NATIONAL BANK LEGISLATION TUESDAY, SEPTEMBER 12, 1961 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE No. 1, The subcommittee met, pursuant to notice, at 10 a.m., in room 1301, House Office Building, Hon. Brent Spence (subcommittee chairman and chairman of the full committee) presiding. Present: Representatives Spence, Reuss, Moorhead, McDonough, and Scranton. The CHAIRMAN. The committee will be in order. The first bill for hearing this morning is H.R. 7796. The clerk will read the title of the bill. Mr. CARDON. A bill to amend certain lending limitations on real estate and construction loans applicable to national banks. The CHAIRMAN. The bill will be inserted in the record and also the reports of the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Federal Reserve System. (H.R. 7796, and the reports thereon follow:) [H.R. 7796, 87th Cong., 1st sess.] A BILL To amend certain lending limitations on real estate and construction loans applicable to national banks Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the fourth sentence of the first paragraph of section 24 of the Federal Reserve Act (12 U.S.C. 371) is amended to read as follows: "No such association shall make such loans in an aggregate sum in excess of the amount of the capital stock of such association paid in and unimpaired plus the amount of its unimpaired surplus fund, or in excess of 70 per centum of the amount of its time and savings deposits, whichever is the greater." SEC. 2. The first sentence of the third paragraph of section 24 of the Federal Reserve Act (12 U.S.C. 371) is amended to read as follows: "Loans made to finance the construction of industrial or commercial buildings and having maturities of not to exceed eighteen months where there is a valid and binding agreement entered into by a financially responsible lender to advance the full amount of the bank's loan upon completion of the buildings and loans made to finance the construction of residential or farm buildings and having maturities of not to exceed eighteen months, shall not be considered as loans secured by real estate within the meaning of this section but shall be classed as ordinary commercial loans whether or not secured by a mortgage or similar lien on the real estate upon which the building or buildings are being constructed: Provided, That no national banking association shall invest in, or be liable on, any such loans in an aggregate amount in excess of 100 per centum of its actually paid-in and unimpaired capital plus 100 per centum of its unimpaired surplus fund." 1 FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. BRENT SPENCE, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: Receipt is acknowledged of your communication requesting a report from the Corporation on H.R. 7796, a bill which you have introduced to amend certain lending limitations on real estate and construction loans applicable to national banks. Under present law the limit applicable to national banks relating to the making of real estate loans secured by first liens upon improved real estate is the amount of the bank's paid-in and unimpaired capital stock plus its unimpaired surplus fund, or 60 percent of its time and savings deposits, whichever is greater. The first section of the proposal would increase the limit from 60 to 70 percent. We are advised that a survey conducted by the American Bankers Association has revealed that approximately 12 percent of the national banks surveyed have reached or are approaching their present lending limitation, as it relates to the ratio to time and savings deposits. It is the view of the Corporation that the lending limits of national banks may be increased as proposed in this section of the bill without undue risk to the banks and their depositors. Section 2 of the bill proposes to liberalize the rules in reference to temporary construction loans for residential or farm buildings. Under present law loans having maturities of 9 months or less to finance the construction of residential or farm properties are not considered to be loans secured by real estate. The current proposal would change the maturity limitation on such loans to 18 months. We are advised that the basis for this extension is the fact that banks have learned from experience that in many instances the construction work financed by residential and farm loans has, because of weather conditions and other conditions which do not affect the risk of the loan, not been completed within the 9 months' limit and, therefore, it is deemed appropriate that this extension be granted. An 18-month provision is in the statute for construction loans on industrial and commercial buildings, provided that there is a "takeout" agreement. Notwithstanding, the proposal offers some hazard to the soundness of insured banks, we, nevertheless, conclude that the proposal provides a flexibility to bank lending operations that will better enable such lending institutions to provide funds for construction operations throughout the country. The extension of time for maturity of construction loans is reasonable and is justified by experience. The present and continuing prohibition against national banks making construction loans in the aggregate, commercial as well as residential and farming, in excess of the unimpaired capital stock and the surplus of the lending bank provides