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Mr. Saxon. Yes, it does. It imposes limitations on the aggregate investment in such securities.

Mr. BOLTON. And how about the ownership of real estate?

Mr. Saxon. Limitations there, also—not only of type but of quantity.

Mr. BOLTON. In other words, in the real estate field today, in order to produce manufacturing facilities, there have been industrial development corporations which have grown up which have purchased land, built plants, and leased those plants back to the rentor on a guaranteed lease basis with a very high credit. And I presume that in some instances there is a pretty heavy layer of bank credit in there.

Would you feel that for a few points the bank could take over ownership of that building with the guarantee of the lessee and become the actual titleholder to that plant?

Mr. Saxon. No, sir, we do not permit that, actual acquisition of the plant.

Mr. Bolton. Well, in that case, sir, why do you permit it in the case of personal property?

Mr. MULTER. Before you ask that-may we clarify this?

As I understand—correct me if I am wrong—the law presently provides that a commercial bank may own real estate only to the extent that it is needed for its own operations. Now, that may be extended to the point where they may own an entire office building, and rent out space that they don't need beyond the bank space, and, also, that they may not own personal property, except that which leads to the operation of the business.

I am not now talking about anything a bank may have to acquire in liquidating a loan, where they may temporarily hold it and can dispose of it in order to liquidate the obligation.

But primarily, to begin with, I think the law states that it may own real estate and personal property only to the extent that it is necessary to operate the business, isn't that so?

Mr. Saxon. Well, I think that is a rather restrictive statement.

The interpretations in the past of these provisions have been very restrictive.

For example, national banks—and in these repsects, incidentally, almost every State law is far more liberal than the national law.

Mr. MULTER. I think Mr. Bolton was directing himself just to national banks.

Mr. BOLTON. That is right.

Mr. Saxon. Now, in the question of bank premises, for example, it had been the rule for 80 years that before a bank could acquire a piece of property for banking use it had to be demonstrated that it was for present or immediate use.

Banks, national banks, were denied the opportunity, available properly to every other business institution, to look to its future needs, and to acquire property or sites for its future expansion in its proper planning for the development of its business, just as any other business institution, and not be put to trying to acquire property when an application has been presented, and then being faced with a highly inflated price, with knowledge on the part of the owners that it was to their interest to acquire it.

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Mr. BOLTON. If I may interrupt the witness—purely because we are running out of time—that acquisition and that property has to do specifically with its banking business.

To properly orient you, sir, I have reference to your notification of March 18 to the national banks to the effect that the leasing by the bank of personal property acquired upon the specific request of and for the use of its customers, and the incurring of such additional obligations that may become incident to becoming an owner of personal property and the lessor thereof is a lawful exercise of the powers of a national bank and necessary to the business of banking.

Mr. Saxon. Yes, sir.

Mr. BOLTON. Frankly, this has been brought to my attention by dealers of automobiles who are disturbed that the capital pools involved in the banking system will invade the field which has become incident to many dealerships, where the dealership has worked out an arrangement with competition with other dealers, with various corporations, for their use of private automobiles.

I am wondering whether in addition to this, this couldn't be actually construed, as far as the language is concerned, to get over into the field of such things as the credit accounts of large department stores, even such things as that.

I frankly am disturbed at the situation this puts banks in. And I would appreciate your comments on it.

Mr. SAXON. Yes, sir.

First, taking the latter point, as to accounts receivable, this is a banking function long engaged in by banks and properly so. This is the only mechanism available.

Mr. Bolton. But title and responsibility remains in the seller.

Mr. Saxon. No, not in the case where for years banks generally, State and National, actually purchase such accounts.

Mr. BOLTON. Yes.

But they always have recourse to the seller in case the account doesn't prove

out. Mr. Saxon. No, sir. Sometimes they do, depending on the arrangement made by banks.

Sometimes they set up reserve accounts, so-called cash collateral accounts.

