Why not just say the principal, if we wanted to do that? Would that amend it? "The principal of such home mortgage loan exceeds $15,000." Scratch out the "unpaid."

Mr. O'BRIEN. Yes.

Senator MORRISON. Will you just make a note of that, so if we want to use it in that way we can.

Mr. O'BRIEN. Yes.

Senator MORRISON. So it will make the original amount of the mortgage $15,000 instead of the unpaid principal. I do not know that I favor that, but I rather think I do.

Senator WATSON. Suppose a man has an original mortgage of $50,000 paid down to $15,000, under the terms you are proposing that would shut him out from a loan.

Senator COUZENS. Why not?

Senator WATSON. If he owes only $15,000 on $50,000 it would be safer than to borrow $15,000 on an original proposition.

Senator COUZENS. I understand that this legislation is not proposed along the line of safety, but, rather, to promote home building.

Senator WATSON. That involves a question of policy, Senator. Senator COUZENS. Yes. I am not discussing it. I am just raising the question. That can be taken up later on, when we have other witnesses.

Senator MORRISON. I think it involves the question of safety, certainly.

Senator WATSON. Yes.

Senator MORRISON. Cutting down the amount that would go through. But there is another question involved, and that is the question of helping folks who do not need it, but who nevertheless get the money.

Senator WATSON. Yes.

Senator COUZENS. Let's go on. We can discuss that later.

Senator WATSON. We can discuss the broad question of policy when we get the men in here who are familiar with that.

Senator MORRISON. I just wanted this gentleman to prepare an amendment for me so if we did want to do it we could do it without much trouble.

Senator WATSON. Yes,

Mr. O'BRIEN. Subsection (c) of this section 8, page 16, lines 15 and following, provides that in addition to the collateral the member trying to secure advances must put up, he must put notes and obligations, and the advances shall bear the rate of interest that the board determine.

It also provides that the bank shall have as security for the advances made to the member the stock which such member owns. The last line of that subsection deals with the aggregate amount which may be borrowed by any member, and that can not exceed at any time twelve times the amount paid in by the member. That includes, of course, the case in which there is a deposit in lieu of stock subscriptions. Senator COUZENS. In other words, I understand that your interpretation, beginning at line 15 on page 16, of the language "such advances shall be made upon the note or obligation of the member secured as hereinafter provided" means that in all cases that accompanying the security must be the note of the borrower.

Mr. O'BRIEN. That is quite so.

Senator CoUZENS. Yes.

Mr. O'BRIEN. Page 17 has more to do with what the member must do to get advances. That is, he has got to enter into an unconditional obligation to pay off his advances and pay his interest and any unpaid costs. The form of this obligations and the terms of the obligation are to be fixed by the bank, with the approval of the board.

The bank is also given authority to require additional or substituted collateral whenever the bank deems that additional collateral is necessary for its protection. In such a case the member who is securing advances must put up additional or substituted collateral.

The sentence beginning on line 11 of page 17 deals with the power of one bank to sell to another bank any advances which it has made to a member. That is, you have this situation: A bank in the district of New York has made an advance to a cooperative bank in New York State. It is possible for that bank in New York to sell that advance to a bank in Boston. It can sell it in part. It can allow participation in that advance. Of course, there is a provision with respect to the assignment of securities which have been deposited for that advance.

Section 9, which begins on page 17, line 23, specifies the general powers and duties of the banks. This relates chiefly to banks borrowing money under section 9 (a). The bank is given the specific authority, subject to the approval of the board, to borrow money and give security therefore and to pay interest thereon. It is also given authority to issue bonds and debentures, having such maturities as may be fixed by the board, secured by the deposit of the home mortgages.

The board, by subsection (b), page 18, line 5 and following, is given authority to prescribe rules and regulations governing the assignment, deposit, custody, and so forth of the home mortgages securing the bonds and debentures, and is also given the authority to prescribe rules and regulations governing the form and terms of the bonds and debentures, and the conditions under which they may be issued or retired.

Lines 11 to 14 provide for the depositing in trust with the trustee, on behalf of the bondholders, whoever he may be-call him registrar, or whatever you may term him-the home mortgages which will secure the bonds or debentures issued by the bank. The bank has got to get some money so it issues bonds and debentures. The trustee is going to get some security for them, and the board provides rules. and regulations for the deposit of the home mortgages as security. The next subsection (c), on that page, lines 15 to 23, is quite complicated.

