the Department is committed to making the
program work as efficiently as possible. The Department
welcomes any specific recommendations for simplification
and improvement which developers and builders may suggest
as they gain experience with the program.
4.
Encourage Housing Production and Increase FHA Staff and
Use of FHA Programs
We are confident the Section 8 program will encourage
the production of housing, as will the recently-announced
Section 202 construction loan program for non-profit
sponsors of elderly and handicapped housing. We have
also reorganized our field structure so these programs,
as well as the unsubsidized insured programs, can be
administered effectively, and we have taken significant
steps to streamline FHA processing. Utilization of all
FHA programs is on the rise, and we will continue to
improve our implementation of these programs. In addition,
we are planning to begin a mortgage co-insurance program
in the near future which should speed up processing, reduce
FHA manhours needed on a case-by-case basis, yet not
diminish the quality of the underwriting.
5.
Lower FHA/VA Interest Rates Substantially to Lead Interest
Rates Down
The Department has recently announced a reduction in the
FHA/VA interest rate to 8 percent. This is the third
1/2 point reduction in this rate in the last four months.
We intend to monitor the impact of this move closely,
since artificially adjusting the interest rate substantially
below market rates could result in the charging of excessive
points. Since points tend to increase the asking prices of
sellers, and discourage the use of the FHA and VA programs,
the result of such artificial actions could hurt rather than
help homebuyers. However, the Department will flexibly tune
the FHA/VA rates in a way that will encourage the purchase
of housing.
FORD
4
6.
Financial Regulatory Agencies
a.
Require 1/2 Percent Differential Between Thrift
Institutions and Commercial Banks
Since January showed considerable strengthening
in the flow of funds into thrift institutions,
and because we feel that February may be a record
month for inflows, the Department feels that it
would not be necessary to re-establish a half
percent spread to make more credit available to
potential homebuyers.
The Department feels that, where specific
regulatory issues are involved, the views of the
responsible agencies should be solicited. In
addition, such issues should be addressed as part
of the fundamental institutional reforms proposed
in the Financial Institutions Act.
b.
Reduce Maximum Allowable Interest Rate on
Certificates of Deposit Under $100,000
Such an action might dry up a major source of
funds for the home building industry. Yields on
alternative investments would be unaffected and
savings and loan associations could once again
face a serious outflow of funds.
C.
The FRB Should Institute a Special Advance
Program for Construction Financing
As noted above, the Department recommends that
the view of the affected agency be solicited on
matters such as these. In principle, the Department
strongly supports the independence of the FRB and
its unrestricted flexibility to regulate the
available money supply. Involvement of the FRB
in assistance programs tailored to specific
industries could hamper its ability to perform
this task.
FORD
of
5
We would also note that a construction loan program
would not seem to be the answer to the problem the
NAHB mentions so frequently, that of completed but
unsold homes. Furthermore, we would question the
immediate need for such a program inasmuch as
construction financing is tied to the prime rate
which has shrunk nearly four points since late
last year. It is our understanding that the supply
of such loans has improved considerably in recent
months.
7.
FmHA Should Implement the Provisions of the Housing and
Community Development Act of 1974
To the Department's knowledge, any limitation of USDA
implementation of the responsibilities given it in the
HCDA of 1974 relate to problems with resource avail-
ability and overall Administration budgetary constraints
rather than to a policy determination of USDA not to
implement the Act.
8.
FNMA
a.
Initiate a Program of Construction Loans
FNMA is an independent organization and its views
on this matter should be obtained. Construction
loans involve a type of activity which differs
from traditional FNMA operations. The detailed
development of relationships with individual
builders is required and this could conceivably
create administrative difficulties.
b.
Purchase Conventionally Financed Multi-Family
Mortgages
The Department has no position on this issue and
urges that the views of FNMA be solicited.
6
Legislative
Short-Term
1.
Expand the Emergency Home Purchase Assistance Act to
Make Conventionally Financed Condominium Units and
Multi-Family Projects Eligible
The Administration recommended discretionary authority
to deal in conventionally financed condominium and
multi-family projects when the Act was considered last
fall, and HUD Under Secretary James L. Mitchell again
supported this authority before the Subcommittee on
Housing and Community Development of the House Committee
on Banking, Currency and Urban Affairs in February. The
Department supports H.R. 2640, provided the maximum
interest rate formula be amended to eliminate the rigid
link to certain Treasury rates, permitting HUD to set
the rate administratively.
2.
Enact H.R. 29 to Provide Homeownership Mortgage Loans
at Six Percent
In the Department's opinion, expressed in Under Secretary
Mitchell's February testimony before the Subcommittee on
Housing and Community Development of the House Committee
on Banking, Currency and Housing, available data suggest
that a very high level of demand and production can be
sustained with interest rates in the 7.5 percent to 8
percent range. Interest rates are now falling toward
these levels and the additional stimulus provided by this
bill would be counterproductive in that it would add to
the Federal deficit. Greater amounts of Federal borrow-
ing could reverse this trend of falling interest rates.
3.
Amend the National Housing Act to Permit No Downpayment
on the First $25,000 of Value under FHA
Such actions would, we feel, unnecessarily subject the
government to inordinately high loss levels when the
terms of FHA insurance are already generous. Available
data suggest that when the homeowner's equity participa-
tion in his mortgage is reduced to insignificant levels,
his incentive to maintain mortgage payments is reduced
dramatically.
7
4.
Amend Small Business Act to Qualify Home Builders for SBA
Loans
The Department's understanding is that the Small Business
Act already provides the legislative authority to permit
financing arrangements with home builders. We would have
no objection to SBA assistance to home builders.
Long-Term
1.
Provide for Tax Exemptions for Interest Earned on Savings
in Thrift Institutions
As a matter of policy such a tax exemption would have
several negative consequences for the .economy that would
not, we feel, be in the long run, best interests of the
homebuilding industry. First, the tax exemption might
cause destabilizing swings in the flow of funds. Second,
the loss of Federal revenue might easily lead to require-
ments for additional Treasury borrowing. Third, as a
matter of tax policy such exemptions for upper and middle-
income people would be inequitable with respect to lower
income citizens and would be a questionable priority among
alternative tools for increasing the supply of shelter for
all citizens. Fourth, there would be no assurance that
increased inflows to thrift institutions would be utilized
for mortgage lending.
2.
Provide Incentive for Investment in Residential Mortgages
through Means of a Variable Tax Credit
The Administration supports the mortgage interest tax
credit outlined in the Financial Institutions Act as
the preferred approach to providing financed institutions
with an incentive to invest in residential mortgages.
3.
Enact Legislation Requiring Pension Funds to Invest a
Percentage of Their Assets in Residential Mortgages
Requirements for investment in residential mortgages is
one of the options to be considered by the proposed
interagency task force on Federal policy toward pension
funds. However, the Administration believes in general
in the proposition that free market forces can more
efficiently allocate credit than can the Government.
8
4.
Enact Legislation that Would Mandate the FRB to Use Its
Powers to Assure that Interest Rates Do Not Exceed Six
Percent for Residential Mortgages
Such legislation, altering the traditional independence
of the FRB, is a matter on which the Department would
defer to the Congress and the FRB. However, strictly on
the policy merits of the proposal, the Department feels
that it is unlikely that the use of the FRB's powers
could guarantee a 6 percent rate or that such a rate is
the appropriate policy target. As noted above, available
data indicate that there were high levels of demand
sustained when interest rates were in the 7.5 to 8 percent
level.
