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EXAMINATION OPERATIONS

Mr. MCMURRAY. With regard to our examination operations, 15 man-years have been used in the first 8 months of fiscal 1964 to examine serious supervisory cases, assist the F.S. & L.I.C. with the acquisition, preservation, or disposition of assets of institutions forced to merge or liquidate, and to take charge of and subsequently merge one Federal association.

Approximately 60 percent of this time was expended in the Chicago area, and a major portion of the remainder has been used to investigate carefully the effect of rapid growth in share capital on leading policies and reserves for losses in institutions paying higher than average dividends.

This unpredicted drain on manpower and the simultaneous net loss of an additional 15 field examiners since July 1, 1963, due to resignations, retirements, and other reasons, have not seriously affected the overall status of examinations, although it has been necessary to arrange temporary transfers of personnel between districts to meet peak workload requirements.

As of February 29, 1964, only one Federal and seven insured State institutions had not been examined within the preceding 13 months, which is a very excellent record. The average period between examinations was 11.5 months in Federals and 12.0 months in the Statechartered institutions.

Examinations are current because the Office of Examinations and Supervision has acted promptly to train personnel in the use of more efficient methods and procedures developed in the past 2 years.

The number of days to make examinations is approximately the same as last year in spite of the growth in assets and activity of the institutions examined, and the use of modified procedures with smaller examining crews results in more examinations being made in the same period of time.

INDEPENDENT ACCOUNTANTS' AUDITS

We are continuing to encourage audits by qualified independent accountants and internal auditors, and there has been a further decrease in the percentage by number and total assets of institutions audited by the Board's examiners since I reported to you last year.

In the first 8 months of fiscal 1964 our examiners made audits in 1,553 institutions having total assets of $22.9 billion, representing 56.1 percent by number and 37.7 percent by asset volume of the 2,769 institutions examined in that period.

When an institution has an acceptable independent or internal audit program and an excellent system of internal checks and controls, chief examiners may authorize further reductions in some detailed procedures.

Since July 1, 1963, 215 institutions have been examined under this program. Their assets increases approximately 13.2 percent and examination time was decreased 25.1 percent below the previous year.

This experience included 64 institutions examined under the program in fiscal 1963, when it was first authorized, and the savings of examination time in those institutions was only 5.3 percent as compared to 30 percent in those complying with the requirements for the first time this year. Thus, it is obvious that the Office of Examina

tions cannot rely upon this program to reduce its manpower requirements substantially in subsequent years.

In other words, we have gotten everything we can out of it. I might say when I first became Chairman, and Earl Cooper will remember, as he sat with us on the task force, Senator Magnuson appointed him to sit with our task force, we discussed, I believe at the first meeting about a month after I became Chairman, how to cut down on examination time and how to get to the essential questions that an examiner should concern himself with rather than picayune questions which consumed a lot of time and only irritated the management.

EFFECTS OF SIZE OF INSTITUTIONS

Senator MAGNUSON. The fact that an institution has more assets doesn't necessarily mean it takes longer to examine it.

Mr. MCMURRAY. Not necessarily. There is, of course, some relationship, sir, to the assets.

Senator MAGNUSON. The bigger they become the more apt they are to have more in-house internal audit. They can afford it, let's put it that way.

Mr. MCMURRAY. Yes, but there is a relation to the two sides. Senator MAGNUSON. Yes, you have more mortgages and more things.

Mr. MCMURRAY. Yes, sir.

Senator MAGNUSON. But you can look at sometimes a smaller institution takes longer than a large one.

Mr. MCMURRAY. Well, there are cases where that is true, I can tell you that.

The savings in examination time and personnel requirements resulting from more efficient examining methods and the approval of modified procedures were projected into the computations of examiner requirements for fiscal 1965.

NO PERSONNEL INCREASE OVER 1964

We have not estimated the need for positions in excess of those authorized for 1964, and, as in 1964, we will not fill all of the authorized positions if the existing staff can keep the work up to date.

