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COMPTROLLER GENERAL OF THE UNITED STATES,

Washington 25, D. C., September 24, 1956. Hon. John SPARKMAN, Chairman, Subcommittee on Housing,

Committee on Banking and Currency, United States Senate. DEAR MR. CHAIRMAN: Attached is the information which was requested in the list of questions submitted with your letter of August 14, 1956, concerning the functions and operations of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation.

We are gratified that your subcommittee is studying the relationships of the Board and the Corporation in the light of the problems which were raised during the hearings of the Subcommittee on Reorganization of the Senate Committee on Government Operations on Reorganization Plan No. 2 of 1956.

If we can be of any assistance to your subcommittee in your important undertaking, please advise. Sincerely yours,

JOSEPH CAMPBELL, Comptroller General of the United States.

COMMENTS ON QUESTIONS RELATING TO THE FEDERAL HOME LOAN

BANK SYSTEM IN GENERAL

1. State your opinion of the primary purposes of the Federal Home Loan

Bank Board and the Federal Savings and Loan Insurance Corpora

tion under existing law and administration The Federal Home Loan Bank Board is an independent supervisory and regulatory agency. It was created in 1932 pursuant to the Federal Home Loan Bank Act (12 U. S. C. 1421) and was made an independent agency by the Housing Amendments of 1955 (69 Stat. 640). The agency is directed by a three-man board. The 3 members are appointed by the President with the consent of the Senate for a term of 4 years; no more than 2 of its members may be of the same political party The primary purposes of the FHLBB comprise:

1. Establishing policies, regulating, and supervising the 11 Federal home-loan banks established and chartered under the Federal Home Loan Bank Act for the purpose of making available reserve credit facilities for home financing institutions.

2. Chartering and establishing policies, regulating, and supervising Federal savings and loan associations established under the Home Owners' Loan Act of 1933 (12 U. S. C. 1461) for the purpose of encouraging local thrift and home financing.

3. Directing the operations of the Federal Savings and Loan Insurance Corporation and establishing policies and regulating

the insured associations. The Federal Home Loan Bank Board does not receive any appropriations for its activities. All of its expenses are paid from two general sources of income: assessments on the Federal home-loan banks and the Federal Savings and Loan Insurance Corporation and fees for the examination of Federal and insured State-chartered institutions. However, the Congress annually places a dollar limitation on the amounts which may be expended for its expenses.

The Federal Savings and Loan Insurance Corporation is a wholly owned Government Corporation created in 1934 by the National Housing Act (12 U. S. C. 1725 (a)). The primary purpose of the Corporation is to insure the safety of share and deposit accounts of all Federal savings and loan associations and qualified State-chartered institutions against loss up to $10,000 for each investor or saver.

Insured institutions are required to pay premiums at a rate equal to 12 of 1 percent per annum of the total amount of all accounts of the insured members plus any creditor obligations. The Corporation's net earnings are required to be accumulated in an insurance fund reserve established for the protection of investors in insured institutions until such time as the reserve equals 5 percent of all insured accounts and creditor obligations of all insured institutions. The net earnings comprise the excess of insurance premiums, income on investments, and other revenues over expenses and provision for losses and for the payment, in lieu of dividends on capital stock, of a return on the average amount of its capital stock at a rate to be determined by the Secretary of the Treasury. In 1950 the act was amended to require the Corporation to retire annually at par a portion of its capital stock equal to one-half of its net income for the year. The appropriation acts place a limitation on the amounts which may be expended for administrative expenses other than for supervisory and various administrative services provided by the Federal Home Loan Bank Board. 2. State your opinion of what these primary purposes should be, if in

your opinion they should be changed We have no suggestions for changes in the primary purposes of the FHLBB insofar as they relate to the regulation and supervision of the Federal home-loan banks and the chartering, regulation, and supervision of Federal savings and loan associations, or in the primary purpose of the Federal Savings and Loan Insurance Corporation. However, we believe as indicated under item 9 of our comments on the questions relating to the desirability for separate management of the FHLBB and the FSLIC, that consideration should be given to the desirability of vesting the responsibility for management of the FSLIC in a board of trustees composed of members other than those constituting the FHLBB. 3. State your understanding of the present functions and relationships

of the Federal Home Loan Bank Board and the Federal Savings

and Loan Insurance Corporation The activities of the FHLBB in carrying out its primary purposes consist principally of

1. Chartering Federal savings and loan associations.
2. Establishing

policies, issuing regulations, and supervising the operations of the Federal home-loan banks and the Federal savings and loan associations.