Senator WATSON. All of it is.

Mr. O'BRIEN. The provision in brief is that the amount of home. mortgages which the trustee for the bondholders holds as security for bonds and debentures shall as nearly as possible equal 190 per cent of the total outstanding amount of the bond issue. One hundred and ninety per cent is with respect to the aggregate unpaid principal of the home mortgage loans secured by the home mortgages deposited as collateral for the bond issue. That is, the trustee for the bondholders has got to have in his hands not less than 190 per cent of the

bond issue in unpaid principal of the home mortgages which he has in his hands as security for the bondholders.

Senator COUZENS. Then I suppose when these mortgages are paid down or anything paid on them, there is a provision made for the substitution of other collateral.

Mr. O'BRIEN. There is?

Senator CoUZENS. Yes.

Mr. O'BRIEN. It is possible for the trustee to secure cash instead of home mortgages, but the theory is that he will only secure cash in a very narrow class of cases. In the main the trustee is to have home

mortgages deposited as security instead of cash.

Senator COUZENS. Is there any provision in the bill providing who shall be a trustee under the mortgage?

Mr. O'BRIEN. No. There is nothing said in that respect. There is authority in the board to appoint officers. We have not provided specifically who is going to appoint the trustees for the bondholders. Senator COUZENS. Is there any inhibition against the bank itself being the trustee for the mortgages, to secure the debentures?

Mr. O'BRIEN. I do not think there is any express inhibition, but I rather think that would be unlikely.

Senator COUZENS. It may appear unlikely; it should be unlikely, but as a matter of fact, we find many of these international bankers who are acting as trustees for sinking funds now, on many of these bonds that have been sold in this country. I think it is bad policy. Mr. O'BRIEN. That is a question we did not have time to go into. Senator COUZENS. Just make a note of it, so we may consider it later on.

Senator WATSON. That is a good point too, Senator.

Senator MORRISON. What would be the objection to making some highly respected board of the Government the trustee rather than the bank?

Senator COUZENS. We will discuss that, Senator, when we get into that.

Senator WATSON. Will you make a note of it, Mr. O'Brien.

Mr. O'BRIEN. Certainly. I must say that I am not too familiar with this provision in that respect. We really did not have an opportunity to go into this appointment of trustees very thoroughly. Senator WATSON. You may go on.

Mr. O'BRIEN. Subsection (d) on the same page, lines 24 and 25, and down to line 6 on page 19, relates to the depositing of additional home mortgages to secure the bonds and debentures, and then there is the express provision at line 2:

Except that when in the opinion of the board home mortgages are not available for such purposes, it may permit, for certain limited periods, as it may deem advisable, the deposit of cash in lieu of the deposit of substitute or additional home loan mortgages.

The idea is that in the main the trustee for the bondholders will have home mortgages as security, and in that very narrow class of cases referred to the trustee may be permitted to get cash in lieu of home mortgages, either in substitution or otherwise.

Page 19, subsection (e), line 7 and following, relates to the rates of interest which shall be paid by the banks on their obligations.

Senator COUZENS. May I ask the witness at that point why they fixed the limit of seven years, in line 10..

Mr. O'BRIEN. That is the limit contained inSenator COUZENS. In the farm loan bank act? Mr. O'BRIEN. Yes; in the farm loan bank act. The board can take any limit on notes and other obligations, but the bonds or debentures can not bear a rate of interest in excess of 5%1⁄2 per cent and if issued within seven years thereafter, not in excess of 5 per cent. If the bank next month contemplated a bond issue and issued it, the rate of interest would be fixed by the board, but it could not be in excess of 5%1⁄2 per cent. If seven years after the enactment of the act the bank is issuing bonds, the rate of interest would not be over 5 per cent.

Senator COUZENS. I want to interrupt with a question right there. There is a provision for tax exemption?

Mr. O'BRIEN. Yes.

Senator COUZENS. I hear a great many protests from the advocates of this bill that there should be a stoppage on the tax exemption. Mr. O'BRIEN. Yes.

Senator COUZENS. And many persons who have written me indorsing this bill say they favor it only on the theory that the debentures and bonds are not tax exempt. I want to make that a matter of record so we can consider it later on.

