Federal Reserve Bank, requiring such person to advance the full amount of the loan upon the completion of the construction of such residential or farm building, and (4) matures not more than six months from the date such loan was made and not more than ninety days from the date of such discount by such Federal Reserve Bank, exclusive of days of grace.

Agricultural

(e) Agricultural paper. paper, within the meaning of this part, is a negotiable note, draft, or bill of exchange issued or drawn, or the proceeds of which have been or are to be used, for agricultural purposes, including the production of agricultural products, the marketing of agricultural products by the growers thereof, or the carrying of agricultural products by the growers thereof pending orderly marketing, and the breeding, raising, fattening, or marketing of livestock.

(f) Paper of cooperative marketing associations. Notes, drafts, bills of exchange, or acceptances issued or drawn by cooperative marketing associations composed of producers of agricultural products are deemed to have been issued or drawn for an agricultural purpose within the meaning of the foregoing definition of "agricultural paper", if the proceeds thereof have been or are to be used by such association in making advances to any members thereof for an agricultural purpose, in making payments to any members thereof on account of agricultural products delivered by such members to the association, or to meet expenditures incurred or to be incurred by the association in connection with the grading, processing, packing, preparation for market, or marketing of any agricultural product handled by such association for any of its members. In addition, any other paper of such associations which complies with the applicable requirements of this part may be discounted. Paper of cooperative marketing associations the proceeds of which have been or are to be used (1) to defray the expenses of organizing such associations, or (2) for the acquisition of warehouses, for the purchase or improvement of real estate, or for any other permanent or fixed investment of any kind, is not eligible for discount, even though such warehouses or other property is to be used exclusively in connection with the ordinary operations of the association.

(g) Factors' paper. Notes, drafts, and bills of exchange of factors issued as

such for the purpose of making advances exclusively to producers of staple agricultural products in their raw state are eligible for discount with maturities not in excess of ninety days, exclusive of days of grace.

(h) Collateral securing discounted paper. Any note, draft, or bill of exchange eligible for discount is not rendered ineligible because it is secured by the pledge of goods or collateral of any nature, including paper ineligible for discount.

(i) Determination of eligibility. (1) A Federal Reserve Bank shall take such steps as may be necessary to satisfy itself as to the eligibility of any paper offered for discount. Compliance of paper with the provisions of paragraph (a) (2) of this section may be evidenced by a statement which adequately reflects the borrower's financial worth and evidences a reasonable excess of quick assets over current liabilities, or such compliance may be evidenced in any other manner satisfactory to the Federal Reserve Bank.

(2) The requirement of this section that a note be negotiable shall not be applicable with respect to any note evidencing a loan which is made pursuant to a commodity loan program of the Commodity Credit Corporation and which is subject to a commitment to purchase by the Commodity Credit Corporation or with respect to any note evidencing a loan which is in whole or in part the subject of a guarantee or commitment made pursuant to section 301 of the Defense Production Act of 1950 as amended.

(j) Limitations. (1) The aggregate of notes, drafts, and bills upon which any person, copartnership, association, or corporation is liable as maker, acceptor, endorser, drawer, or guarantor, discounted for any member bank shall at no time exceed the amount for which such person, copartnership, association, or corporation may lawfully become liable to a national bank under the terms of section 5200 of the Revised Statutes of the United States, as amended.

(2) The law forbids a Federal Reserve Bank to discount for any State member bank notes, drafts, or bills of exchange of any one borrower who is liable for borrowed money to such State member bank in an amount greater than that which could be borrowed lawfully from such State member bank were it a national bank.

§ 201.4

General requirements as to advances and discounts.

(a) Applications for advances or discounts. (1) Every application by a member bank for an advance to such bank or for the discount of paper must contain a certificate of such bank, in form to be prescribed by the Federal Reserve Bank, that the security offered for the advance or the paper offered for discount, as the case may be, has not been acquired from a nonmember bank (otherwise than in accordance with § 201.5) or, if so acquired, that the applying member bank has received permission from the Board of Governors of the Federal Reserve System to obtain advances from the Federal Reserve Bank on security so acquired or to discount with the Federal Reserve Bank paper acquired from nonmember banks.

