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 nomina

tions 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 aply 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 insti

tutions 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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Mr. O'BRIEN. It means other than amortized eight years or more. Senator WATSON. Yes.

Mr. O'BRIEN. In the case of such as are straight loans and short time amortized loans, the advance can be no more than 50 per cent of the unpaid principal. I think I have explained the unpaid principal before. The unpaid principal is the amount which Smith, the home builder, is obliged to pay the cooperative bank or the building and loan association. It is not contemplated that the bank will be able to lend 50 per cent of the face of the mortgage. You might have a situation in there where the face of the mortgage was $10,000 and all but $1,000 on that mortgage had been paid. It is not contemplated that they are going to lend 50 per cent of $10,000, but, rather, not more than 50 per cent of $1,000.

Senator MORRISON. Under this, if the bank has taken a mortgage of 50 per cent of the value of the property originally, then this institution could lend him 50 per cent of that mortgage, which would in general practice be about 25 per cent of its value.

Mr. O'BRIEN. Would you mind postponing that, Senator, until we get down to discussing subsection (b)?

Senator MORRISON. Not a bit.

Mr. O'BRIEN. I think that is taken care of in subsection (b).
Senator MORRISON. That is all right.

Mr. O'BRIEN. I might explain that in subparagraph (b) there is an express provision.

Senator WATSON. Which one?

Senator MORRISON. Well, let us go ahead. Disregard my question until you get to it.

Mr. O'BRIEN. All right.

Paragraph 3, lines 12 to 14 on page 15.

That says that in no case shall the amount of the advance be more than 40 per cent of the appraised valuation of the real estate. That is, in any case, even in spite of the 60 per cent provision, the bank can not make an advance which exceeds 40 per cent of the appraised valuation of the real estate for which the loan is placed.

Senator COUZENS. Whose appraised valuation?

Mr. O'BRIEN. There is a provision over on the next page with respect to appraisals.

Senator COUZENS. All right.

Mr. O'BRIEN. Subsection (b), page 15, lines 15 and following, puts further restrictions on the type of collateral security which may be received for an advance by the bank. Those restrictions are, first, that if and at the time the advance is to be made the mortgage has more than 20 years to run to maturity, that mortgage can not be accepted. Second, if at the time the advance is made by the bank the unpaid principal of the home mortgage exceeds three-fourths of the appraised valuation of the real estate, if the loan is an amortized loan or exceeds 60 per cent of the appraised valuation if the loan is not amortized, that mortgage can not be accepted as collateral.

In addition to that, if the unpaid principal of any loan is in excess of $15,000, it is not eligible to secure an advance under this act. Senator COUZENS. My understanding was that this $15,000 was limited to the principal, but I see you have it here as unpaid principal. Mr. O'BRIEN. Unpaid principal; that is right.

Senator COUZENS. So that the mortgage might be a $100,000 and reduced to $15,000.

Mr. O'BRIEN. That is quite true.

Senator COUZENS. That is not my understanding. My understanding of the purport of the law was that no loan was to be made or home supported which exceeded in valuation $30,000, and therefore the $15,000 limit was placed there.

Senator WATSON. Where did you get that conception?

Senator COUZENS. I can not tell you.

Mr. O'BRIEN. In that respect the bill has not been changed by the committee.

Senator COUZENS. I might say in that connection that I participated in the discussion in which that very question was raised, and some of the strongest advocates for this legislation said that this was not proposed for the purpose of aiding homes that cost $40,000, $50,000 or $60,000, but was, rather, proposed to limit the support to persons desiring homes that did not in any sense exceed the original cost of $30,000. In other words, I understand that the President at one time made a public statement to the effect that his limit is proposed to be $20,000, and I took the position that $10,000 was enough for the Government to interest itself in, and that would mean that it would only interest itself in a home that might not cost more than $20,000, but it now seems by the wording of this bill that any kind of a home, no matter what its luxury or style or elegance may be, may be helped under this plan if the original mortgage has been reduced down to $15,000.

Mr. O'BRIEN. Yes.

Senator COUZENS. That is not my conception of the bill.

Mr. O'BRIEN. In that connection, lines 1 to 5 provides for appraisals. Those are appraisals not only for the purpose of subsection (b), but also for the purpose of subsection (a). That is, appraisals under 3 under which the loans can not be for more than 40 per cent of the appraised valuation of the real estate, and also for the purpose of ascertaining whether the unpaid principal of the home mortgage exceeds three-fourths of the appraised valuation under subsection (b). That, I think, Senator, answers your question with respect to whose appraisal. The appraisal has to be established under such evidence as the board may require, but there is a suggestion made in the bill that it may be established by a certification to the bank by the borrowing member. That does not, however, prevent the board from requiring such other evidence as it wants to establish that appraisal.

The bank is also given the privilege to make appraisals or such other investigations as it thinks necessary.

There is a further restriction that no mortgage can be accepted as collateral security for an advance if any officer or director, and so forth, of the bank or of the borrowing institution is personally liable thereon, unless the board specifically authorizes that mortgage to be accepted as collateral.

Senator MORRISON. Would it be permissible for me to go back to this question you were talking about just now.

Mr. O'BRIEN. Certainly.

Senator MORRISON. On page 15, 3 at the bottom there: "The unpaid principal of such home mortgage loan exceeds $15,000."