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Mr. O'BRIEN. That is so provided in this bill; they can not transfer to anybody other than another stockholder.

Senator MORRISON. That seems to take care of that.

Mr. O'BRIEN. On the same page, subsection (i) takes care of withdrawals of a member from the home loan bank, and also takes care of removal of a member in case a member does not comply with the act or comply with the regulations of the board made pursuant to the act.

In the case of involuntary withdrawal, the member is entitled to a hearing by the board.

In the case of voluntary withdrawal, the member must file six months' notice of intention to withdraw. He can not withdraw until he has liquidated his indebtedness. That is true in every case; and in addition to that, upon his withdrawal, his capital stock is surrendered, and the value of his capital stock is paid him. There are limitations on the case in whch there is an impairment of the capital of the bank by which the institution which is withdrawing does not get any more than his subscription less the pro rata impairment of the capital.

On page 10, lines 5 to 7, this disposal to another member is taken care of. That is, it says that Federal home loan banks may, with the approval of the board, permit the disposal of stock to another member.

Subsection (k) is the subsection in which you are interested, Senator Morrison.

Senator MORRISON. Is that language sufficient—"dispose of it to another member"? Ought it not to negative the idea that they could dispose of it to anybody else, emphatically?

Mr. O'BRIEN. I think that is the case. Subsection (h), on page 9, reads: Stock subscribed for

shall not be transferred or hypothecated except as hereinafter provided.

My recollection is that this is the only exception.

Senator MORRISON. Then I think it is all right to leave that part of it.

Mr. O'BRIEN. Subsection (k) is a subsection relating to payment of dividends. The stock subscribed by the United States is not to receive any dividends, but all other stock in the Federal home loan bank is to share in the divided distributions, without any preference.

Senator COUZENS. That is the place to put in the amendment suggested by Senator Morrison.

Mr. O'BRIEN. Yes.

Senator MORRISON. You are not personally aware of the reason for that?

Mr. O'BRIEN. Not at all.
Senator MORRISON. Where is that?
Mr. O'BRIEN. Page 10, lines 8 to 11.

Senator MORRISON. At any particular time is it made mandatory that the Government stock shall be retired?

Mr. O'BRIEN. Yes. On page 8, lines 13 to 24, and on page 9, line 2, it is provided that just as soon as the stock subscriptions by persons other than the United States equal the amount of stock subcriptions by the United States, the stock of the United States is going to be begun to be retired. It is to be retired at the rate of 50

per cent a year of all the stock subscriptions made by members either coming in thereafter or stock subscriptions made by members who have previously been in, but who are subscribing to more stock.

Senator MORRISON. In other words, if the Government were getting pay for it, it could not just stay in. Under that, it would naturally, at that time, just go out?

Mr. O'BRIEN. Yes. In addition to that, the next sentence provides that the bank itself, with the approval of the board, may pay off the stock of the United States at par. In addition to that, the board may require the bank to pay off the stock of the United States at par when the board thinks the resources of the bank justify its paying the United States.

Senator COUZENS. I simply wish to bring to your attention the fact that the word “may” is used instead of "shall."

Mr. O'BRIEN. Yes, sir.

Senator Watson. It is provided here that any member may withdraw on certain conditions.

Mr. O'BRIEN. Yes, sir; but he has to settle up.

Senator WATSON. Is there any restriction on how far the capital stock may be impaired and yet the institution go on? Suppose they all withdraw.

Senator COUZENS. It refers to the impairment of the stock.

Senator WATSON. Suppose they all withdraw. The Government does not have to make up the remainder of that stock subscription?

Mr. O'BRIEN. No. There is no contemplation that the United States will be making further subscriptions after the initial subscription made by the United States. If, at the end of 30 days, the original capital fixed by the board is not subscribed by institutions, the United States makes up the difference; but there is no provision with respect to the United States buying any stock after that.

Senator Watson. Is there any restriction then as to how far the capital may be impaired and yet the institution go on?

