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Mr. SPENCE. The Director of the Budget decides what functions and what powers shall be transferred, as I understand it, and I think unless the powers are very clearly defined between these two organizations, that there will be constant disagreement and doubt as to just what is the function of each organization.

Chairman Dawson. Mr. Holifield, do you have some questions of Mr. Spence?

Mr. HOLIFIELD. No; no questions.
Chairman DAWSON. Mr. Fascell?

Mr. FASCELL. Mr. Spence, as far as the Committee on Banking and Currency of the House is concerned, the present system that we have for the Federal Savings and Loan Insurance Corporation is working effectively and efficiently; is it not?

Mr. SPENCE. I think the present system is operating very well. The organization has done splendidly, and that is the best argument to continue it as it is now constituted.

Chairman Dawson. Congressman Lanham, of Georgia, a former member of this committee, is with us.

Do you have any questions you would like to ask!
Mr. LANHAM. No, no questions.
Chairman Dawson. Thank you very much, Mr. Chairman.
Mr. SPENCE. Thank you, Mr. Chairman.
Chairman Dawson. We are certainly happy to have you with us.
Mr. Brundage.
Mr. Brown. Aren't you going to hear these other Congressmen ?

Chairman Dawson. If they have other meetings. I am trying to get the witnesses who have other meetings, and Mr. Brundage asked that he be heard early, if possible.

Mr. LANHAM. Yes; I have no other meeting this morning until 11:45.



Mr. BRUNDAGE. Thank you very much, Mr. Chairman. I had to leave another meeting to come here for this appearance. I appreciate the opportunity, Mr. Chairman, to appear before your committee in support of Reorganization Plan No. 2 of 1956.

This reorganization plan is designed to strengthen the organization and administration of both the Federal Savings and Loan Insurance Corporation and the Federal Home Loan Bank Board by transferring the management of the Corporation from the Federal Home Loan Bank Board to a new and separate board of trustees.

From its establishment in 1934 to 1942, the Corporation operated under a board of trustees composed of the five members of the Federal Home Loan Bank Board, and held separate meetings as a corporate board.

In 1942 the functions of the board of trustees were transferred by Executive order to the Federal Home Loan Bank Commissioner and this arrangement continued until 1947.

Reorganization Plan No. 3 of 1947 abolished the board of trustees— it was handled by a Commissioner at that time; the operations were not large—and transferred its functions to a newly established Home Loan Bank Board under the Housing and Home Finance Agency. These functions have been retained by the present independent Federal Home Loan Bank Board.

When viewed in the light of the tremendous growth of the savings and loan industry during the last decade and its present importance in the national economy, the urgent need for this further reorganization becomes apparent. Our home mortgage debt is now almost

five times the 1945 year-end level. Savings and loan associations are the largest single source of home mortgage funds and currently account for 37 percent of mortgage recordings. Well over 90 percent of their earning assets are invested in real estate mortgages. Our concern about this matter is not because of the Federal capital but because we are insuring over $31 billion of these deposits.

Insurance of share-accounts by the Federal Government has been one of the major incentives for savers to invest in savings and loan associations. Consequently, largely for competitive reasons, over a thousand savings and loan associations whose accounts had not been previously insured, have applied for and obtained insurance since 1945. By the end of 1955, outstanding mortgage loans of the 3,544 insured associations were 7 times as high as in 1945 and were greater than the insured share-accounts of $28.3 billion. Over three-quarters of these loans are not insured or guaranteed by Federal agencies, with their security depending solely upon the soundness of the borrowers and assets themselves.

The phenomenal growth of these insured institutions and the character of their assets emphasize the importance of the responsibilities vested by law in the Federal Savings and Loan Insurance Corporation. The Corporation has a duty to require such examinations of insured institutions as may in its judgment be “necessary for its protection and the protection of other insured institutions” and to take steps, through the appropriate supervisory body, to secure such corrective action as may be indicated. Effective examination and supervision are essential to the protection of the Corporation and the holders of share-accounts, particularly since the reserves and undivided profits of the insured associations represent a smaller proportion of risk assets than in 1945, and since the surplus and reserves of the Corporation itself have decreased during the same period from 1.2 percent of the insured liability to .6 percent of the insured liability.