Senator WATSON. You say they are not tax exempt?

Senator COUZENS. I mean, they do not favor it if the bonds and debentures issued under it are tax exempt.

Senator WATSON. Yes.

Senator MORRISON. The Federal land bank is not tax exempt.

Mr. O'BRIEN. The same subsection, lines 14 to 21 on page 19, sets up a guide to the board in its determination of the margins between its rates on advances made by the bank and interest rates paid on loans to the bank. That guide is the margin in the interest rates, the difference, shall be such that it will cover the expenses of the operations of the bank and create reserves. There is further provision in line 20 that "some part of such reserve may be devoted to retirement of the stock subscribed by the United States." Senator WATSON. I wanted to ask about that.

Mr. O'BRIEN. Again, that is just one of these things we tried to take care of at the time, but this was left in as an atavism from the old bill, so on that one part we are not altogether sure what part of the reserve shall be devoted to retirement. We just left it in without having time to think it through and see what part it was. Senator WATSON. We ought to definitely know that. Mr. O'BRIEN. Yes; I think it is very important.

Senator WATSON. Make a note of that.

Senator COUZENS. There are other witnesses to appear and I would like to have them tell us something about any objections they would have to providing for the full retirement of the stock subscribed by the United States before any dividends are paid.

Mr. O'BRIEN. Page 19, the next subsection, beginning on line 22, and running over to page 20, provides for all of the banks being jointly and severally liable on the bonds of each bank. In addition to that, they are jointly and severally liable on the notes and other obligations issued by each bank and the interest thereon. But the proviso, which begins on line 1, page 20, permits the board specifically to authorize a bank to borrow funds temporarily, and under the terms under which they are borrowed it must be stated expressly that the liability for that borrowing is limited to the issuing bank.

Senator COUZENS. That is very objectionable and I just want you to make a note of it now. We can discuss it later on.

Mr. O'BRIEN. The banks are given authority to make arrangements among themselves, under the rules and regulations of the board, for meeting the payment of obligations on which they are jointly and severally liable. But those arrangements can not limit the statute in its provision, express provision, that they are to be jointly and severally liable.

Senator COUZENS. But you do make an exception in this paragraph where they are not jointly and severally liable.

Mr. O'BRIEN. Yes. There is a narrow class of cases in which they are not.

Senator COUZENS. I think that is very objectionable, and I want the other witnesses to straighten us out on that one, as to the reason or need for it.

Mr. O'BRIEN. (g) authorizes the bank to accept deposits made by members or made by other banks. They can not accept deposits from anybody else. The deposits are not to be subject to check and they can not bear a rate of interest in excess of 3 per cent per annum. That is to be considered in connection with the final sentence of that subsection, which provides that the bank can not transact any business not authorized by the act. There is no contemplation that this bank is going to be a regular commercial bank, neither can it transact any business which is not expressly authorized by the act.

Senator COUZENS. When some of the other witnesses come in I would like to know the reason for that provision, because it seems to indicate that the bank is to receive deposits, and yet in lines 21 and 22 there seems to be specific inhibition against accepting them. If it is not engaged in the banking business, it seems to me the mere acceptance of deposits is engaging in the banking business.

Senator WATSON. Made by members of such banks, or by other Federal home loan banks.

Mr. O'BRIEN. I might point out in that connection, if you look over on page 21, in paragraph (i), lines 10 to 18, there is a provision under which there is established an investment requirement with respect to the capital stock subscriptions of members. Now, I think it is contemplated in this bill that the stock subscriptions of members and the amount of deposits from members shall be invested only in a very, very narrow class of obligations. The class is United States Government securities, interest bearing deposits in banks or trust companies, and advances with a maturity not greater than one year made to members. The theory under which that is written--and that is to be taken in connection with the deposits in (g) on page 20-is this: In addition to this bank being a bank which will provide credit for home loan lenders, that is, these institutions, the bank is to have on hand a lot of liquid assets, which can be readily capable of being lent to these members. Part of the funds which they are to invest in liquid assets are these deposits which are made under (g). Not only are the capital stock subscriptions to be invested in these liquid assets, but also the deposits.

Senator COUZENS. I want to point out in that specific relation that under the provisions of this act, as the witness has just testified, it is quite within reason to expect that if these member associations can deposit moneys with the Federal home loan banks and receive up to