There are various means for handling these to protect the bank. Various devices are used and have been for many years in this area.

As to the first point you raised, the so-called leasing operation, we realizewe have heard from a number of these leasing companies.

Actually, the major source of the funds of these companies have come from the banks. They are thin on the whole, thinly capitalized companies which are dependent on bank credit, acquired at very low rates, and which in the arrangements worked out have resulted in very high cost leasing.

I am talking of machine tool manufacturers in Cincinnati and other places, other capital producers of goods.

The question here was whether or not this activity, already engaged in by banks, should not formally be made available to all banks, whereby for the account of specifically, of a customer, there could not be direct financing at a much lower cost available directly through bank financing.

Mr. BOLTON. Well, basically, if you have a piece of equipment, whether it be an automobile or a press or anything elseif that piece of equipment is going to be actually purchased and owned by the bank, couldn't the customer in the first place go to the bank and get that credit, if his credit is good enough, in order to purchase it himself!

Mr. Saxon. Again, the answer is perhaps.

Mr. BOLTON. And isn't one of the reasons why the customer doesn't is because he goes to a dealer who has the knowledge and the skill of the acquisition of that equipment, carries it on his own account over a certain period of time, and, therefore, has to have a financing charge in addition?

Mr. Saxon. Well, the banks are really carrying the risk of it—the banks themselves, who are the major suppliers of the funds for the leasing company.

Here is where the real risk lies.

In every one of these cases it provides, in effect—what is being done today, it provides for direct lease rental payments to support the credit and other collateral devices to protect the banks.

Mr. Bolton. But isn't this exactly the same as in the mortgage company or a holding company, where actually the banks provide a great source of the monetary funds behind the operation and rely on the security of the operation, its background, its history, and all the other things that go into the making of a loan?

Mr. Saxon. It is a means of providing direct financing of the movement of such equipment, the purchase of it, by concerns, business houses interested in using this.

Now, I realize this raises a competitive thrust here. There is no question about this. And there has been some stern reaction from some of the leasing companies.

But the very fact-in the letters we receive, they plainly acknowledge it is the competitive factor which disturbs them.

Mr. BOLTON. Well, if I may interrupt there—frankly, it is the competitive factor which disturbs me, strangely enough—being one dedicated to competition.

But here it disturbs me in this instance, because the bank, which represents a pool, a large pool of capital in the community, is in a position to command certain leasing arrangements which a small competitive company isn't in a position to do, it doesn't seem to me.

And, therefore, we are stressing the centralization of more than merely the monetary side of the business within the banking institution.

Mr. Saxon. It is a competitive thrust, there is no doubt about this, and it will have some impact costwise, bank financing being much lower than that obtainable by the acquisition of such equipment through the leasing companies. There is no doubt about it.

The failure of this thing, on the other hand, Mr. Bolton—the creation of such a vacuum over past years generated the growth of such institutions.

And they are high-cost institutions.
Mr. Bolton. If I can just get one more question.

If the borrower has sufficient credit himself, he can then go to the bank and get the use of low-cost bank financing anyway, and have the title in the borrower.

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If, on the other hand, he does not, and chooses to lease, then doesn't the bank have to look to the credit of the leasing company?

Mr. Saxon. Well, the leasing company is really out of the picture. We are talking about the use —if the bank is financing this, it is on direct leasing, the financing company is out of the picture.

I guess I didn't get the question.

Mr. Bolton. Well, the leasing company is only out of the picture because now the bank is capable of taking title.

Mr. Saxon. Direct financing, yes. Mr. BOLTON. I will yield to Mr. Brock. Mr. BROCK. Doesn't this concern you, sir, to the extent that you give a far greater degree of monopolistic power to the banks, in that they could refuse, for competitive reasons, in the leasing field, to finance the leasing corporations with whom they are in conflict or in competition?

Aren't you giving them an inordinate amount of power in this

Mr. Saxon. Whether they would—whether any bank would abuse this power to the extent of denying credit would raise a problem for us, if we saw this.

