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Mr. Saxon. I wonder, Mr. Chairman, if we might submit a memandum on this subject, to deal with the various aspects of it in detail.

( The supplemental statement of the Comptroller of the Currency ATEMENT ON THE COMPTROLLER'S LETTER OF March 18, 1963, ADDRESSED TO THE PRESIDENTS OF ALL NATIONAL BANKS OF THE SUBJECT OF THE DIRECT LEASING

PERSONAL PROPERTY The letter of March 18, 1963, was the result of a long period of study stimulated Comptroller of the Currency. (A copy of the Committee's recommendations on 1 part by the recommendations of the Advisory Committee on Banking to the his subject is attached.) The letter simply expresses the conclusion that:

The leasing by the bank of personal property acquired upon the specific request tions as may be 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."

Banks have, from the beginning of commercial banking, financed the acquisition and the nise of personal property. They have lent money on the security of

form of ownership or control of the property financed. They have also jent money to lessors on the security of the lessee's agreement to pay rent. No

questions the propriety of these transactions. For a number of years, however, it was thought that banks could not participate in lease financing by the direct acquistion and leasing of property without engaging in a merchandising operation. The development of lease financing companies has proved the contrary. They have established that there is a significant need for a form of leasing in which property management is largely in the hands of the lensee. The letter of March 18, 1963, recognizes that this form of leasing is a financial business well within the power of a bank to perform.

This recognition of the authority of national banks to engage in direct lease financing hay provoked some criticism from a limite number of automobile dealers and lease financing companies engaged in the leasing of automobiles. It is asserted that it is not a proper function of banks to engage in the purchase and lease of merchandise of any sort. It is also alleged that the intrusion of banks into the business of leasing constitutes unfair competition for those now engaged in the business and deprives those in that business of access to necessary financing.

The power which national banks possess to engage in direct lease financing transactions does not carry with it the power to purchase merchandise for the purpose of stocking in anticipation of future leasing. This is the essence of a merchandising operation. The precise function of the merchant in the distributive process is to provide the consumer with a stock of merchandise at convenient locations and in quantities which make supplies readily available 80called place utility. This is the function for which he is conipensated as a merchant.

The financing of his operations is a separate function. Most merchants rely on outside financing in some degree to finance both their purchases and their sales and banks have been a chief source of such financing.

The power of national banks to engage in lease financing transactions is entirely a financing power. While the national banks may become the owner of commodities, they may not carry out the functions of the merchant. They may not purchase commodities for stock, and hold them for eventual anticipated lease or sale. They may purchase only at the request of a customer who wishes to have the full and immediate use of the commodity on a lease basis. National banks become the owner of commodities in permitted lease financing transactions principally for the purpose of providing a well defined financial, and not a merchandising, service. They do not offer or solicit the sale of commoditiesbut only of financing.

Thus, when national banks enter into direct lease financing arrangements they compete not with leasing companies, but with other sources of financing. The distributive and property management functions, as contrasted with financing, are really performed by the lessee himself where the transaction is handled directly by a bank.

The fear has been expressed that the entry of national banks into direct lease financing transactions would constitute “unfair competition with leasing organi

zations, and even lead banks to deny financing to their competitor leasing organizations.

No bank is in a position to assure effective denial of financing to any prospective borrower unless the bank is in a monopoly position or acts in concert with other banks. Such power, where it may exist, cannot be derived from the fact that banks are authorized to enter into leasing transactions and should be attacked irrespective of the manner in which it is employed. So long as there is competition among banks, it can never be to the advantage of any bank to withhold profitable loans—but only to seek the most profitable outlets for their lendable resources.

The question whether the national banks would become unfairly competitive under this authority raises a different set of issues. Throughout our private enterprise economy, under the influence of competitive forces, there is a constant search for improved means both of production and distribution. It is not unfair for any entrepreneur to devise less costly or more effective means of serving consumers—that is indeed the basic aim we seek under our private enterprise system. If national banks are able, under this authority, to provide less costly means of financing the distribution of commodities and services, that can only be to the advantage of the consuming public. It is the consumer, and not any particular class of producers or distributors, who ought to be safeguarded.

JAMES J. SAXON.

NATIONAL BANKS AND THE FUTURE REPORT OF THE ADVISORY COMMITTEE ON

BANKING TO THE COMPTROLLER OF THE CURRENCY

(Extracts from pp. 55 and 58)

PERSONAL PROPERTY LEASES

Analysis of the issues

The lease has become a popular tool for financing the acquisition of machinery, equipment, fixtures, and other personal property by industry and business generally. Banks have engaged in such financing, usually on the security (when security is required) of a chattel mortgage and assignment or rentals executed by the lessor. Situations frequently arise, however, when it would be to the interest of all concerned that such secured financing be arranged by a bank discounting a lease or otherwise acquiring the lessor's interest in the lease and the leased property, without recourse on the lessor. There appears to be some question of the propriety of a national bank providing the latter type of financing since the bank would thereby succeed to the lessor's ownership of, and reversionary interest in, the leased property. The Committee feels that this type of financing is a proper and useful method of credit extension for national banks.