a restriction against an excessive volume of construction loans in any bank. The Corporation believes that the liberalization of the lending requirements in the bill would not be detrimental to national banks or their depositors. Accordingly, the Corporation would interpose no objection to the enactment of this bill. We have been advised by the Bureau of the Budget that it has no objection from the standpoint of the administration's program to the submission of this report. Sincerely yours, ERLE COCKE, Sr., Chairman. TREASURY DEPARTMENT, July 31, 1961. Hon. BRENT SPENCE, Chairman. Committee on Banking and Currency. DEAR MR. CHAIRMAN: Reference is made to your inquiry of June 23, 1961, requesting a report on H.R. 7796, a bill to amend certain lending limitations on real estate and construction loans applicable to national banks. The bill would amend present law to enable national banks to make real estate loans in aggregate sums not in excess of 70 percent of the amount of time and savines deposits instead of the prosent limit of 60 percent, and to permit construction loans to be made on residential or farm buildings for periods not to exceed 18 months instead of the present limit of 9 months. This Department has no objection to the passage of the proposed legislation. The Department has been advised by the Bureau of the Budget that there is no objection from the standpoint of the administration's program to the submission of this report to your committee. Sincerely yours, Hon. BRENT SPENCE, ROBERT N. KNIGHT, General Counsel. BOARD OF GOVERNORS, OF THE FEDERAL RESERVE SYSTEM, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: This is in response to your letter of June 23, 1961, requesting a report on the bill, H.R. 7796, which would amend section 24 of the Federal Reserve Act in order to liberalize lending limitations on real estate and construction loans by national banks. Under the first paragraph of section 24 a national bank may now make real estate loans in an aggregate amount not in excess of the amount of the capital stock of the national bank paid in and unimpaired plus the amount of its unimpaired surplus funds, or not in excess of 60 percent of the amount of its time and savings deposits, whichever is greater. H.R. 7796 would increase the second alternative to 70 percent. Under the third paragraph of section 24 loans by national banks to finance the construction of residential or farm buildings, maturing in not more than 9 months, are not subject to the limitations and requirements of that section applicable to loans secured by real estate. H.R. 7796 would increase the permissible maximum maturity on such loans to 18 months. This is to advise that the Board has no objection to favorable consideration of the bill. Sincerely yours, C. CANBY BALDERSTON, Vice Chairman. The CHAIRMAN. Mr. Bergmann is the first witness. Mr. Bergmann, you may proceed. STATEMENT OF HARRY P. BERGMANN, MEMBER OF THE MORTGAGE FINANCE COMMITTEE, THE AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY J. O. BROTT, GENERAL COUNSEL, THE AMERICAN BANKERS ASSOCIATION Mr. BERGMANN. Mr. Chairman and gentlemen, my name is Harry P. Bergmann. I am vice president of the Riggs National Bank of Washington, D.C., and a member of the Mortgage Finance Committee of the American Bankers Association. With me is Mr. J. O. Brott, general counsel of the American Bankers Association. The American Bankers Association wholeheartedly endorses H.R. 7796, which would be most helpful in permitting national banks to more effectively meet the real estate mortgage needs of their communities. As a matter of background, I would like to comment that the interest of our association in this bill is but one aspect of our increased activity in encouraging a larger role for commercial banking in the residential mortgage field. In recognition of the increasing importance of commercial bank interest in residential mortgages both to the public and to the commercial banking system, the Savings and Mortgage Division of the ABA was reorganized last year and a separate mortgage finance committee, of which I am a member, was established. One of the first actions of this new mortgage finance committee was to recommend to the appropriate committees of the association that the ABA support the two changes in the law which are contained in H.R. 7796. Our recommendation was accepted and the association has officially adopted a position favoring these two changes. Turning now to the specific provisions of H.R. 7796, the first section would provide that the aggregate amount of conventional real estate loans shall not exceed the unimpaired capital stock and surplus of the bank, or 70 percent of the amount of its time and savings deposits, whichever is the greater. Under existing law national banks are limited to 100 percent of unimpaired capital and surplus, or 60 percent of time and savings deposits, whichever is greater. The present provision has been unchanged since 1934. Since that time many developments have occurred in connection with real estate mortgage practices, particularly the development of the amortized loan. There can be no question that the present form of real estate mortgage lending provides a much safer type of investment which in itself would appear to warrant the modest increase in the aggregate amount of such mortgages. I am