NAHB Proposal
HOME BUILDERS BUILDERS
NATIONAL ASSOCIATION OF HOME BUILDERS
NationalHeusing Conter
15TH AND M STREETS, N.W., WASHINGTON, D.C. 20005
.S. "MICKEY" NORMAN, JR.
TELEX 89-2600
TELEPHONE (202) 452-0200
RESIDENT
February 20, 1975
Mr. L. William Seidman
Assistant to the President
for Economic Affairs
The White House
Washington, D. C. 20500
Dear Mr. Seidman:
As you requested at our meeting yesterday, I am enclosing a Housing
Action Program which we strongly recommend to you and the President.
Implementation of this program would lead housing out of its present
seriously depressed state, thereby significantly helping the unemploy-
ment situation and starting the nation's economy back on the road to
recovery.
We would appreciate an early response as to the Administration's re-
action to each of the points set out in the Program.
Sincerely,
Mickey J.S. "Mickey" Norman, Jr.
President
Enclosure
FORD
is
February 20, 1975
HOUSING ACTION PROGRAM
Statements and comments from Administration officials in recent
days and as far back as mid-summer of 1974 have been unrealistically
optimistic in relation to the housing situation. The drop in the rate of
permits in January presages a future, very low level in housing activity
and no appreciable turnaround can occur even by the end of 1975.
Therefore, in response to your request for specific administrative
and legislative actions that could be taken immediately for a housing re- -
covery leading to a broad economic recovery, the National Association of
Home Builders recommends the following:
ADMINISTRATIVE
1.
Special Assistance Programs -
a) set the interest rate and points charged under all programs,
both GNMA and FHLMC, at the same level and reduce this
uniform rate significantly below present 7-3/4% level.
b) allow interest rate on existing commitments to be converted
to lower rate in effect at time of conversion upon payment of
one-half percent fee.
c) release remaining $1. 75 billion under Emergency Home
Purchase Assistance Act, make available for recommitment
funds returned under all programs, and keep the programs
active until they are no longer needed.
2. Release and use immediately all frozen low and moderate income
housing subsidy funds.
3. Simplify and expedite the Section 8 Program SO that it will be work-
able.
4. Initiate a positive program in HUD with adequate staffing to encourage
production of housing and full use of FHA and other housing programs.
5.
Lower FHA-VA interest rate substantially in order to lead all mortgage
interest rates downward.
FORD
Housing Action Program
Page 2
6. Financial Regulatory Agencies -
a) re-establish the one-half percent differential on savings for
thrift institutions over commercial banks.
b) substantially reduce the maximum allowable interest rate on
certificates of deposit under $100, 000.
c) Federal Reserve institute a special advance program for
construction financing.
7. Farmers Home Administration fully implement all provisions of 1974
Housing Act, with staff and funds necessary to carry out implementation.
8. Federal National Mortgage Association -
a) initiate a program of construction loans for conventional and
FHA-VA single family homes.
b) establish a program for purchase of conventionally financed
multifamily mortgages.
LEGISLATIVE
Short-Term
1.
Expand Emergency Home Purchase Assistance Act to make conventionally
financed condominium units and multifamily projects eligible and support
H.R. 2640 which would also extend the Act and increase funding.
2.
Enact H.R. 29, or similar legislation, to provide homeownership
mortgage loans at 6%.
3. Amend National Housing Act to permit no downpayment on the first $25,000
of value under FHA.
4. Amend Small Business Act to qualify home builders for SBA loans and
loan guarantees.
Long-Term
1.
Provide for the exemption from taxation of a portion of the interest earned
on savings in thrift institutions, or alternatively accomplish the same
purpose by means of a tax credit for the saver.
FORD
Housing Action Program
Page 3
2.
Provide an incentive for investment in residential mortgages through
means of a variable tax credit.
3.
Enact legislation requiring pension funds to invest a percentage of
their assets in residential mortgages.
4.
Enact legislation that would mandate the Federal Reserve Board to use
its powers with respect to the growth of the money supply, the purchase
of government securities, and credit allocation to assure that the
general level of interest rates is brought down so that residential
mortgage interest rates do not exceed 6%.
9. FINANCIAL
BRO
FINANCIAL AND BANKING
Legislative and Other Initiatives
A paper prepared by Treasury on the status of financial
legislation and proposals is included in the first section of
this Tab. Items discussed include the following:
1. The Financial Institutions Act of 1975 has been prepared
for submission to Congress.
2. The Federal Home Loan Bank Board is initiating a program
to broaden the powers of Federal Savings and Loan Institu-
tions.
3. The National Credit Union Administration has prepared a
draft bill as a substitute for applicable provisions of
the FIA.
4. A draft bill providing for Emergency Lending and Guaranteeing
powers has been prepared by Treasury staff in consultation
with Federal Reserve staff. (The draft bill is included in
the second section of this Tab).
5. The Foreign Bank Act of 1975 was submitted to Congress on
March 4 by the Federal Reserve. It provides for treatment
of foreign banking operations in the U.S. similar to that
for domestic banks.
6. The Federal Reserve has proposed emergency bank holding
company powers in a bill to permit waiver of delays and
restrictions in existing laws.
7. The Federal Reserve is studying reform of bank regulatory
structure and procedures.
Proposals to Channel or Control Credit
8. Encourage voluntary expansion of mortgage loans by banks
and financial institutions.
9. Introduce legislation to exempt from State usury laws all
mortgage loans with any Federal participation.
10. Consider using thrift institutions for Treasury tax and loan
accounts.
11. Develop voluntary program to channel credit into areas such
as housing or utilities.
12. Use variable reserve ratios established by the Federal Reserve
to create incentives to channel credit on the basis of type
of loan.
-2-
13. Develop and implement an explicit mandatory credit control
scheme.
14. Raise the limits for FDIC and FSLIC insurance on deposits.
FORD
Treasury Status R
ORD
(March 10, 1975)
STATUS OF FINANCIAL LEGISLATION AND PROPOSALS
The Financial Institutions Act of 1975
This bill contains the Treasury's comprehensive program
of financial reform. Originally introduced in the Congress in
the fall of 1973 after an extensive review of the findings of
the Hunt Commission, the legislation has been redrafted to
incorporate changes warranted by the Senate hearings, enactment
of other legislation, such as the Housing and Community Develop-
ment Act of 1974, and consultation between the Treasury and
representatives of affected groups. The changes have been
relatively minor, however, when measured against the overall
scope of the program. The bill will be resubmitted to the
Congress within the next two weeks. There probably will be
little difficulty in obtaining hearings in the Senate within
the next few months, although sponsorship problems remain,
and action in the House is a little more uncertain.
The basic intent of the legislation is to strengthen
the financial system to enable it to meet changing financial
conditions without stress or disruption. Achieving this will
eventually remove the need for deposit rate ceilings, which
presently contribute to disintermediation during periods of
high interest rates. An outcome of the program will be a
FORD
- 2 -
reduced need for direct Federal financial and mortgage market
support.
The means by which this reform will be achieved is the
authorization of increased depositor and borrower services for
commercial banks, savings and loan associations and mutual
savings banks, combined with the removal of inefficient financial
and mortgage market restrictions. As a result, all of these
institutions will be authorized to offer such services as
checking accounts, NOW accounts, consumer loans and unsecured
construction loans. In addition, credit unions will be able
to offer such services as mortgage loans, consumer lines of
credit, and variable share certificates. As an added stimulus
to mortgage lending and in order to equalize the tax treatment
of the differing financial institutions a mortgage interest
tax credit of 1.5 percent will be available to all individuals
and between 1.5 percent and 3.5 percent to all corporations
maintaining at least 10 percent of their assets in qualified
residential mortgages. In return for this, S&L's and MSB's
will give up their present bad debt loss reserve tax preference.