(2) Every such application shall also contain a notation by the member bank as to whether it has on file a statement which adequately reflects the financial worth of a party primarily liable on the paper offered as security for an advance or for discount or of the person from whom the member bank acquired such paper if such person is legally liable thereon.

(3) Every application of a State member bank for the discount of paper must contain a certificate or guaranty to the effect that the borrower is not liable and will not be permitted to become liable to such bank for borrowed money during the time his paper is under discount with the Federal Reserve Bank in an amount greater than that which could be borrowed lawfully from such State bank were it a national bank.

(b) Financial statements. In order to determine whether security offered for an advance or paper offered for discount is eligible and acceptable, any Federal Reserve Bank may require that there be filed with it statements, or certified copies thereof, which adequately reflect the financial worth (1) of one or more parties to any obligation offered as security for an advance or to any note, draft, or bill of exchange offered for discount and (2) of any corporations or firms affiliated with or subsidiary to such party or parties. A Federal Reserve Bank may in any case require such other information as it deems necessary.

(c) Other information. Each Federal Reserve Bank is required by law to keep itself informed of the general character

and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances or discounts, the Federal Reserve Bank is required to give consideration to such information. Each Federal Reserve Bank may require such information from its member banks as it may deem necessary in order to determine whether such undue use of bank credit is being made and whether the granting of any requested credit accommodation would be consistent with the general principles applicable to extensions of credit under this part.

(d) Amount of collateral. In connection with any advance or discount under this part, a Federal Reserve Bank may require such collateral as it may deem advisable or necessary; but it is expected that the Federal Reserve Bank in determining the amount of collateral will give due regard to the public welfare and the general effects that its action may have on the position of the member bank, on its depositors, and on the community; and in general a Federal Reserve Bank should limit the amount of collateral it requires to the minimum consistent with safety.

§ 201.5

Paper acquired from nonmember banks.

(a) Prohibition upon acceptance of nonmember bank paper. Except with the permission of the Board of Governors of the Federal Reserve System, no Federal Reserve Bank shall accept as security for an advance or discount any assets acquired by a member bank from, or bearing the signature or endorsement of, a nonmember bank, except assets otherwise eligible which were purchased by the offering bank on the open market or otherwise acquired in good faith and not for the purpose of obtaining credit for a nonmember bank. (b) Applications for permission. An application for permission to use as security for advances assets acquired from nonmember banks or to discount paper acquired from nonmember banks shall be made by the member bank which desires to offer such assets as security or such paper for discount and shall state fully the facts which give rise to such

application and the reasons why the applying member bank desires such permission. Such application shall be addressed to the Board of Governors of the Federal Reserve System but shall be submitted by the member bank to the Federal Reserve Bank of the district, which will forward it promptly to the Board of Governors of the Federal Reserve System with its recommendation.

(c) Paper acquired from Federal Intermediate Credit banks. The Board of Governors of the Federal Reserve System hereby grants permission to Federal Reserve Banks to make advances to member banks upon the security of paper or assets bearing the signature or endorsement of, or acquired from, Federal Intermediate Credit banks or to discount for member banks paper bearing such a signature or endorsement or so acquired, if otherwise eligible under the law and this part. § 201.6

Discounts for Federal Intermediate Credit Banks.

(a) Kinds and maturity of paper. Any Federal Reserve Bank, under authority of section 13a of the Federal Reserve Act, may, with the permission of the Board of Governors, discount for any Federal Intermediate Credit bank (1) agricultural paper as defined in § 201.3, or (2) notes payable to such Federal Intermediate Credit bank covering loans or advances made by it pursuant to the provisions of section 202 (a) of Title II of the Federal Farm Loan Act, which are secured by notes, drafts, or bills of exchange eligible for discount by Federal Reserve Banks. Any paper discounted for a Federal Intermediate Credit bank must bear the endorsement of such bank and must have a maturity at the time of discount of not more than nine months, exclusive of days of grace.

(b) Limitations. No Federal Reserve Bank shall discount for any Federal Intermediate Credit bank any paper which bears the endorsement of any nonmember State bank or trust company which is eligible for membership in the Federal Reserve System under the terms of section 9 of the Federal Reserve Act. In acting upon applications for the discount of paper for Federal Intermediate Credit banks, each Federal Reserve Bank shall give preference to the demands of its own member banks and shall have due regard to the probable future needs of its own member banks.