The Committee further feels that national banks should be permitted to purchase personal property for the purpose of leasing it directly to a lessee. National banks should be permitted to engage in such lease financing in appropriate situations, rather than be compelled to resort to the more cumbersome and less efficient security devices now used. Recommendations

National banks should be permitted to discount leases of personal property, or otherwise acquire a lessor's interest in the lease and the leased property, without recourse to the lessor; and to purchase personal property for the purpose of simultaneous leasing.

Mr. BOLTON. And may I request, sir, that in that you take into account the effect this will have in the field of automobiles on the dealer, where the prime accounts are of necessity going to go to the bank, where the prime accounts have their pension funds, their large deposits, et cetera, as contrasted to the higher risk.

Mr. Saxon. Yes, sir.

Mr. MULTER. If there are no other questions, I would like to indulge in a personal note for a moment, if we have the time.

The charge has been made, and it has been put into the record_by Mr. Drew Pearson and Mr. Jack Anderson-that I, through my law

firm in New York, have pledged my influence to aid them or the firm of Nova & Seymour, to help their clients before the various banking agencies.

You and I have known each other for many years—long before you became Comptroller, and had many conferences before and since, and talks and conversations about things in your office, both policy and the handling of particular cases.

Did I ever say anything to you, Mr. Saxon, or to anybody in your office, that you would hesitate to put upon the public record ?

Mr. Saxon. No, sir; the only advantage you have ever taken of me is on the golf course, sir.

Mr. LLOYD. Mr. Chairman?
Mr. MULTER. May I pursue this one step further.

I have never made any improper representations to you as to any matter pending before your Office? ?

Mr. Saxon. No, sir.

Mr. MULTER. And is it also true I have never talked to you on behalf of Nova & Seymour, or so far as you know to anybody in your Office on behalf of the firm of Nova & Seymour or any of their clients ?

Mr. Saxon. No, sir.

Mr. LLOYD. Mr. Multer, I just want to say as a member of your subcommittee I am pleased to hear Mr. Saxon's affirmation. And I would also like to express my commendation to Mr. Saxon-since this concludes the testimony on this particular legislation—for his very helpful and vigorous advocacy of the national bank system under his administration.

Mr. Saxon. Thank you, sir.

Mr. MULTER. I think, Mr. Saxon, this subcommittee, every member of this subcommittee has the utmost confidence in you and the manner in which you are operating your Office. There are differences of opinion which, of course, will continue to occur. We want your help on the legislative matters. And I assure you the committee is ready to help you if you need our help.

Mr. Saxon. Thank you.

Mr. MULTER. This does conclude this present series of hearings on these two bills. We will determine at a later date when we will reconvene for further hearings, if that becomes necessary.

The record will be kept open in order to permit the asking of questions of the witnesses by the members by letter, which will be sent to them. Those will be added to the record.

We will also add to the record any other matter the members of the subcommittee feel should be made a part of the printed record.

(The following communications have been received and without objection are inserted in the record:)

MCDONALD STATE BANK,

North Platte, Nebr., May 21, 1963. Hon. WRIGHT PATMAN, Member of Congress, House Office Building, Washington, D.O.

DEAR CONGRESSMAN PATMAN: I want to fully support the statement made by Mr. J. L. Robertson, member of the Board of Governors of the Federal Reserve System before your Banking and Currency Committee of the House of Representatives. This concerns H.R. 5874. In previous years I have corresponded with you concerning my feeling that here is a definite need to consolidate bank supervision at the Federal level. I am of the firm opinion that banking to

survive must eventually operate under one Federal supervisor and one State supervisor. I can give you examples of the lack of harmony in the three agencies that supervise our bank. These are the State of Nebraska, the Federal Reserve System, and in addition we must live under the rules and regulations of the Federal Deposit Insurance Corporation. I sincerely hope H.R. 5874 is passed. Yours respectfully,

J. Y. CASTLE, President.

THE LIBRARY OF CONGRESS,
LEGISLATIVE REFERENCE SERVICE,

Washington, D.O., May 6, 1963.
To: House Banking and Currency Committee (Attention : Mr. Poston).
From: American Law Division.
Subject: May a Federal savings and loan association voluntarily dissolve with-

out prior approval of the Federal Home Loan Bank Board ? This will refer to your inquiry for information concerning the problem of whether a Federal savings and loan association may discontinue its operations voluntarily without being required to first secure approval of its plan of dissolution from the Federal Home Loan Bank Board.

Briefly, 12 CFR section 546.4 provides that the board of directors of any Federal association (i.e., any building and loan association, cooperative bank or homestead association, or savings and loan association, etc.) many propose a plan for the dissolution of such association. Such plan shall thereupon be submitted to the Board (Federal Home Loan Bank Board) for approval. If it appears to the Board that dissolution is advisable and the plan of dissolution is in the interest of all concerned, the Board will approve the plan. If the contrary appears, the Board will either make recommendations to the association concerning the plan or disapprove it.

Essentially the same procedure and approval is required with regard to pro posed mergers and reorganizations of such banks.

Thus, clearly, under the regulations, the saving and loan banks may not voluntarily dissolve without first obtaining Board approval.