The present rate of growth of the institutions supervised by the Board, the seriousness of some trends in lending and operations, and the need for time to develop better programs and train personnel to use them justify the number of positions requested for 1965.

We really have kept our requirements down to what we really think are about minimum.

In other words, we could- we have done our very best to say, well this we can get along with, but please don't cut it any more, because I have always felt

Senator MAGNUSON. You are doing better than when we had the 18 months.

Mr. MCMURRAY. Yes, sir.

Senator MAGNUSON. Because if you are going to get in there every 12 months or once a year you don't have as much to do than if you let it slide for another 6 months.

Mr. MCMURRAY. That is right. I think, really, Larry Walters, who is the head of the Division of Examinations, has done a terrific job

of following through on the Board's policy of trying to do something about it and this is the record of which I as chairman, and the other Board members feel the same, am presently proud. We really worked on this, and I know how Association officers feel, they have these examiners in and we want to get them in and get them out and not irritate the officers or consume their time and yet do our job and we are doing that and the industry is very pleased with what we have done. Senator MAGNUSON. Do these examiners, through your chief examiner, the head who is here, they immediately make a report to you, don't they, about it?

Do they make a separate report and then an area report?

Mr. MCMURRAY. I might say in answer to your question, we have also done something else. Previous to becoming Chairman, the examination was separated from supervision. This meant the examiners made the examination and gave the report to the field supervisor, usually the president of the district bank; a copy of the report came to Washington to the Division of Supervision.

UNIFICATION OF SUPERVISION AND EXAMINATION

We have instituted under the reorganization of the Board a unification of the functions of supervision and examination.

At the present time we have unified it at the Washington level and Mr. Armistead, the Director, who is here today, used to be the Vice President of the Richmond Federal Reserve Bank; he retired from that bank, and I was able to secure his services to help us bring about a unification and a reorganization of our program, and we are making good progress.

Now, we are gradually unifying it at the field level, but it is only at the beginning stages so at the present time the reports still go to the field supervisor and a copy comes to Washington.

Mr. Armistead or Mr. Walters is here to answer your question in more detail.

Senator MAGNUSON. What about the timing? Obviously to do this job it has got to be done day to day, week to week, and month to month. So that when an association in Richmond, for instance, might be examined in July, and one in Seattle in January, does that make any difference in this business?

Mr. MCMURRAY. No, sir. Because, of course

SCHEDULING EXAMINATIONS

Senator MAGNUSON. Are there any seasonal aspects to this thing? Mr. MCMURRAY. Well, you know there is always the surprise element in an examination, and each district works out a schedule of examinations.

Senator MAGNUSON. Of its own.

Mr. MCMURRAY. And they work pretty much within their own districts. However, if there is a special problem of a serious nature the Chief Examiner will order additional examiners into a district, on a temporary basis if it is necessary.

Senator MAGNUSON. So that is no serious problem for the members that one of them happens to be examined in July and the other in January?

Mr. MCMURRAY. No, sir. No trouble at all. Of course, some of them would prefer, I would suppose, there are certain periods when they are busier than others, and they would

Senator MAGNUSON. There is seasonal business?

Mr. MCMURRAY. But I wouldn't be surprised if the Division of Examinations takes that into account when scheduling examinations. Senator MAGNUSON. In the different areas.

Mr. MCMURRAY. But they have to keep their people fully employed.

Senator MAGNUSON. All right.

DEFAULTS ON MORTGAGES

Now, let's go on to defaults of the mortgages.
Mr. MCMURRAY. Yes, sir.

Foreclosures by savings and loan associations as a group of financial institutions compares favorably with foreclosures by all lenders. The foreclosure rate per 1,000 loans held for the four quarters ending December 31, 1963, was 5.04 for savings and loan associations insured by the FSLIC. This includes deeds in lieu of foreclosure, which account for about 20 percent of the total number of foreclosures. Senator ALLOTT. Now this 5.4.

Mr. MCMURRAY. That is 5 mortgages per 1,000.
Senator ALLOTT. Per 1,000, all right.