They may convert to the new tax treatment at any time prior
to 1979 but may not switch back having done SO.
Authority for all deposit rate ceilings will expire 5-1/2
years after enactment of the FIA. Before 5 years after
enactment, the Secretary of the Treasury will submit a report
FORD
- 3 -
to the Congress concerning the competitive strength of the
financial sector. It is believed that this provision will
greatly reduce opposition to the measure by the thrift
industry, without affecting the intent of the bill.
While interest rates are low at present and deposit
outflows have ceased, the underlying structural weakness of the
financial system remains a serious problem requiring immediate
attention. The present lull in monetary pressure should be
regarded as an opportunity for action.
Federal Home Loan Bank Program for Family Financial
Centers. This program proposes a broadening of the powers
of Federal S&L's in much the same way as the FIA and for
essentially the same reasons. It is narrower than the Treasury
proposal in that it only deals with S&L's, but it treats their
problems more intensively. Essentially the program is one of
giving S&L's a "new identity" while retaining their housing
specialization. They would become family financial centers,
offering checking account and other third party payments powers,
consumer loans, financial counselling and planning services,
investment programs, and tax and trust programs, all geared to
the average family's needs. Additionally, the FHLBB would
reinforce the ability of S&L's to offer variable rate mortgages,
FORD
- 4 -
(See Item I.B. in attached Agenda for House Subcommittee on
Financial Institutions Supervision, Regulation and Insurance),
and would permit them to raise long term funds through the
sale of mortgage-backed bonds.
The Board is going ahead with the regulatory aspects of
this program on its own. Proposals have recently been published
in the Federal Register concerning automatic bill payment
powers (October 17, 1974), the variable rate mortgage
(February 14, 1975), and the mortgage-backed bond authority
(December 19, 1974). Presumably the FIA will cover much of
the remainder of their program.
Credit union legislation. The National Credit Union
Administration has prepared a draft bill, apparently intended
as a substitute for the credit union provisions of the FIA,
which would (1) confer on credit unions essentially the
same new powers as the FIA, (2) restructure the National
Credit Union Administration, and (3) create a Central Liquidity
Facility in lieu of the Discount Fund proposed in the FIA.
(See Items I.I. and I.J. in attached Agenda).
The proposed restructuring of NCUA is beyond the scope
of the FIA and is not consistent with the early decision within
the Administration that the FIA would not address the Hunt
Commission's recommendations for restructuring the financial
FORE
WALL
- 5 -
regulatory agencies. Additional questions are raised by
those provisions in the restructuring portion of the draft
bill which seek to exempt NCUA from provisions of other laws
such as budgeting and civil service personnel provisions.
The Central Liquidity Facility proposed. in the NCUA
draft bill would go far beyond the limited purpose of
providing funds to meet emergency and temporary liquidity
problems contemplated for the Discount Fund proposed in FIA.
The CLF proposal raises many of the same issues as the National
Credit Union Bank proposals which the Treasury opposed in
the 93rd Congress. The broad scope of the CLF proposal raises
questions of the role of credit unions vis-a-vis competing
depository type lending institutions including the tax-exempt
status of credit unions. The proposed capital market or
Treasury financing for credit unions through the CLF would be a
significant departure from the "common bond" membership basis
of these institutions, under which loans to members are financed
predominately from deposits of members. Authority for the CLF
to issue its own obligations in the market raises the issue
of proliferation and coordination of Federal agency borrowing
activities in the market.
The NCUA draft bill has been sent to Senator Proxmire.
(See attached NCUA letter of February 12, 1975).
FORD
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Emergency lending and guaranteeing powers
Several "Reconstruction Finance Corporation" type proposals
were introduced late in the 93rd Congress (e.g. S. 4039,
H.R. 17619), and similar proposals have been introduced in
the 94th Congress.
Treasury staff in consultation with Federal Reserve staff
drafted a bill to create a "Federal Financial Assistance
Corporation" which would be authorized to make and guarantee
loans and purchase stock in emergency situations. A copy
of the draft bill is attached.
The Federal Reserve has reportedly adopted contingency
plans for emergency credit to financial institutions and
business corporations (see attached March 6, 1975 Wall Street
Journal article).
Foreign Bank Act of 1975
This is the Federal Reserve bill which was sent to the
Congress on March 4, 1975 and introduced by Senator Proxmire
as S. 958 (See Item I.D. in the attached Agenda). The bill
establishes equality of treatment between foreign banking
operations within the United States and domestic banks by
placing branches and agencies of foreign banks under effective
Federal control. The bill's chief means of accomplishing this
is to define United States branches and agencies of foreign
banks as "banks" for purposes of the Bank Holding Company Act.
FORE
- 7 -
The Treasury supports the basic objectives of the bill,
and has recommended establishment of an interagency group
consisting of Treasury, State, the Comptroller of the Currency,
OMB, CEA, CIEP, and FDIC to assist OMB in coordinating the
reports the various agencies will be asked to submit to the
Congress. (See attached March 4, 1975 report to OMB).
Emergency bank holding company powers
This is Federal Reserve proposed legislation which has
sent to the Congress on February 19, 1975 and introduced by
Senator Proxmire as S. 890 and by Congressmen Reuss and
St. Germain as H.R. 4008. (See Item I.C. in attached Agenda).
The legislation would permit the Federal Reserve Board, in
emergency situations, to waive provisions of existing law
which require that consummation of an acquisition by
bank holding company be delayed 30 days and which prohibit
acquisitions across State lines.
Bank supervision and regulation
Developments in banking practice over recent years
indicate that there are substantial weaknesses in the system
of bank supervision and regulation, divided as it is among
three Federal agencies and the 50 State bank chartering
authorities. The Financial Institutions Act does not address
the Hunt Commission's recommendations for restructuring the
financial regulatory agencies. The Federal Reserve is
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currently studying the question of reform in the bank
regulatory structure and procedures, but no legislative
proposals have been drafted.
FORD
of
(.)
Federal Financial
Assistance Corporation Bill
1/14/75
DEPUTY SECRETARY GARDNER
Richard P. Albrecht
Further Revision of Proposed Federal Financial Assistance
Corporation Act
Attached is a suggested revised text of the Federal Finan-
cial Assistance Corporation Act. This text cmbodies the essence
of relatively limited suggestions on the previous draft received
informally from the Loard of Governors of the Federal Reserve
System and three changes which have occurred to me. All of the
modifications are in Sections 3 and 5.
The first of the three changes which I am suggesting is
the elimination of the provision in Section 3(a) for "public"
members of the Board. It seems to me that the proposal for a
hybrid Board would present both conceptual and operational
difficulties. However, the original form of the section, which
includes public members, is attached to the draft as Alternate 1.
The second possible change is the revision of Section (b)
to provide that, except in situations of special energency, the
Board would cetablish standards for determining when assistance
is to be granted rather than determining that a particular sector,
entity, or region of the economy is in need of assistance, as in
the existing draft. This provision would fulfill the suggestion
in one of the footnotes in the previous draft.
The third change is the incorporation as Section 5(g) of an
exemption of the determinations of the Board and the operations
of the Corporation from the provisions of the National Environ-
nental Policy Act (NIPA). The rather time-consuming procedures
of that Act would be inconsistent with the ability of the Corpora-
tion to deal effectively with the problems which it is designed
to handle.