While the identity in management of the Federal Savings and Loan Insurance Corporation and the Federal Home Loan Bank System may have been justifiable during the formative years of the insurance program, that program has now attained a size and importance which clearly demand the full-time attention of a separate board of trustees. The great growth in the Federal Home Loan Bank System also makes it desirable that the Federal Home Loan Bank Board be relieved of responsibility for the insurance program, so that it may concentrate completely on its increasingly important duties with respect to the supervision and regulation of the 11 Federal Home Loan Banks, the chartering, supervision, and regulation of Federal savings and loan associations, and the maintenance of a stable flow of funds for home financing

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I am convinced that separation of the Corporation and the Federal Home Loan Bank Board will serve the best interests of both agencies and the public.

In view of the present and rapidly increasing magnitude of the commitments undertaken by the Corporation, it is imperative that the Government establish those organizational arrangements which are best calculated to assure the continued financial soundness of the insurance program. Both the second Commission on Organization of the Executive Branch of the Government and the General Accounting Office have pointed to the need for making the reorganization accomplished by this plan.

The Commission in its report on “Lending, Guaranteeing and Insurance Activities” recommended that, no person be permitted to serve as a member of the Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation at the same timeand emphasized the desirability of aclear separation of the management of the two agencies. In a number of its audit reports submitted to the Congress the General Accounting Office has also recommended that the Corporation administering insurance underwriting be made independent of the agency having the authority to promote and charter insured Federal savings and loan institutions. The General Accounting Office has stated that there is a serious question as to the desirability of permitting one agency to exercise the function of supervision of insurance underwriting as well as the functions of promoting and chartering Federal savings and loan associations. Past experience in this respect indicates that the responsibilities for these functions are inherently conflicting.

In recommending that the Congress consider complete or partial separation of the Corporation from the Home Loan Bank Board, the General Accounting Office observed that such a separation of functions exists in the commercial banking field. The Federal Deposit Insurance Corporation is independent of the Federal agencies concerned with the chartering and supervision of commercial banks, but coordination is obtained through the provision that the Comptroller of the Currency be an ex officio member of the board of directors of the Federal Deposit Insurance Corporation.

Under the plan, the Federal Savings and Loan Insurance Corporation will have a form of organization in most respects comparable to that of the Federal Deposit Insurance Corporation. Although the Hoover Commission recommended that management of the Corporation be separated completely from the Federal Home Loan Bank Board, the plan provides that the Chairman of the Board shall be 1 of 3 members of the Board of Trustees of the Federal Savings and Loan Insurance Corporation with authority identical to that of the other trustees. It is believed that such an arrangement is necessary and desirable to assure coordination of the policies of the two agencies.

Under Reorganization Plan No. 2, the trustees, other than the Chairman of the Federal Home Loan Bank Board, will be appointed by the President by and with the advice and consent of the Senate. The plan does not require the Board to be bipartisan. The Corporation is engaged solely in insurance underwriting and related functions. All of the Government's major insurance programs, with the sole exception of the Federal Deposit Insurance Corporation, are administered either by agencies with a single head or by a Government corporation under a board of directors which is selected for its experience and not on a partisan basis. These include mortgage insurance (Federal Housing Administration), crop insurance (Federal Crop Insurance Corporation), veterans' life insurance (Veterans Administration), farm tenant mortgage insurance (Farmers' Home Administration), and ship mortgage insurance and war risk insurance (Secretary of Commerce). It may also be noted that only two (Federal Deposit Insurance Corporation and Export-Import Bank) of some 50 active Government corporations (other than the Federal Savings and Loan Insurance Corporation) have boards of directors selected on a bipartisan basis.

It has been contended that the reorganization will result in duplicate Federal supervision and examination of savings and loan associations, duplicate reporting, and conflicting regulations. Careful analysis of the assignment of functions between the Corporation and the Federal Home Loan Bank Board, as provided by the plan, will demonstrate that these contentions stem from a misunderstanding of the plan. The following is a brief summary of the respective functions and responsibilities of the Board, the Corporation, and the State supervisory authorities after the reorganization goes into effect.