The regulation cited above is promulgated under the general authority of 12 U.S.C. 1464 which declares that in order to provide local mutual thrift institutions in which people may invest their funds and in order to provide for the financing of homes, the Federal Home Loan Bank Board is authorized, under such rules and regulations as it may prescribe, to provide for the organization, incorporation, examination, operation and regulation of associations to be known as Federal savings and loan associations.

Section 1464 (d) gives the Board full power to provide in such rules and regulations for the reorganization, consolidation, merger, or liquidation of such association, including the power to appoint a conservator or receiver to take charge of the affairs of any such association.

The constitutionality of the above section 1464 (d) was attacked in Fahey v. Mallonee (332 U.S. 245).

In that case, the Board appointed a conservator to take possession of the assets of the Long Beach (Calif.) Federal Savings & Loan Association on the ground that its management was unfit and unsafe, and that it was pursuing a course injurious to, and jeopardizing the interests of its members, creditors and the public.

The district court held that 1464 (d) was an unconstitutional delegation of the congressional function.

In overruling the district court and upholding the constitutionality of the statute, the Supreme Court held that there was no unconstitutional delegation of legislative functions since what is involved is mere regulation in a well established field.

In this regard, the Court noted that savings and loan associations are created, insured, and aided by the Federal Government. The provisions here involved are regulatory. They do not deal with unprecedented economic problems of varied industries. Instead, they deal with a single type of enterprise and with the problems of insecurity and mismanagement which are as old as the banking enterprise. The remedies which are authorized are not new ones unknown to existing law to be invented by the Board in the exercise of a lawless range of power.

“A discretion to make regulations to guide supervisory action in such matters may be constitutionally permissible * * *."

The Board has adopted comprehensive rules and regulations concerning the powers and operations of every Federal savings and loan association. These regulations apply to such associations from their cradle to their corporate grave.

The rules and regulations promulgated under the authority conferred by the statute have the force and effect of law.

In Maryland Casualty Co. v. U.S. (251 U.S. 342), Mr. Justice Clarke, speaking for the Court, said:

"It is settled by many recent decisions of this Court that a regulation by a department of Government, addressed to and reasonably adapted to the enforcement of an act of Congress, the administration of which is confided to such department, has the force and effect of law if it be not in conflict with express statutory provisions" (C.f. Community Federal Savings and Loan Ass'n v. Fields, 128 F. 2d 705; People of the State of California et. al. v. Coast Federal Savings and Loan, 98 F. Supp. 311).

In the Community Federal case, id., the circuit court of appeals relied on the above to hold that the provision of section 1464 id., giving the Federal Home Loan Bank Board the power to make rules with respect to Federal savings and loan associations gives such rules the force and effect of law and they are binding on an association and its board of directors when such rules are not in conflict with the express statutory provisions.

The provisions of 12 CFR, section 546.4 do not appear to be in conflict with the statutory mandate of 12 U.S.C. 1464(d) which empowers the Board to prescribe rules and regulations for the liquidation of such associations, hence, it would appear that the requirements of section 546.4 would have the force and effect of law and thereby be binding upon such associations so as to require them to secure Board approval or disapproval of any proposed plan of merger, reorganization, and liquidation.

However, this is not to say that such associations are without any powers of their own.

The corporate charters of such associations usually contain an enumeration of certain express powers of the association ; i.e., such as the power to have perpetual succession, sue and be sued, appoint officers and agents, to have bylaws not inconsistent with the Constitution or laws of the United States, etc.

Concerning such powers, the courts have held that savings and loan associations also have the implied power to do all things reasonably incident to the accomplishment of its express powers, but powers merely convenient or useful are not implied if they are not essential, having in view the nature and object of the incorporation, and the powers which the association may exercise must be determined by an interpretation of the Federal statute in the light of the policy apparent therefrom. (See: Century Fed. S. & L. Ass'n v. Sullivan, 116 N.Y.S. 2d 323.)

Concerning the above, it was contended in Eddy v. Home Fed. S. & L. Ass'n (140 P. 2d 156), that the savings and loan association could not insert a provision in a deed of trust reserving to it the right to place all insurance on the mortgaged premises. To support this contention, appellant cited the rule that powers granted to national banks are held to exclude and withhold those powers not granted expressly. Thus, inasmuch as the power to insert such a provision was not expressly granted, it could not be implied and is, therefore, illegal.

The court replied that in the absence of a clearly defined precedent, it is unwilling to extend this rule to such associations. The court bases its reluctance also on the fact that savings and loan associations are not national banks and the powers and duties of the two are materially different.

The import of the above with regard to the problem under discussion is that a savings and loan association may exercise only those powers expressly granted and those implied powers necessary and essential to the accomplishment of its express powers. If it is to dissolve voluntarily without being required to obtain the prior approval of the Board with regard to its plan of dissolution, this power would have to be expressly granted to it in its charter of organization or incorporation. If it is not so granted, then in view of what has been said herein with regard to the effect of the Board's rules and regulations, then such dissolution would require Board approval.

ROBERT M. UJEVICH,

Legislative Attorney.

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