3. Directing the operations of the FSLIC including the establishment of policies and the issuance of regulations pertaining to

insured associations. These activities include the supervision and examination of savings and loan associations operating in the District of Columbia and the periodic examination of Federal and insured State-chartered associations. These examinations are made for the purpose of ascertaining

the financial condition of the institutions and their compliance with prescribed regulations applicable to membership in the Federal Home Loan Banks, to insurance by the FSLIC, to holding Federal charters, and to doing business in the District of Columbia.

The activities of the FSLIC in carrying out its primary purpose consist principally of underwriting insurance, billing and collecting premiums, and investing surplus funds. In addition to these activities the act creating the corporation directs that it shall be appointed conservator or receiver of defaulted Federal savings and loan associations and authorizes it to so act for any other defaulted insured savings and loan association when appointed by a public authority having the power of appointment. The act also directs the corporation to prevent the default of an insured institution and to restore an institution in default to normal operation as an insured institution by making a loan to, purchasing the assets of, or making a contribution to such an institution. The power to declare a Federal institution in default is vested in the FHLBB.

Functions pertaining to the insuring of Federal and State-chartered savings and loan associations that are performed by the FHLBB in its direction of the operations of the FSLIC include:

(a) The establishment of policies and the issuance of regulations pertaining to insurance of savings and loan associations.

(6) The supervision and regulation of insured Federal and State-chartered savings and loan association.

(c) Notification to an insured institution of violations of its duty as such, violations of law and regulations, and of unsafe or unsound practices.

(d) Notifications to State supervisory authorities, if any, of such violations or practices.

(e) Taking the necessary action to terminate the insured status of an institution. The regulation and supervision of all Federal savings and loan associations and insured State-chartered institutions is performed largely by the FHLBB's Division of Supervision and designated officers of the 11 Federal home loan banks who act as field supervisory agents of the FHLBB. Compliance with supervisory recommendations is usually achieved by the Division of Supervision or by the supervisory agents, acting directly or through State supervisory authorities without any formal action by the Federal Home Loan Bank Board.

The supervision and regulation of insured savings and loan institutions is based largely on supervisory examinations and audits made by the FHLBB's Division of Examinations. The supervisory examinations of insured State-chartered institutions are, in some cases, performed jointly by Federal and State examiners. The audits of insured savings and loan institutions are made either by FHLBB examiners or by independent accountants retained by the insured institutions. The supervisory examination and audit reports are reviewed by field supervisory agents of the FHLBB, that is, designated officers of the Federal home-loan banks, and, on a test basis, by the FHLBB Division of Supervision which also determines that proper supervisory action has been taken by the field supervisory agents.

The law contemplates that upon the granting of a charter to a Federal savings and loan association its accounts will be insured; no approval by the FSLIC is required other than that of the FHLBB in its role as manager of the FSLIC. 4. Give any recommendations you may have for changing the functions

or relationships of the Federal Home Loan Bank Board and Federal

Savings and Loan Insurance Corporation We believe that there is a need for changing the practice of designating officers of the Federal home-loan banks to act as supervisory agents for the FHLBB. This supervisory function consists of reviewing reports of supervising examinations and audits made by FHLBB of Federal savings and loan associations and other insured institutions, taking supervisory action deemed necessary, and reporting the action taken to the FHLBB. These supervisory activities with respect to insured institutions are the responsibility of personnel conducting normal banking lending activities with the same institutions. As explained in our audit reports to the Congress, this change is desirable because the supervised institutions elect the majority of directors of a Federal home-loan bank who, in turn, appoint the supervisory agent. 5. Other recommendations