1. Chartering of savings and loan associations: This will remain exclusively a function of the Federal Home Loan Bank Board and the appropriate State authorities.

2. Insurance: The Federal Savings and Loan Insurance Corporation will have the power to approve or reject applications for insurance, whether by Federal- or State-chartered associations, and to terminate insurance as provided by law.

All Federal associations are required to be insured. An applicant for a Federal charter must, therefore, among other conditions, meet the eligibility requirements for Federal insurance.

3. Regulation: The establishment of regulations governing the organization, incorporation, and operation of savings and loan associations will remain a function of the Federal Home Loan Bank Board and the appropriate State authorities, excepting regulations directly related to the granting or withdrawal of insurance. Different standards are now set for insurance than for membership in the Home Loan Bank System. The same is true of standards prescribed by State authorities. This will continue to be the case. In view of the liability assumed by the Government, the standards for insurance should be and are now often higher than those set by the Board for membership in the System or by the State supervisory authorities for chartering or for other purposes.

4. Supervision: Savings and loan associations will continue to receive directions on supervisory matters from a single Government agency, either the Federal Home Loan Bank Board, in the case of Federal associations, or the appropriate State authorities, in the case of State-chartered institutions. Supervisory letters to associations based on findings of annual examinations will be signed, as under present procedure, either by the Board, or its authorized agent, or by the State supervisory authorities.

When examinations disclose unsafe and unsound practices which may lead to the termination of insurance, the Corporation, as now provided by law, will notify the insured association through the appropriate supervisory authority, or if there is no supervisory authority, notify the association directly. In the case of insured State-chartered associations, the supervisory process can be simplified, in that the Corporation will be able to communicate directly with the State authorities. Under existing procedure, the Corporation communicates with State authorities through the presidents of the home loan banks who act as supervisory agents for the Bank Board.

5. Examination authority: The Federal Home Loan Bank Board will retain authority to provide by regulation for the examination of the approximately 1,700 Federal savings and loan associations. The Board will also retain authority to examine State-chartered member or nonmember borrowers from the home loan banks “in any State where State examination is deemed inadequate” and to charge the expenses of such examinations to the cost of making advances in such States. There are over 2,600 State-chartered members of the System, of which about 1,900 are insured.

The Corporation will have authority to make such examinations of insured institutions "as in its judgment may be necessary for its protection and the protection of other insured institutions" and "to require insured associations to pay the reasonable costs of such examinations." This authority extends to all insured institutions, whether Federal or State-chartered. These examinations are now made on behalf

of the Corporation by employees of the Federal Home Loan Bank Board.

(a) Federal associations: The Federal Home Loan Bank Board and the Corporation will have a joint interest in the examinations of Federal associations, but for somewhat different reasons. Examination is one of the tools used by the Board to ascertain compliance with applicable laws and the regulations issued thereunder. Èxaminations may be supplemented by periodic inspections and other sources of information. In that respect, the relationship of the Bank Board to Federal associations is comparable to that of State authorities to State-chartered institutions. The Corporation is concerned with the financial soundness of Federal associations and must rely primarily on periodic examinations to disclose unsafe and unsound practices which may jeopardize its insurance risk.

(6) State associations: So far as State-chartered institutions are concerned, supervisory responsibility is vested in the respective State agencies and the Bank Board's interest is limited to the credit standing of the State associations which borrow from the home loan banks. The Bank Board is authorized to examine such associations only after it has made a finding that the State examination is inadequate. The Corporation, on the other hand, has identically the same responsibility and authority with respect to insured State institutions as it has in the case of Federals.

6. Administrative arrangements for examinations: The Federal Home Loan Bank Board cannot delegate its responsibility for the chartering, supervision and regulations of Federal savings and loan associations. Neither can the Federal Savings and Loan Insurance Corporation delegate its responsibility to maintain the financial soundness of all insured institutions.

Each may choose, as a matter of administrative convenience, or in the interests of efficiency, to utilize the services of another agency to

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