The footnotes to the previous text have been clininated since
they have not evoked any significant response except on the revi-
sion of Section 5(b).
ARNOLD
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Please give us such instructions for future action as you
may deem appropriate.
Attachments (See Fed 7 7 in. Asstance Comp Act file,
dreft datah 1/10/75)
? FORD
1-10-75
A BILL
To establish a Federal Financial Assistance Corpora-
tion to provide financial assistance found to be in
the public interest 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 Financial Assistance Corporation Act of 1975."
CREATION OF CORPORATION
SEC. 2. There is hereby created a body corporate to be known as the
Federal Financial Assistance Corporation which shall be an agency of the
United States Government and shall have succession until dissolved by act
of Congress. The Corporation shall establish such offices as may be
necessary or appropriate in the conduct of its business.
BOARD OF DIRECTORS
1
SEC. 3. (a)
The Corporation shall have a Board of Directors consisting
of the Secretary of the Treasury as Chairman of the Board, the Attorney
General of the United States, the Chairman of the Board of Governors of
the Federal Reserve System and four additional members who shall be appointed
by the President from among the officers of any department or agency of the
United States who have been appointed with the advice and consent of the
Senate. The Chairman and each other member of the Board may designate
some other officer or employee of the Government to serve in his place,
except in the making of determinations pursuant to Section 5 (b) hereof.
1 An alternate text of this section, continuing the provisions for "public"
members of the Board, is attached at the end of this draft.
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(b) The Board of Directors shall meet at the call of its Chairman.
The Board shall determine the general policies which shall govern the
operations of the Corporation.
(c) The members of the Board and their designees, as such, shall
not receive compensation for their services.
ADMINISTRATOR AND STAFF
SEC. 4. (a) The Board of Directors, upon the recommendation of the
Chairman of the Board, shall appoint a qualified individual to serve as
Administrator of the Corporation at the pleasure of the Board. The
Administrator, subject to the direction of the Board, shall manage and
supervise the affairs of the Corporation. The Administrator shall be
compensated at a rate not in excess of level III of the Executive
Schedule under section 5314 of title 5, United States Code.
(b) The Administrator, with the approval of the Board, shall select
and effect the appointment of qualified persons to fill such other offices
as may be provided for in the bylaws, and such persons shall be the
officers of the Corporation and shall discharge such executive func-
tions, powers, and duties as may be provided for in the bylaws or by the
Board of Directors.
PROVISION OF FINANCIAL ASSISTANCE
SEC. 5. (a) The Corporation is authorized on terms and conditions
determined by the Board of Directors to provide financial assistance
YORG
- 3 -
10 entities, as defined in this Act, for projects, programs, or activi-
ties, the continuance or initiation of which are essential to the national
interest, as determined in accordance with the following subsection.
(b) After considering such information as, in its sole discretion,
it deems appropriate, the Board may make a determination or determina-
tions from time to time that a sector or sectors, or one or more entities
therein, of the economy of the nation, or a region thereof, as defined by
the Board in its determination, is in need of financial assistance, that
without such assistance the national interest will be serious damaged,
and that such assistance is not likely to be otherwise available on rea-
sonable terms. Each such determination shall be transmitted to the
Congress and shall be final upon the thirtieth day of session of the
Congress after the date of its transmittal unless the Congress disapproves
2
it by concurrent resolution adopted within such period.
(c) No financial assistance shall be extended to any project, pro-
gram, or activity unless the Board finds, in its sole discretion, that
(i) such project, program, or activity falls within a determination which
has become final under the preceding subsection and has not been revoked
by the Board, (ii) capital and credit for the project, program, or
activity are not otherwise available on reasonable terms, and (iii) the
prospective earning power of the entity to be provided with assistance,
together with the character and value of any security pledged, is rea-
sonably sufficient to protect the financial interest of the United States.
2 An alternate text of this section, providing for the determination by
the Board of standards for the furnishing of assistance, is attached
at the end of this draft.
- 4 -
(d) Financial assistance by the Corporation shall provide for interest
or other return (in addition to guarantee fees, and service charges, if any)
determined by the Corporation to be reasonable, taking into account the
prevailing rates and terms in the private market for similar capital or
credit and the risks assumed by the Corporation.
(e) The Corporation is authorized to charge commitment, guarantee,
and other fees adequate to cover all expenses and to provide for the
accumulation of reasonable contingency reserves.
(f) The total of financial assistance provided by the Corporation
under this Act, including the full amount of guarantees issued by the
Corporation, shall not exceed $5,000,000,000.
(g) Because of the nature of the determinations of the Board and
f the operations of the Corporation, including their urgent quality,
they shall not be subject to the provisions of the National Environmental
Policy Act of 1969, P. L. 91-190, 83 Stat. 852.
DEFINITIONS
SEC. 6(a) For the purposes of this Act, financial assistance means
to make, participate in, purchase, or guarantee loans and other evidences
of indebtedness or lease or lease-purchase contracts, or purchase non-
voting redeemable preferred stock or similar security issued by any
entity, provided that financial assistance shall not include assistance
with respect to obligations the income from which is not included in gross
income for the purposes of chapter 1 of the Internal Revenue Code of 1954
unless such obligations are held by an agency owned in whole or in part by
the United States.
- 5 -
(b) An entity eligible for financial assistance from the Corpora-
tion shall include a corporation, partnership, limited partnership, trust
or other legal entity and may include municipal corporations or other
governmental units when acting in a proprietary capacity.
OBLIGATIONS OF THE CORPORATION
SEC. 7. (a) The Corporation is authorized, with the approval of the
Secretary of the Treasury, to issue and have outstanding obligations
having such maturities and bearing such rate or rates of interest as may
be determined by the Corporation. Such obligations may be redeemable at
the option of the Corporation before maturity in such manner as may be
stipulated therein.
(b) The Secretary of the Treasury is authorized to purchase any
obligations issued pursuant to subsection (a) of this section, and for
such purpose the Secretary of the Treasury is authorized to use as a
public debt transaction the proceeds of the sale of any securities here-
after issued under the Second Liberty Bond Act, and the purposes for which
securities may be issued under the Second Liberty Bond Act are extended to
include such purchases. Each purchase of obligations by the Secretary of
the Treasury under this subsection shall be upon such terms and conditions
as to yield a return at a rate not less than a rate determined by the Secre-
tary of the Treasury, taking into consideration the current average yield on
outstanding marketable obligations of the United States of comparable maturi-
ties. The Secretary of the Treasury may sell, upon such terms and conditions
FORD
- 6 -
nd at such price or prices as he shall determine, any of the obligations
acquired by him under this subsection. All purchases and sales by the
Secretary of the Treasury of such obligations under this subsection shall
be treated as public debt transactions of the United States.