pleased to note that the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation have concurred in letters to your committee that this change can be made without undue risk to banks and their depositors. This increase in aggregate amount of mortgage limits is needed to permit national banks to serve the needs of their communities. A survey of banks made by our mortgage finance committee in August 1960 developed the information that over 12 percent, or at least one in eight banks, held conventional real estate mortgages in an aggregate amount equal or close to 60 percent of their savings and time deposits. Another 12 percent held conventional mortgages in an aggregate amount equal to between 40 and 50 percent. Thus, more than a year ago this survey indicated that one-fourth of the banks in this country had no or very little additional lending capacity to make real estate mortgages. Our survey further revealed that most of those banks that had reached their real estate loan limits were located in small communities. It is important that these banks be able to support the growth of their communities. In many instances these smaller communities do not. have representatives of insurance companies, or mortgage bankers, or savings and loan associations. The people in these locations must, therefore, look to their banks to provide all banking services. We are of the opinion that the extension of real estate credit is a service expected of a bank and one that a bank should provide. While the ABA survey covered 800 banks and included both National and State-chartered banks, it is believed to be representative of all banks, both National and State. Therefore, it is apparent that a substantial number of national banks have either reached or will shortly reach their present statutory limit. Accordingly, there is an immediate need of an increase in this limit in order to permit national banks to properly serve the home financing needs in their business areas. We do not think this will impair the liquidity of banks. It has been demonstrated that in times of recession or economic weak ness the time or savings deposits of banks tend to increase rather than decrease. Moreover, an examination of the banking laws in the various States shows that most States permit their State-chartered banks to make conventional mortgage loans in greater aggregate amounts than national banks are permitted under existing law. As of December 31, 1960, there was no aggregate real estate loan limit in 24 States. In 10 other States the limit, based upon time and savings deposits, is a higher percentage than the 60-percent ratio applicable to national banks. A number of other States provide a further alternative limitation in terms of a percentage of assets or total deposits, which in many instances would certainly result in a higher aggregate loan limit than the national bank provision. In fact, as of December 31 of last year only seven States had an aggregate real estate loan limit of 100 percent of capital and surplus, or 60 percent of time and savings deposits, whichever is greater. Finally, it should be noted that as of April 12, 1961, national banks had time deposits of slightly under $39 billion. Therefore, if the time deposit ratio in the aggregate real estate loan limitation is increased from 60 to 70 percent, it would add nearly $4 billion to the mortgage investment potential of national banks. Section 2 of H.R. 7796 would permit national banks to make construction loans on residential or farm buildings having maturities up to 18 months without being considered loans secured by real estate within the meaning of section 24 of the Federal Reserve Act. At the present time such construction loans on residential and farm buildings may not exceed 9 months. There is no other change in the existing provision of law, so that national banks would continue to be limited. in the total amount of construction loans for industrial and commercial purposes as well as residential and farm construction loans, to 100 percent of unimpaired capital and surplus. This change in the law is desirable because experience has shown that in many instances conditions beyond the control of the contractor have delayed construction of residential and farm buildings financed by construction loans from national banks so that it has not been possible to complete the construction within a 9-month period. Even though the builder can complete the residence within the 9-month period, we know of instances involving Government insured or guaranteed financing where as long as 6 to 8 weeks elapse between the submission of an application and the receipt of a commitment. The extension of time for a construction period from 9 to 18 months would meet any conceivable delay not caused by the builder. In our opinion this is realistic and deserving of your favorable consideration. For the reasons given, the American Bankers Association believes that H.R. 7796 is sound legislation which would be of great benefit to the public and to the national banks. We recommend that your committee report it favorably to the House of Representatives. Thank you, gentlemen, for this opportunity to appear here. The CHAIRMAN. This bill would make a relatively minor change in the substantive law? Mr. BERGMANN. That is correct, sir. 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