INTERPRETATIONS

§ 201.101 Eligibility of Merchant Marine Bonds as security for loans by Federal Reserve Banks.

(a) The question has recently been asked whether United States Government Insured Merchant Marine Bonds are eligible as security for loans by Federal Reserve Banks to member banks. The eighth paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 347), provides that "any Federal reserve bank may make advances for periods not exceeding ninety days to its member banks on their promissory notes secured by such notes, drafts, bills of exchange, or bankers' acceptances as are eligible for rediscount or for purchase by Federal reserve banks".

(b) The Board has concluded, in the light of the language of the quoted provision, its legislative history, and the language and scope of other provisions of the Federal Reserve Act, that the words "notes, drafts, bills of exchange, or bankers' acceptances" refer only to obligations arising out of commercial or agricultural transactions. Merchant Marine Bonds are not of this character, they are not eligible as security for advances by Federal Reserve Banks to member banks under the provisions of section 13 of the Federal Reserve Act.

Since

(c) Merchant Marine Bonds are, of course, eligible as security for advances by Federal Reserve Banks to member banks pursuant to section 10(b) of the Federal Reserve Act (12 U.S. Code 347b), which authorizes advances to member banks on "notes having maturities of not more than four months and which are secured to the satisfaction of [the] Federal Reserve bank." However, the statute provides that the interest rate on section 10(b) advances shall be not less than one-half of one per cent "higher than the highest discount rate in effect at such Federal Reserve bank on the date of such note."

[25 F.R. 1435, Feb. 18, 1960]

99-127 O-69-11

provisions of Title VIII of the National Housing Act in connection with the military housing program, are eligible as collateral for advances to member banks under any of the provisions of section 13 of the Federal Reserve Act.

(b) It is understood that the "Deed of Trust Notes" are issued by so-called "Capehart Corporations" and that the financing institutions which advance the funds for the housing construction look to the Defense Department for payment pursuant to a so-called guaranty agreement executed by the Secretary of Defense or his designee under which the United States undertakes to make each periodic payment which becomes due on the note without prior demand for such payment.

(c) After careful consideration of the questions involved, the Board has conIcluded that (1) the notes would not be eligible as collateral for 15-day advances under the eighth paragraph of section 13 of the Federal Reserve Act since the "Deed of Trust Notes" are not "bonds, notes, certificates of indebtedness, or Treasury bills" as those words are used in the eighth paragraph; (2) the notes are not "such notes, drafts, bills of exchange, or bankers' acceptances" as are eligible for rediscount or for purchase by Federal Reserve Banks under the provisions of the Federal Reserve Act, and, accordingly, they are not eligible as collateral for 90-day advances under paragraph eight of section 13; and (3) the notes are not eligible for advances under the last paragraph of section 13 which authorizes 90-day advances to any individual, partnership, or corporation on promissory notes secured by direct obligations of the United States.

(d) Some comment seems desirable with respect to (3) above. Notwithstanding the fact that in a broad sense the Government's contract to make periodic payments on the notes without prior demand appears to be a direct obligation of the United States, it is the Board's view that the Government's contract does not constitute such an obligation within the meaning of the last paragraph of section 13. Under that paragraph, advances by Reserve Banks are authorized on such obligations subject to such "limitations, restrictions, and regulations" as the Board may prescribe. While the term "direct obligations of the United States" is not specifically defined in this Part 201, nevertheless in two

places in paragraph (a) of § 201.3, the term is parenthetically defined as meaning only bonds, notes, Treasury bills, or certificates of indebtedness of the United States. Clearly this evidences an intent that the term shall have that meaning wherever it is used in Part 201.

(e) Of course, the "Deed of Trust Notes" are eligible for advances under section 10(b) of the Federal Reserve Act although at a rate of interest not less than one-half of one percent per annum higher than the highest rate applicable to discounts for member banks then in effect.

[25 F.R. 7044, July 26, 1960]

§ 201.103 Farmers Home Administration insured notes as collateral for advances.

(a) The Board's views have been requested as to whether promissory notes evidencing loans by member banks to farmers which are insured by the Farmers Home Administration are eligible as collateral security for 90-day advances within the meaning of paragraph 8 of section 13 of the Federal Reserve Act.