GENERAL POWERS
SEC. 8. The Corporation shall have power --
(a) to sue and be sued, complain and defend, in its corporate
name;
(b) to adopt, alter, and use a corporate seal, which shall be
judicially noticed;
(c) to adopt, amend, and repeal bylaws, rules and regulations as
may be necessary for the conduct of its business;
(d) to conduct its business, carry on its operations, and have
offices and exercise the powers granted by this Act in any State without
regard to any qualification or similar statute in any State;
(e) to lease, purchase, or otherwise acquire, own, hold, improve,
use, or otherwise deal in and with any personal property, or any interest
therein, wherever situated, and to acquire, hold, own, improve, use or
otherwise deal in and with any real property which the Corporation deems
it appropriate to acquire for an obligation previously contracted;
(f) to accept gifts or donations of services, or of property,
real, personal, or mixed, tangible or intangible, in aid of any of the
purposes of the Corporation;
- 7 -
(g) to sell, convey, mortgage, pledge, lease, exchange, and
otherwise dispose of its property and assets;
(h) to appoint such officers, attorneys, employees, and
agents as may be required, to define their duties, to fix and to pay such
compensation for their services as may be determined, subject (except
as provided in section 4 (a) hereof) to the civil service and classifi-
cation laws, to require bonds for them and pay the premium thereof;
(i) to enter into contracts, to execute instruments, to incur
liabilities, and to do all things as are necessary cr incidental to the
proper management of its affairs and the proper conduct of its business;
(j) to act through any corporate or other agency or instru-
mentality of the United States, and to utilize the services thereof on
a reimbursable basis, and any such agency or instrumentality is authorized
to provide services as requested by the Corporation; and
(k) to determine the character of and the necessity for its
obligations and expenditures, and the manner in which they shall be
incurred, allowed, and paid, subject to provisions of law specifically
applicable to Government corporations.
REPORTS
SEC. 9. The Corporation shall transmit to the President and the
Congress the following:
(a) within 30 days after the end of each calendar quarter, a
summary report specifying the nature, amount, and purpose of each extension
of financial assistan within the quarter;
- 8 -
(b) as soon as practicable after the end of each fiscal year,
a complete annual report of its operations and activities therein.
GOVERNMENT CORPORATION CONTROL ACT
SEC. 10. Section 101 of the Government Corporation Control Act
(31 U.S.C. 846) is amended by inserted "Federal Financial Assistance
Corporation;" immediately following "Reconstruction Finance Corpora-
tion;"
EXEMPTIONS
SEC. 11. (a) The Corporation, its property, its franchise, capital,
reserves, surplus, security. holdings, and other funds, and its income shall
be exempt from all taxation now or hereafter imposed by the United States
or by any State or local taxing authority, except that (1) any real
property and any tangible personal property of the Corporation (other
than that required to carry on its operations) shall be subject to Federal,
State, and local taxation to the same extent according to its value as
other such property is taxed, and (2) any obligations issued by the Corpora-
tion shall be subject both as to principal and interest to Federal, State,
and local taxation to the same extent as the obligations of private corpora-
tions are taxed.
(b) The acquisition and disposition of assets by the Corporation in
the discharge of its functions shall not be included, in the totals of the
budget of the United States Government and shall be exempt from any general
limitation imposed by statute on expenditures and net lending (budget outleys)
of the United States.
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SEPARABILITY
SEC. 12. If any provision in this Act is held invalid, the validity
of the remainder of the Act shall not be affected.
FORD
Alternate 1 - Section 3
(a) The Corporation shall have a Board of Directors consisting
of the Secretary of the Treasury as Chairman of the Board, the
Attorney General of the United States, the Chairman of the Board
of Governors of the Federal Reserve System and two additional
members who shall be appointed by the President from among the
officers of any department or agency of the United States who have
been appointed with the advice and consent of the Senate or shall
be qualified members of the public appointed by the President
with such advice and consent. The Chairman and each other member
of the Board who is an officer of any department or agency of the
United States may designate some other officer or employee of the
Government to serve in his place, except in the making of deter-
minations pursuant to Section 5(b) hereof.
(b) The Board of Directors shall meet at the call of its Chairman.
The Board shall determine the general policies which shall govern the
operations of the Corporation.
(c) The members of the Board and their designees, as such, shall
not receive compensation for their services, provided that any member
who is not otherwise an officer of the Federal Government shall
receive $300 per diem when engaged in the actual performance of his
duties plus reimbursement for travel, subsistence, and other necessary
expenses incurred in the performance of such duties.
TORO
Alternate 2 - Section 5(b)
(b) After considering such information as, in its sole discre-
tion, it deems appropriate, the Board may, from time to time, make
a determination or determinations (i) establishing or amending
standards for the provision of financial assistance under this
Act, which standards shall include provisions for determining
that a sector or sectors, or one or more entitities therein, of
the economy of the nation, or a region thereof, is in need of
financial assistance, that without such assistance the national
interest will be seriously damaged, and that such assistance is
not likely to be otherwise available on reasonable terms or (ii)
in case of special emergency found by the Board, establishing that
a specific sector or sectors, entity or entities, or region, as
aforesaid, is in need of financial assistance and that with respect
to it the other conditions referred to in the preceding clause
exist. Each determination hereunder shall be transmitted to the
Congress and shall be final after a period of thirty days has
elapsed while Congress is in session unless the Congress dis-
approves it by concurrent resolution adopted with such period.
FORD
Foreign Bank Act
Discussion
SWIMINT
OF
THE
THE GENERAL COUNSEL OF THE TREASURY
WASHINGTON, D.C. 20220
1789
MAR 4 1975
Director, Office of Management and Budget
Executive Office of the President
Washington, D.C. 20503
Attention: Assistant Director for
Legislative Reference
Sir:
This is in response to your letter of January 30, 1975 re-
questing the comments of the Department of the Treasury on S.
4205, the "Foreign Bank Act of 1974", introduced in the last
Congress on December 3, 1974 at the request of the Federal Reserve
Board. We understand that the Board plans to present the bill
for introduction in this Congress on February 24, 1975.
Description of the bill
The bill establishes equality of treatment between foreign
banking operations within the United States and domestic banks
by placing branches and agencies of foreign banks under effective
Federal control. The bill's chief means of accomplishing this
is to define United States branches and agencies of foreign banks
as "banks" for purposes of the Bank Holding Company Act.
The Bank Holding Company Act would then apply to virtually
all foreign banks conducting depository and bank lending func-
tions in the United States. The bill thus subjects branches
and agencies of foreign banks to the Act's restrictions on
multistate branching and nonbank activities. Multistate opera-
tions, nonbank activities, and securities affiliates in existence
on December 3, 1974 would be permanently grandfathered.
Under the bill, all subsidiaries, branches, and agencies
of foreign banks having worldwide assets of $500 million or
more would be required to become members of the Federal Reserve
System. Reserve requirements and other Federal Reserve regu-
lations would then apply to their United States operations, and
they would have access to the Federal Reserve's lending facili-
ties. In addition, all foreign banks covered by the bill would
be required to carry coverage of the Federal Deposit Insurance
FORD
Corporation.
The bill would make it possible for foreign banks to
establish National Banks and Edge Corporations. It would amend
the National Bank Act to allow up to half of the directors of
-2-
a national bank to be noncitizens. In addition, the Comptroller
would be authorized to license a "Federal" branch of a foreign
bank in any state to conduct a banking business on the same basis
as a national bank in that state whether or not the state re-
stricted entry of foreign banks.
With respect to Edge Corporations, under current law, a
majority of shares must be owned or controlled by citizens of
the United States and all of the directors must be citizens of
the United States. The bill would grant the Federal Reserve
Board authority to waive these requirements.
Section 25 of the bill introduces a new Federal licensing
requirement applicable to all foreign banks entering the United
States market. It provides that a Federal banking license must
be obtained from the Comptroller of the Currency as a precon-
dition of the establishment of such banks under state law.
Licenses may be issued only with the approval of the Secretary
of the Treasury. The Secretary is required to grant the Sec-
retary of State and the Board of Governors of the Federal Reserve
System an opportunity to examine applications and to submit views
prior to his issuance of a license.