Mr. O'BRIEN. No; there is not, except in so far as this contemplates impairment; and this relates to the case in which there is impairment, and you consider how much the withdrawing member is going to get for his stock. The whole question of insolvency or bad financial condition of this bank is considered over in another section to which I have not devoted a great deal of attention, so I can not speak with a great deal of authority on that section.

Senator COUZENS. May I suggest to the witness, when he is preparing an amendment to section (k) on page 10, that he also make provision on page 8, beginning along with line 20, for a reimbursement of the capital furnished by the Federal Government.

Mr. O'Brien. Section 6, page 10, lines 13 and following, running over on page 11, page 12, and page 13, relates to the management of the banks.

Subsection (a), lines 13 to 16, provides that there are to be 11 directors, and all of them are to be citizens of the United States and residents of the district in which the bank is situated. Two of the 11 directors are to be appointed by the board. Those two directors are the Federal directors. The United States always has two directors on the board of each bank.

Nine of the directors are first to be appointed by the board, and they are to serve until the end of the calendar year 1932. Their successors are to be elected, and the terms are to be staggered-one, two, and three years, respectively—so that they will not all be going out at once.

The terms of the directors of all classes are to be three years after they get going properly.

Senator COUZENS. There is no compensation provided here for the directors; is there?

Mr. O'BRIEN. There is no compensation specifically provided, nor is there any prohibition upon their receiving compensation, as I understand. I think that is up to the bank.

In the case of directors who are to be elected, they are taken care of in subsection (d), page 11, lines 9 and following: This subsection contemplates that the board will divide the institutions which are members of the system into three groups. The division is to be on the basis of size of the members rather than the total capitalization within a group. The size is to be determined according to the net value of the home mortgages which the institutions have. The theory is that the representation ought to be of large institutions, medium-sized institutions, and small institutions.

It is possible for the board to revise the membership in each group from time to time.

Senator COUZENS. Is there any substantial difference between that and the provision in the case of the Federal farm loan banks?

Mr. O'BRIEN. I do not know. I do not recall going into that. Senator MORRISON. The general principle is the same.

Senator Watson. I do not remember the specific provision. I think they are very much alike.

Senator MORRISON. Yes. The other is territorial, of course.

Mr. O'BRIEN. The directors selected for each group have to be either directors or officers of a member in each group.

Senator MORRISON. Right there, in the farm land bank they are divided on a territorial basis, but in this urban business it could not be done that way.

Mr. O'BRIEN. Whenever there is an election of directors, the group of the letter-A, B, or C—will nominate qualified persons (that is, persons connected with the home financing business) to represent the group to which they belong, and they cast one vote for a director in each class. The board is given the authority to prescribe rules and regulations governing the nomination and election of directors. Vacancies are taken care of, and the board is required to appoint one of the directors chairman and another vice chairman.

Senator COUZENS. In other words, there is a provision in subsection (h), on page 12, for compensating the directors if in the judgment of the board that is desirable?

Mr. O'BRIEN. Yes; that is all. They are not required to pay them. Senator COUZENS. No.

Mr. O'BRIEN. On page 12, subsection (g), lines 9 to 12, is very important. It provides that whenever

Senator WATSON. Read it.
Mr. O'BRIEN (reading):

If at any time when nominations are required, members shall hold less than $1,000,000 of the capital stock of the Federal Home Loan Bank, the board shall appoint a director or directors to fill the place or places for which such nominations are required until the expiration of the next calendar year or, in the case of a vacancy, until the expiration thereof, whichever period is the shorter.

That is, when the stock subscriptions of the members are reduced below $1,000,000, whenever an election comes up, or whenever a vacancy is to come up, the board, on behalf of the United States, appoints the director in that class to serve until the end of the calendar year, or, in the case in which there is a vacancy, until the end of the vacancy. That is designed to take care of the United States, I understand. The United States has a greater interest.

Subsection (h) provides for the payment of directors, which is not mandatory.