We have no recommendations in regard to (a) chartering new Federal associations, (b) establishing branch offices, (c) formulation and promulgation of regulations, legal opinions, and board decisions, (d) processing applications for insurance, (e) liaison between the FHLBB and the regional banks and between the regional banks and their member institutions, and (g) coordination of policies with other governmental agencies. With respect to item (f) we believe, as indicated in 4 above, that the responsibility for supervisory activities should be separated from the responsibilities for normal banking operations.

COMMENTS ON QUESTIONS RELATING SPECIFICALLY TO THE DESIR

ABILITY FOR SEPARATE MANAGEMENT OF THE FEDERAL HOME LOAN BANK BOARD AND OF THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION

1. What are the advantages and disadvantages of creating separate

management for the Federal Home Loan Bank Board and the

Federal Savings and Loan Insurance Corporation? The principal advantages that would result from a separation of management of the FHLBB and FSLIC and the creation of an entirely separate board of trustees to direct and manage the corporation would be (a) the board of trustees would be able to give full attention to the operations of the corporation; and (6) the board of trustees could establish policies and make decisions relating to the eligibility of existing State-chartered savings and loan associations for insurance and to the financial soundness of insured institutions and their right to continued insurance free from any considerations pertaining solely to their growth and the providing of additional funds for home financing.

The principal disadvantages that would result from separate management of the FHLBB and the FSLIC are (a) the possibility of differing policies of the FHLBB and of the FSLIC as they relate to the insured Federal savings and loan associations that would be subject to regulation by the two agencies; and (b) a duplication of supervisory, examination, and administrative functions with increased administrative expenses.

In case the management of the FSLIC were to be vested in a separate board of trustees, the duplication of functions could be kept to a minimum by vesting authority in the FHLBB to examine and supervise all insured associations subject to the FSLIC's review and approval of the adequacy of all examination and audit programs, and vesting authority in the FSLIC to review examination and audit reports and corrective actions taken and to make such additional examinations or to take such further supervisory action as it may deem necessary. 2. Does the existing identity of management contribute to or detract from

the purpose of protecting deposits? We have no information on which to base a categorical answer to this question. We have observed, however, certain minor weaknesses in the examination, supervisory, and regulatory functions which may or may not have existed if the two agencies had been separately managed. For instance, the recent defalcation in the Commonwealth Building and Loan Association, Inc., Norfolk, Va., and the original insuring of weak institutions (see p. 16 of our audit report for fiscal years 1945 and 1946, H. Doc. No. 660, 80th Cong., 2d sess.) might have occurred even if the Congress had provided separate boards of directors for the two agencies. 3. In what ways would separate management of the Federal Home Loan

Bank Board and Federal Savings and Loan Insurance Corporation promote public confidence in the savings and loan insurance program, or safeguard the interests of the Corporation and of the

Treasury? We do not believe that as a practical matter public confidence in the savings and loan insurance program would be materially affected by a change in the existing management of the two agencies, because the public at large seems to be content with the knowledge that the Government fosters the insurance program.

With respect to safeguarding the interests of the FSLIC and of the Treasury we believe that additional protection would result from the management of the Corporation by a separate board of trustees composed of members well qualified by experience. Such a board would be able to devote their full time to directing the Corporation's operations and evaluating the financial soundness of the insured institutions and their eligibility to continued insurance. In the case of the Federal savings and loan associations, the Board's evaluations would act as a check on those made by the FHLBB in the performance of their regulatory and supervisory functions. 4. What evidence can be cited to illustrate the contention that the existing

identity of management is less desirable at the present time that it has been since the creation of the Federal Savings and Loan Insur

ance Corporation? In our audit reports we have indicated our belief that the separation of the identity of management of the FHLBB and the FSLIC would be desirable because the promotion of Federal savings and loan associations appeared to be inherently conflicting with the functions

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