The permanent grandfathering provisions of the bill permit
expansion of a foreign bank in the grandfathered banking form
within a given state--for example, by additional branches if it
previously had branches. In addition, the bill permits a foreign
bank to convert grandfathered operations to another form--for
example, from agencies to branches--and to expand in the converted
form in the state of its present operation in accordance with
state law. Securities affiliates are also permanently grand-
fathered; however, foreign banks would not be permitted to acquire
or to establish additional securities affiliates.
The espoused objectives of the bill are to create a unified
Federal policy toward foreign banks and to bring about equality
of treatment of domestic banks and foreign banking operations
in the United States. In the past, there has been no coordinated
policy toward foreign banks at the Federal level and their regu-
lation has been a matter of state law. However, treatment by the
states has been inconsistent, giving some foreign banks advantages
over their American counterparts.
Recommendation
While we support the basic objectives of the bill, it is an
extremely complicated measure with broad interagency implications.
Without delaying the submission of the bill, we recommend and are
prepared to establish an interagency group consisting of Treasury,
-3-
State, the Comptroller of the Currency, OMB, CEA, CIEP, and
FDIC. This interagency group would endeavor to resolve the
remaining issues and develop an Administration position that
could provide the basis for your coordination of the reports
the various agencies will be asked to submit to the Congress.
Based on our review to date, we have identified the
following issues which we believe have sufficient merit to
receive the attention of the interagency group we are proposing.
1. National Treatment
On April 12, 1974, the Executive Committee of the Council
on International Economic Policy reached a decision to support
the Federal Reserve Board's basic proposal of Federal regulation
of foreign banks so long as it remained consistent with the
principle of national treatment. Treasury stands behind the
application of this principle to new foreign banking legislation.
Nonetheless, a few of the provisions of S. 4205 constitute at
least literal deviation from national treatment.
a. Federal Reserve membership and FDIC coverage
The requirement that certain foreign banks licensed under the
Act become members of the Federal Reserve System contrasts with
optional membership by domestic banks. Federal Reserve member-
ship confers substantial privileges, but at least some foreign
banks would not wish to become members.
Membership would be required only of foreign banks operating
here which possess world-wide assets of $500 million or more.
Only a handful of U.S. banks of this size are not members, and,
thus, the provision constitutes the practical equivalent of
national treatment. De facto national treatment also occurs in
the case of the parallel requirement for FDIC coverage in view
of the near universality of FDIC coverage of U.S. banks. None-
theless, since the Federal Reserve membership requirement applies
only to foreign banks, it can be challenged as a literal departure
from national treatment.
b. Federal Licensing
The bill requires a foreign bank to obtain a federal license
as a prerequisite to applying for a state charter. While foreign
banks may criticize this as a departure from national treatment
since it is not required of domestic banks applying for state
charters, that appears unlikely. We know of no country that per-
mits foreign banks to establish banking entities within their
borders without government or central bank approval.
-4-
C. Application of the Bank Holding Company Act
The Bank Holding Company Act approach, which is central
to the structure of the bill, treats as bank holding companies
foreign institutions that would not be so regarded if incor-
porated in the United States. The difference in treatment
between domestic and foreign entities in this regard is a
departure from national treatment.
2. Federal Reserve Membership
This requirement is likely to be an object of controversy
during the legislative process. Even a segment of the United
States banking industry may criticize it as the opening wedge for
required membership by domestic banks. Alternatives would be
selective application of Federal Reserve requirements essential
to effective control of monetary policy or creation of a special
membership category for foreign banks.
The bill defines branches and agencies of foreign banks
as "banks" for purposes of the Federal Reserve Act. As a
result, all such branches and agencies that under the bill would
be required to become members of the Federal Reserve System,
would have the same rights and duties as any other member.
Accordingly, United States branches of foreign banks would have
access to emergency assistance from the Federal Reserve as a
lender of last resort on the same basis as U.S. subsidiaries of
foreign banks and domestic banks. The Federal Reserve Board has
expressed the hope that foreign central banks will unequivocally
accept responsibility for foreign branches in the United States.
However, such statements may be of little weight as against the
legal entitlement of foreign member banks to assistance under
the bill.
Moreover, the Federal Reserve Board's legal staff has
informally advised Treasury that the Board would expect a U.S.
bank to support an imperiled overseas branch. In fact, the Board
would strongly criticize as an adverse reflection on U.S. banking
the failure of a United States parent to support even a foreign
subsidiary which found itself in difficulty. Several U.S. banks
have, in fact, undertaken such support operations on behalf of
their foreign affiliates. Thus, it would be undesirable for the
FORD
-5-
bill to result in a double exposure of the Federal Reserve in
having to assist foreign branches here and yet having to stand
behind U.S. bank support for their branches abroad. The Board's
legal staff feels that the Board's lender of last resort functions
are discretionary and create no absolute liability. Nonetheless
it would be difficult to exclude foreign members from emergency
assistance without engaging in discrimination.
3. Federal Licensing Requirement
The bill provides for the issuance of Federal banking
licenses by the Comptroller of the Currency subject to the
approval of the Secretary of the Treasury and with the con-
sultation of the Federal Reserve Board and the Secretary of
State. The bill would prohibit the issuance of a license if its
issuance would "adversely affect the domestic or foreign commerce
of the United States. " The Federal licensing requirement is an
important feature of the bill giving the Federal Government
control over foreign bank entry into the United States market
and this Department believes that such a provision is desirable.
4. The Bank Holding Company Act Approach
The bill's basic approach of making foreign branches and
agencies subject to the provisions of the Bank Holding Company
Act is a shorthand method of applying restrictions on multi-
state branches, participation in investment banking, and on
nonbank activities. This approach is somewhat anomalous and
artificial in that it results in branches and agencies being
treated in the same manner as subsidiaries for purposes of the
Act's definition of "banks" falling within its purview. This
is inconsistent with United States case law which has differ-
entiated between branch systems and holding company systems.
The Comptroller of the Currency has consistently attempted to
maintain this distinction in litigation. Treating branches as
bank holding company operations, even for the limited purposes
of S. 4205, involves some risk that such treatment might serve
as a precedent in other areas as well.
The bill lodges the new Federal licensing authority in the
Comptroller of the Currency. However, Section 3(a) of the Bank
Holding Company Act provides that any action which would cause
a company to become a bank holding company requires the approval
of the Federal Reserve Board. Duplication arises in that since,
under the bill, the establishment of a foreign branch or agency
would, by definition, be an action falling under Section 3(a),
it would require Federal Reserve Board approval notwithstanding
the prior issuance of a Federal license with the participation
of the Board.
FORD
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One effect of the Bank Holding Company Act approach is to
exclude foreign banks from securities business not permitted
U.S. banks under the Glass-Steagall Act restrictions. The
question of whether the Glass-Steagall Act restrictions should
be retained in U.S. law generally is presently under study by
the inter-agency capital markets working group headed by
Assistant Secretary Parsky. However, pending any amendment of
the Glass-Steagall Act's restrictions on investment banking,
this Department feels strongly that, with the exception of
grandfathered operations, foreign banks conducting banking
operations in the United States should be subject to the same
restrictions on investment banking as domestic banks. This
approach is consistent with the principle of national treatment
and should be observed notwithstanding that, in many foreign
countries, the commercial banking and securities businesses are
combined.