(b) It is understood that the loans in question are insured pursuant to the Consolidated Farmers Home Administration Act of 1961, which comprises Title III of Public Law 87-128 approved August 8, 1961, and pursuant to section 514 of the Housing Act of 1949, as added by Title VIII of Public Law 87-70 approved June 30, 1961. Loans insured under Public Law 87-128 are made for farm operating purposes and to permit farmers or ranchers to buy, enlarge, develop, or improve a farm or to refinance debts; to develop water supply systems for irrigation, household use, and livestock; to drain farmland; and to carry out soil conservation measures. Loans insured under Public Law 87-70 are made to individual farmers and groups of farmers, political subdivisions, and public or private nonprofit associations to construct or repair housing and related facilities for domestic farm labor.

(c) Paragraph 8 of section 13 of the Federal Reserve Act provides that any Federal Reserve Bank "may make advances for periods not exceeding ninety days to its member banks on their promissory notes secured by such notes, drafts, bills of exchange, or bankers' acceptances as are eligible * for purchase by Federal reserve banks under

* *

the provisions of this Act." The insured notes here involved are supported by the full faith and credit of the United States and, although the insurance endorsement of the Farmers Home Administration uses the term "insurance" rather than the term "guarantee", they are to be considered as "fully guaranteed" by the United States as to principal and interest within the meaning of section 14(b) of the Federal Reserve Act, as amended, and are therefore eligible for purchase by the Federal Reserve Banks.

(d) The insured notes here involved are to be distinguished from the Government-insured marine bonds considered by the Board in a 1960 published interpretation (§ 201.102; 25 F.R. 7044). The obligations there involved, although technically "notes", were clearly what are generally regarded as securities, and the Board felt that they did not constitute the kind of notes contemplated by the provision authorizing advances to member banks secured by "notes, drafts, bills of exchange, or bankers' acceptances" eligible for discount or purchase by the Federal Reserve Banks. trast, the insured notes involved in the present case are not securities as that term is ordinarily used.

In con

(e) Accordingly, the Board has concluded that insured notes of the kind here involved are eligible as security for advances to member banks by Federal Reserve Banks.

[27 F.R. 4905, May 25, 1962]

§ 201.104

INTERPRETATIONS

Eligibility of consumer loans and finance company paper.

(a) The Board of Governors has been asked to clarify its position with respect to the eligibility for discount with the Reserve Banks of consumer loans and finance company paper.

(b) Section 13, Paragraph 2, of the Federal Reserve Act authorizes a Federal Reserve Bank, under certain conditions, to discount for member banks "* * * notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Board of Governors of the Federal Reserve System to have the right to

determine or define the character of the paper thus eligible for discount, within the meaning of this Act."

(c) It continues to be the opinion of the Board that borrowing for the purpose of purchasing goods is borrowing for a commercial purpose, whether the borrower intends to use the goods himself or to resell them. Hence, loans made to enable consumers to purchase automobiles or other goods should be included under commercial, agricultural, and industrial paper within the meaning of the Federal Reserve Act, and as such are eligible for discounting with the Reserve Banks and as security for advances from the Reserve Banks under section 13, paragraph 8, of the Federal Reserve Act as long as they conform to requirements with respect to maturity and other matters. This applies equally to loans made directly by banks to consumers and to paper accepted by banks from dealers or finance companies. It also applies to notes of finance companies themselves as long as the proceeds of such notes are used to finance the purchase of consumer goods or for other purposes which are eligible within the meaning of the Federal Reserve Act.

(d) If there is any question as to whether the proceeds of a note of a finance company have been or are to be used for a commercial, agricultural, or industrial purpose, a financial statement of the finance company reflecting an excess of notes receivable which appear eligible for rediscount (without regard to maturity) over total current liabilities (i.e., liabilities maturing within one year) may be taken as an indication of eligibility.

[30 F.R. 11949, Sept. 18, 1965]

§ 201.105 Export-Import Bank participation certificates as collateral for advances.

(a) The Board of Governors has been asked whether participation certificates representing interests in loans made by Export-Import Bank of Washington ("Bank") are eligible as collateral security for advances by Reserve Banks to member banks.

(b) The eighth paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 347) provides that any Reserve Bank "may make advances for periods not exceeding ninety days to its member banks on their promissory notes secured by