Mr. MCMURRAY. When adjustment is made for this, to make it comparable with available data covering foreclosures by all lenders, the forclosure rate drops down to about 4 per 1,000, somewhat less than the rate reported by all lenders in 1963. We include the deeds-in-lieu of foreclosures.

PROBLEM AREAS IN FORECLOSURE

Detailed examination of the foreclosure data, however, reveals certain problem areas. Associations in two of the Federal Home Loan Bank Districts-Little Rock and San Francisco-had foreclosure rates above the national average. In the San Francisco district the rate was 79 percent above the national average; and in the Little Rock district, 20 percent. If the San Francisco district is excluded, the national rate drops from 5.04 per 1,000 to 4.16 per 1,000.

I might say in connection with California, which is the real problem area, where the foreclosures are current, that it has good foreclosure law; it can act rather quickly, and it takes more advantage of it, for example, than Illinois, where it takes you probably a year and a lot of money to foreclose."

NATIONWIDE FORECLOSURE RATE

Eliminating FHA and VA foreclosures, the foreclosure rate for conventional loans on a nationwide basis was 4.17 per 1,000; further eliminating deeds-in-lieu of foreclosure on conventional mortgage loans would reduce this foreclosure rate to 3.23 per 1,000, a quite respectable rate when compared with foreclosures for all lenders. The San Francisco district is the only district with a foreclosure rate on conventional loans above average, and that rate is more than twice the rate for the country as a whole.

Senator MAGNUSON. Right there, when you talk about the San Francisco district you are talking about the southern California area which is included in the San Francisco district?

Mr. MCMURRAY. I would say that it probably concentrates itself more in southern California.

Senator MAGNUSON. So we get that clear.

Mr. MCMURRAY. So these averages, this is for the State, and that rate is more than twice the rate for the country as a whole.

Looking at foreclosures on conventional loans among the different States, we find that during the four quarters ended December 31, 1963, 11 States had a foreclosure rate above the national average. The foreclosure rate was 40 percent or more above the average for the Nation in the four States of Arizona, California, Florida, and Nevada. The highest foreclosure rate of 26.97 per 1,000 was reported in Nevada with the next highest, 10.57 per 1,000, appearing in California.

Senator MAGNUSON. Of course; now the obvious question is where is Washington and Colorado, are we all right? Are we in the average because we have some unemployment running around in at least our two States, too?

Mr. MCMURRAY. I can get it for you.

Senator MAGNUSON. All right, go ahead.

Mr. MCMURRAY. I can give you these off the record but these give too much detail and we don't disclose it, but I would say (Discussion off the record.)

Senator MAGNUSON. All right, go ahead, we will take a peek at it.
Mr. MCMURRAY. Washington is very good, sir.
Senator MAGNUSON. All right.

FORECLOSURES BY METROPOLITAN AREAS

For

Mr. MCMURRAY. We have also summarized total foreclosures, including those on FHA and VA loans, by metropolitan area. the four quarters ending December 31, 1963, our records show that 68 metropolitan areas out of 215 had a foreclosure rate higher than the average for the United States, in 28 of the metropolitan areas the foreclosure rate exceeded 10 per 1,000.

States with metropolitan areas whose associations had substantially higher than average foreclosure rates included Arizona, California, Florida, Kansas, Louisiana, Nevada, and Texas. There are a number of other States which have one or two metropolitan areas with higher than average foreclosure rates.

CORRELATING FORECLOSURES

AND OTHER REGIONAL CHARACTERISTICS

We have recently run some tests attempting to correlate foreclosure rates and certain other characteristics. It is evident, as the table before you headed "Relationship of Foreclosures and Growth Rates" demonstrates, that foreclosures are more common, listen to this, in areas with rapid growth rates that in areas with lower growth

rates.

We attribute this primarily to the fact that in areas where savings and loan associations have shown rapid growth, the flow of savings has been such that it has been difficult to penetrate the market and get the yield necessary to support the dividend rate without taking a

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