The Federal Reserve does not believe the bill deals with
the problem of regulating consortium banks which are. not
covered by the Bank Holding Company Act because the extent of
ownership by each foreign bank is less than that necessary for
control under that Act.
We believe it is possible to amend the bill to clarify
this uncertainty. If a consortium bank is established in the
United States as a domestic banking corporation, it is subject
to all of the appropriate state and federal laws related to the
chartering of banks. If a foreign consortium bank wishes to
establish an agency or branch or banking affiliate in the United
States, the provisions of the bill encompass such activities.
The provisions of the bill also provide for licensing all foreign
banks by the Comptroller of the Currency subject to the approval
of the Secretary of the Treasury and consultation with the Federal
Reserve Board. This section of the Act should be expanded to
attempt to deal with the consortium question in a non-discrimi-
natory manner.
5. Discretionary Edge Act and National Bank Participation
The bill would alleviate existing restrictions on par-
ticipation of foreign nationals in Edge Corporations and
FORD
national banks. However, the bill's means of accomplishing
this would be to permit the Federal Reserve Board and the
Comptroller of the Currency to waive to a certain extent the
present limitations. Some thought should be given to whether
the alleviation of these restrictions should be by statute
rather than discretionary, although the Board apparently
feels, with some justification, that foreign entry into these
-7-
areas may be controversial and more acceptable if some dis-
cretion is retained in the regulatory agencies.
6. Reciprocity
The bill contains several provisions which we understand
are indirect references to the issue of reciprocity for United
States banks operating in foreign markets. For example, the
bill's licensing provision provides that a Federal license may
not be issued if its issuance would "adversely affect the
domestic or foreign commerce of the United States. " This pro-
vision, looked at only on its face, would appear to be unneces-
sarily imprecise. However, we understand that the provision
is intended to build into the licensing process some discretion
to withhold a license where the home country of the applicant
does not grant reciprocity to United States banks. A similar
provision is contained in the section governing Federal Reserve
Board approval of foreign bank ownership of an Edge Corporation.
The question occurs as to whether the issue of reciprocity
can be dealt with more openly. The Federal Reserve Board
apparently has some concern that explicit mention of reciprocity
may give rise to demands by foreign banks and foreign govern-
ments for rights for foreign banks in the United States based
on an interpretation of "reciprocity" at variance with the U.S.
interpretation. Accordingly, there may be some merit in main-
taining a "low profile" on the point and handling specific
reciprocity problems through international negotiations.
7. Grandfathering Provisions
The purpose of grandfathering nonconforming enterprises
when regulatory legislation is enacted is to prevent the harsh-
ness of forced divestiture or curtailment of vested interests
emplaced during the status quo ante. Arguably, the bill's
grandfathering provisions go beyond this in permitting expan-
FORD
sion of banking operations from a grandfathered base.
For example, if a foreign bank operates a grandfathered
branch in a secondary state into which it would not have been
permitted to expand had the bill been enacted prior to the
branch's establishment, it would be authorized to continue to
expand in that state by establishment of additional branches.
This provision for further intrastate branching apparently
goes beyond what is necessary to protect the vested interest.
The Federal Reserve Board apparently believes that the provi-
sion is necessary to prevent the grandfathered branch from
being frozen in its market. However, this rationale would
not justify additional intrastate branching outside of the home
-8-
office community in all cases. Such additional branches in
other communities may arguably be regarded as entering new
markets. Still, some banks might argue that it would not have
been a sound business decision to enter such a state if it
could have been anticipated that expansion rights would later
be cut off.
The bill would also permit conversion of a grandfathered
banking operations into another form, e.g., from an agency into
a branch, and then expansion in the new form. The Board ac-
parently feels that there is no harm in according foreign banks
affected by the bill a "last chance" to elect the form in which
they wish to have their operations grandfathered. There is
concededly some merit in this; however, the reservations which
apply to future intrastate branching apply. to the conversation
and expansion option as well.
Thus, at least from a legalistic standpoint, the grand-
fathering provisions may go beyond what the United States would
ordinarily feel compelled to extend to satisfy the basic stand-
ards of fairness upon which the practice of grandfathering is
premised. Some domestic banks may object to the apparent
generosity of these provisions. Nonetheless, the flexibility
which existing foreign bank operations in the United States
are afforded under the grandfathering provisions may do much to
mollify foreign opposition to the bill and to avoid retaliation.
It may be expected that a number of domestic banks concerned
about their foreign operations may find the grandfathering pro-
visions desirable for the effect they may have on the regulatory
environment abroad.
Sincerely yours,
Richard R. Albrecht
General Counsel
FORD
Other Treasury Mater
March 6, 1975
Wall Street Journal
Fed Adopts Contingency Plans to Rescue
Ailing Firms to Prevent Economic Shock
By JAMES P. GANNON
vent and the bulk of its assets sold.
Staff Reporter of THE WALL STREET JOURNAL
The Franklin National case and other
WASHINGTON -- The Federal Reserve
bank-industry troubles last year caused con-
Board has mapped out a set of contingency
cern at the Fed about the need for a contin-
plans under which it would rescue finan-
gency plan to shore up shaky banks. While
concern about the banks has eased in recent
cially shaky corporations, banks or thrift in-
weeks. the severe recession is putting some
stitutions to prevent any big economic
general business corporations under finan-
shock.
cial strains, raising the threat of widespread
The Fed is closely monitoring the finan-
failures.
cial condition of a "handful" of large U.S.
The Reserve Board has laid separate
corporations and as many as 50 or 60 of the
contingency plans for emergency aid to
nation's nearly 14.000 banks for any signs of
banks. to savings and loan associations and
threatened insolvency. The names of those
savings banks, to other financial institutions
being watched are thus far a tightly kept se-
and to general business corporations. The
cret.
details of these plans weren't disclosed, but
Arthur Burns. Fed chairman, is known to
it was said they could involve either direct
believe that the Fed has some responsibility
loans from the Fed to the troubled concern,
to provide emergency loans to large corpo-
or extraordinary Fed loans to banks that. in
rations or financial institutions whose fail-
turn would use them for loans to the ailing
ure might trigger a series of bankruptcies
concern.
or create panic in financial markets. He is
Mr. Burns isn't sure just how far along
reluctant to advocate establishment of a
the corporate-bailout path the Fed would go.
separate agency, such as the Depression
The Reserve Board would be more inclined
years' Reconstruction Finance Corp., to aid
to act as a rescue agency only if one or two
failing businesses. but he would support that
corporations needed help than if there were
idea if a major corporate-rescue plan
many. Mr. Burns would prefer to hand the
seemed necessary.
rescue effort over to a congressionally cre-
The Fed's contingency plans and Mr.
ated agency if it appeared a large number
Burns' views were made known to reporters
of corporations needed emergency loans.
under conditions that don't permit naming
Congressional leaders of both the Repub-
of sources. They are, however, authorita-
lican and Democratic parties have called
tive.
for creation of an RFC-type agency to aid
failing businesses. The Ford administration
The disclosure of the Reserve Board's
is cool to that idea, and SO is Mr. Burns. The
contingency bailout plans didn't firmly sug.
Fed chief fears that if Congress set up an
gest that the Fed actually believes such ex.
RFC now, commercial banks that currently
traordinary aid will be necessary. The na-
are extending credit to troubled companies
tion's central bank in the past has under-
would stop doing so and try to "dump" their
taken a few emergency-rescue efforts, as
shaky clients into the lap of such an agency.
it did last year in providing up to $1.7 billion
raising the prospect that U.S. taxpayers 111-
In loans to Franklin National Bank of New
timately would get stuck with bad-loan
York before that bank was declared insol-
losses.