We don't see this, however, because the banks are seeking outlets for their funds in the form of credit.

But we would, if we saw this happening we would be concerned and take action to correct it.

Mr. BROCK. I am not suggesting that any bank would refuse credit.

But I am saying some of them might raise their rates so that the leasing company would not be in a competive position.

Mr. Saxon. To me, the situation is not substantially indistinguishable from that in consumer financing, installment, or single payment basis. We have the finance companies operating in these areas as well as the banks, both in the consumer area, the installment basis, competitively.

It has worked very well.

Still, primarily, the finance companies have had their sources of funds dependent on two sources—the sale of their own commercial paper, but primarily bank credit, and obtained at prime rates, very large amounts, and re-lent at rates from 8 up, very high rates.

We all know that bank financing is much lower in this area.
I don't think the two situations are indistinguishable.

Now, it is, again, I suppose, more the fear of competition than the actual result.

We have found on the whole this type of competing financial facility is good. Savings and

loans exercise a constructive and important function in our society. They are also in the mortgage area. Finance companies, credit unions, various groups, competing financial institutions.

This, as I see it, is a healthy development.

I think what we may see by the finance company, is a matter of lower rates as a result of this, and a beneficial public effect.

Mr. BROCK. I concur that it might result in lower finance rates. But it seems to me that you have a basic difference in the degree of risk involved here, which does make the lower rates to the leasing companies logical and feasible.

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And I cannot see the fact that a leasing operation by the bank is at all similar to the loaning of money to a leasing corporation, which may be leasing to 20 or 500 clients. And it may have a great deal firmer financial foundation on any one particular piece of equipment.

Mr. Saxon. It depends on which leasing company is involved.

But, on the whole, it has been our observation that any time an intermediary is involved, it adds to cost. And the less efficient the intermediary mechanism between the consumer and the credit source, the more costly the operation.

Mr. BROCK. But isn't it true that the intermediary can perform .services which warrant the additional cost?

Mr. Saxon. Yes, it is possible.
Mr. BROCK. And quite often do?

Mr. Saxon. But, fundamentally—they pay a cost for the credit, say 4, 41/2, 5, 51/2 percent. And the balance of the cost is built on this basis.

You start with a substantial cost, to which must be added the other costs.

And even in the most efficient companies, the heavier charge is there. I don't question they render a service. Indeed, they have. It is a good and useful service they have rendered in moving equipment from manufacturers.

Our view is that competition in this area might be a good thing for all parties.

I would be concerned, all of us would, if we did see a situation develop where abuse of the kind you mentioned—this would trouble us seriously.

Mr. MULTER. I am concerned in this instance that it appears to me this is a merchandising venture, and not a banking function. If you do it in one instance, where will the banks stop?

If this type of merchandising function, instead of a lending deal, is being done to evade some of the lending statutes or regulations, then it is bad and should be stopped.

On the other hand, if it is a straight merchandising function of buying and leasing, then I say this is not the business of a bank.

Mr. Saxon. Well, Mr. Chairman, what about inventory and receivable financing, which amounts to this?

If I understand you, this amounts to substantively-
Mr. MULTER. You take that as security.

Mr. Saxon. There are several ways of handling this. There are many different devices. But one of the most conventional ones is direct purchase of accounts receivable.

Mr. MULTER. But as I understand this buying and leasing deal, there is no question of checking credit at all. This is a good commercial venture--can the bank make money on the lease?

Mr. Saxon. I wouldn't say that at all.

Mr. MULTER. Well, what guarantee does the bank take that the amount it puts into the purchase of the product it leases is going to be paid back to it, so far as the person to whom it leases is concerned?

It is an outright purchase to begin with.

Title passes to the bank from the manufacturer or the dealer. And then the bank turns around and leases this to somebody.

Is there a guarantee taken from the lessee, that the total amount that the bank has invested in this merchandise will be repaid?

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