Subsection (i), on page 12, provides that the board shall administer the affairs of the bank fairly and impartially, and extend advances to the members in such manner as they may safely and reasonably be made. The considerations which are to guide the board of directors in their extension of advances are discussed in this subsection, and are very important. Perhaps I had better read that section:

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

That is a general statement of the policy which is to guide the board of directors in their administration of the advances made.

Page 13, lines 8 and following, provides for the Federal board causing examinations of the laws of the various States to be made from time to time, in order to ascertain just what the laws of the States authorize the members to do, and whether or not the laws properly protect the interests of the bank.

The board is also given authority to withhold the establishment or prevent or limit the operation of any Federal Home Land Bank in a State until satisfactory conditions of law with respect to the things I have mentioned are established.

Examinations of members are taken care of. In the case in which the State examination is inadequate, the board will provide for examination itself.

The board is to make studies of the trends of home and property values and such other things as may be deemed useful to guide the policies of the banks and members.

Section 7, page 14, lines 10 to 18, is very important. The provision is something like this:

You have institutions which have already subscribed to stock. They must also ap ly for advances. They have to make a general application before they can apply for a specific advance, and that general application is to secure permission ro apply for advances. The bank is given the discretion to deny this general application, or, subject to the approval of the board, may grant it on such conditions as the bank prescribes.

Section 8, page 14, lines 20 and following, over on page 15, really is probably the most important thing in the bill from the point of view of practical operation.

This section provides for the lending of money by the bank to the member institution. The banks are to lend money to these institutions which have applied for permission to secure advances upon the security of home mortgages. The board is given the power to prescribe regulations, restrictions, and limitations with respect to making such advances.

On page 15, lines 3 to 7, the statutory limitations are set out. It is contemplated that a member institution will come to this bank with a lot of mortgages in hand, and try to secure an advance on those mortgages. Now, these are the limitations on the bank's power to lend, with respect to what kind of mortgages the member institution will put up for an advance.

Mr. O'BRIEN. Paragraph 1 of subsection (a) section 8 on page 15, lines 3 to 7, discusses the further limitation. In the case of an amortized home mortgage loan which has an original term of eight years or more, the advance may be for an amount not in excess of 60 per cent of the unpaid principal. I will first explain what that unpaid principal means.

Senator COUZENS. Before you get to that, what was the theory of the eight years?

Mr. O'BRIEN. Eight years was thought to be the dividing line between the long term and short term loans.

Senator COUZENS. In other words, if it was a 5-year mortgage, he could not get a loan under this provision?

Mr. O'BRIEN. He could get the loan, but he could not get as much. The 5-year term is taken up in paragraph 2. He could get 50 per cent on it. I think the theory is that the long-term loans are more secure than short-term loans and, therefore, you can lend more on them.

In addition to the restriction that the original term of the mortgage must be eight years or more in order that the advance may be as much as 60 per cent of the unpaid principal, there is a provision here that such a mortgage must be an amortized mortgage.

I might explain that in my own way like this: It is a mortgage which is paid off in instalments. There are several situations, in some of which the payments are small at first and others in which they increase in amounts, and others in which the payment is substantially equal all the time.

I think the conception of the House committee is something like this: That when the term “amortized mortgage” is used, it means a mortgage in which the payments are substantially equal. They do not contemplate this sort of a thing; that is, where a man pays 1 per cent each year on a 10-year loan, so that at the end of 10 years he has only paid 10 per cent; for he has either got to pay 90 per cent or renew it. What is meant is the ordinary case, in which the ordinary home owner makes the ordinary arrangements with the savings bank under which he pays off a substantial amount of his principal, plus interest, at each payment.

Limitation 2 is that any other mortgage than a long-term mortgage which is amortized can only have an advance of 50 per cent of the unpaid principal.

Senator COUZENS. Why do you just use the broad language of “any other home mortgage loan''?

Mr. O'BRIEN. Other than one which is provided for in subparagraph 1. Senator Watson. I suppose it means other than amortized.

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