It's understood. however. that Mr. Burns
would favor creation of an RFC if the busi-
ness-bailout effort seemed likely to become
very large or long-lasting. At the moment,
he's keeping his options open-hoping the
country can get through the recession with-
out a corporate-rescue agency, but prepared
to propose one if it can't.
NATIONAL CREDIT UNION ADMINISTRATION
Washington, D.C. 20456
Office of the Administrator
February 12, 1975
Honorable William Proxmire
Chairman
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, D. C. 20510
Dear Mr. Chairman:
This is in further response to your letter of December 12, 1974,
in which you asked for my views and recommendations for changes in
credit union powers in anticipation of legislation in this area that
you and your Committee may wish to consider.
As you mentioned, the Financial Institutions Act, the 1973 bill,
is considered out of date. By the same token, the views of many of
those who commented on or testified concerning that bill have also
probably been changed, to a greater or lesser degree, as a result of
time and the onrush of events and developments. Some of these develop-
ments were not before us at an earlier time and therefore did not come
within our scope of consideration. I must admit that I did not antici-
pate the dramatic evolvement of electronic funds transfers systems (EFTS),
the paralyzing rise in interest rates, public and private floating of
debentures or other security instruments, and other disconcerting effects
of disintermediation. In addition, there has been an open and declared
refocus by other institutions in the financial community from their
generally pursued areas of interest toward the long-ignored small
consumer loan field, which has until recently been amply serviced by
our Federal and state credit unions.
With this bit of overview as a frame for my response, it seems to
me that there are several areas in which legislative updating of the
Federal Credit Union Act are vitally necessary if credit unions are
to continue to provide the services expected of them and for which
they have amply demonstrated their capacity..
First, there is a need to authorize credit unions to make use of
variable share and interest rates to reflect changes in the financial
marketplace that occur from time to time. The 1973 and 1975 FIA pro-
vide this important authority.
Second, there is a need for a central liquidity facility (CLF).
Such a discount fund was included in FIA '73. It had limited emergency
type operational capability, which at the time appeared to be adequate
for the needs of credit unions. A very similar central discount fund
bill also appears in FIA '75. Since consideration of the 1973 bill we
have all, of course, learned a lot more about the needs of credit unions
and not too remarkably discovered that they have much the same type of
need as do banks and savings and loan institutions. A central liquidity
facility must offer more than a last resort type of emergency funding
capacity and must be readily responsive to the requirements of credit
unions in times of tight money, in times of disintermediation, and in
times of local money shortages of a temporary nature.
As mentioned in my response of December 19, 1974, a series of
conceptual reports concerning a central liquidity facility for credit
unions, as well as a proposed restructuring of the National Credit
Union Administration, were being discussed, reviewed, and reactions
recorded at seminars throughout the country. Results of those meetings,
including reports on overall reactions, have been reported to us by the
two national trade associations, CUNA and NAFCU.
With these results in hand I am in a better position to provide
you with a substantive response on the matter of a liquidity facility
by providing you with the attached rough draft of proposed legislation,
which in summary provides for the establishment of the already mentioned
CLF in lieu of the central discount fund provided for in the Financial
Institutions Act. The rough draft also provides for the restructuring
of the National Credit Union Administration.
This preliminary legislative effort is, as you know from my earlier
letter to you, a product of the consulting firm employed by us to pro-
duce a concept of CLF suitable and appropriate to meet the needs of
credit unions. I recognize that the attached rough draft does not
meet minimum technical standards for introduction as a bill in Congress.
It is, in fact, no more than the consulting firm's rough draft with our
additions, substitutions, deletions, and technical changes provided,
but without any attempt at improved draftsmanship, in order that the
draft more accurately reflect our view of what such a proposed bill
should ultimately contain.
Third, lines of credit, or replenishment type loans, will provide
credit union sharcholders with the convenience available to customers
of other financial institutions and retail establishments. It will
also make for a more efficient operation in the credit union by reducing
the repititious paper mailings to sharcholders for renewal notes. Lines
of credit are included in FIA '75.
2
Fourth, credit unions should be authorized to provide their share-
holders with 30-year home mortgage secured loans, subject, of course,
to Administration regulatory restrictions.
These areas of legislative updating arc, in my view, vitally
necessary for the continuing viability of credit unions in a changing
competitive financial environment. There are many other changes in the
law which will no doubt be offered for your consideration by our credit
union leaders.. I am familiar with many of the suggested changes being
discussed, and subject to what may be specifically and finally proposed,
I find very few of such changes that I could not wholeheartedly support.
I trust these comments and may be helpful to you and your
Committee.
With all good wishes, I am
Sincerely yours,
JR.
Attachment
3
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
PROPOSED AGENDA
March 5, 1975
I. LEGISLATIVE ITEMS
A. Electronic Funds Transfer Systems Commission -- established
by P.L. 93-495
Discussion of Moratorium Legislation (H.R. 1619)
Review of Comptroller's CBCT Ruling
B. Variable Rate. Mortgages
Federal' Reserve Board Regulations -- published February
14 -- comment 90 davs
Senate Full Committee hearings scheduled April 14-17
C. Liberalized Bank Holding Acquisition of Failing Banks
H.R. 4008 introduced (by request) on February 27 by
Reuss and St Germain
D. Foreign Bank Operations in the United States
Federal Reserve proposal submitted 3/4/75
Essentially identical to 93rd Congress submission
introduced (by request) by Patman
E. Bank Secrecy Act Amendments
Individual right to privacy (33 bills introduced i-
93rd Congress -- 94th Congress principal sponsors,
Stark, Koch, Rousselot)
F. Status of USNB (San Dieco) Failure Investication Hird
Congress. Printed hearings distributed
Discussion of need for extensive oversight investigation
encompassing Franklin National and Security National failer
G. Elimination of Check Cashing Fees for Government Checks
(i.e., Social Security, mailroad retirement, etc.)
H. Free Merchandise and Other Give-aways by financial
institutions reviewed in connection with any substhntive
financial reform legislation
I. Credit Union Control Liquidity Pacility
J. Review of National Credit Union Restructuring Pronossis
FORD
STATE
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K. Regulation ? (expiration date, December 31, 1975,
pursuant to Sec. 107, P.L. 93-495) Element of Financial
Institution Reform Proposal
II. REPORT REVIEW AND REVIEW OF STATUTORY "EXPERIMENTS" LEADING
TO POSSIBLE SUBCOMMITTEE ACTION
A. Advisory Commission on Intergovernmental Relation'
study of "doing business taxes" pursuant to Sec. 7 (a), P.L.
93-100. (Moratorium upon the imposition of designated
taxes upon depositories expires January 1, 1976)
B. 100% Insurance of Public Unit Deposits -- 2-year study
by Advisory Commission on Intergovernmental Relations
authorized by .Sec. 101 (f) (1) of P.L. 93-495.
C. Conversion of Savings and Loan Associations -- review
of limited number of conversions authorized during
continuation of existing moratorium (June 30, 1976).
Sec. 105 (d) (j) (1), P.L. 93-495
D. Review of "NOW" account experiment authorized by P.L
93-100 for Massachusetts and New Hampshire
E. Review of bank securities disclosure publication
requirement directed by Sec. 105(b) (1), P.L. 93-495.
(publication date, February 28, 1975)
F. Consideration of EFTS experiment cuestions after appoint-
ment of Commission members and staff
FORD