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Rep. Fernand J. St. Germain (D-RI), with 28 co-sponsors, introduces HR 6267, the “Net Worth Guarantee Act” officially entitled “A bill to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans.” (Library of Congress 5/19/2008) As introduced, the bill would create a fund for loans to those troubled banks and savings and loans institutions that would have to be put into receivership if their condition deteriorates to a small degree from the bill’s qualifying requirements. The provisions are as follows:
Amendments to the Federal Deposit Insurance Act (which regulates the Federal Deposit Insurance Corporation, FDIC), the National Housing Act (which regulates the Federal Home Loan Bank Board, FHLBB), and the Federal Credit Union Act (the National Credit Union Administration Board, NCUAB) so that the regulated bodies can guarantee the net worth of qualified insured institutions.
Requirements that a qualifying depository institution be one that is threatened with insolvency, as measured by very low net worth and a recent trend of losses; that the institution be one that mainly serves the residential mortgage industry, as measured by the share of its loans or other assets that are held in or collateralized by residential mortgages or real estate; and that it continue in this service under the net worth guarantee, as measured by the share of its new deposits that it devotes to certain types of mortgages.
Rules for determining the initial amount of the guarantee, and for either extending or phasing out the assistance to a given institution. Extensions after two years are to be contingent upon a showing that “certified continued earnings losses are caused by general market conditions and not by the actions of the institution.”
Creation of a Net Worth Guarantee Account in the US Treasury in the amount of $8.5 billion to cover the payment of any guarantees.
A sunset date for new extensions of guarantees.
An oversight process in which the three bank regulating bodies report quarterly to Congress on their activities in granting guarantees, and the comptroller of the currency provides semiannual audits. (Library of Congress 5/14/2008; Library of Congress 5/14/2008)
Fate in the House - The Net Worth Guarantee Act passes the House of Representatives on May 20, 1982, with amendments that extend the coverage to qualifying State-chartered commercial banks, and qualifying national banks whether or not they are members of the FDIC; that add investment in residential housing co-operative stock and mortgages on multifamily rental projects to the qualifying activities for sustaining the guarantee; that alter the exit path from the program; that add compliance with community credit provision requirements under the Community Reinvestment Act of 1977; that make the Treasury senior to holders of existing subordinated debt of any guaranteed bank that later winds up in receivership; and that clearly give the sunset date as September 30, 1984. (Library of Congress 5/14/2008; Library of Congress 5/14/2008; Library of Congress 5/14/2008)
Eventual Fate - With substantial amendments that address other banking regulatory issues besides the net worth of depository institutions, the bill finally passes the Senate under several short titles, of which the primary is “Depository Institutions Amendments of 1982,” superseding S.2879 sponsored by Sen. E.J. “Jake” Garn. The bill is enacted with the signature of President Ronald Reagan on October 15, 1982 as the Garn-St. Germain Depository Institutions Act of 1982. (Library of Congress 5/14/2008)
The House Banking Committee approves H.R. 6267, the Net Worth Guarantee Act, by a vote of 25 to 15, with three abstaining. The approval is the first action of Congress to provide direct and specific financial assistance to troubled thrifts, although by a reported estimate in the New York Times, most of the nation’s 4,500 thrift depositories are “losing money” by this time. (Noble 5/12/1982, pp. D1, D13) Voting on the bill, which was introduced into the House by Representative and committee chairman Fernand J. St. Germain (D-RI) on May 4 (see May 4-October 15, 1982), is largely partisan: Republican members generally favor an alternative proposal by Rep. Chalmers P. Wylie (R-OH) that differs in qualifying firms at a higher current net worth, and in allowing regulators discretion over this qualification, although debate on the Wylie amendments is short-circuited by a motion to table the amendment made by Rep. Frank Annunzio (D-IL). (Noble 5/12/1982, pp. D1, D13) The Wylie provisions form the basis for the bill S.2531 which is introduced into the Senate on May 14, 1982 (see May 14, 1982). (Noble 5/12/1982, pp. D1, D13; Library of Congress 5/19/2008)
The Capital Assistance Act of 1982 is introduced by Sen. E.J. (Jake) Garn (R-UT) and three co-sponsors under the title, “A bill to provide flexibility to the Federal Savings and Loan Insurance Corporation and the Federal Deposit Insurance Corporation to deal with financially distressed institutions.” (Library of Congress 5/20/2008; Library of Congress 5/20/2008) The bill provides the following:
Amendments to the National Housing Act and the Federal Deposit Insurance Act so that the Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Deposit Insurance Corporation (FDIC) may buy capital certificates from institutions that they regulate, for the purpose of either increasing or maintaining the capital of those institutions.
Criteria that qualifying institutions must meet to receive this assistance. The criteria differ from those required by the Net Worth Guarantee Act importantly in requiring a prior net worth of three percent of assets, instead of two percent in the House version.
Parameters of the initial capital certificates, and provision for the subsequent modification of those parameters at the discretion of the FSLIC and FDIC.
Restriction of aid to cases in which this course of action is less costly than liquidation of the institution would be. (Library of Congress 5/20/2008) The most important difference between the Capital Assistance Act (CAA) and the Net Worth Guarantee Act (NWGA) is that the CAA is meant to avoid the need for a Congressional appropriation of funds. Instead of establishing a Treasury account to be drawn on to fund the assistance, as does the NWGA, the CAA would permit the assisting agencies, FSLIC or FDIC, to give the thrifts promissory notes in exchange for the thrifts capital certificates. (Staff 5/15/1982) The Capital Assistance Act of 1982 is evidently the bill that Rep. Wylie promised several days previously would be introduced into the Senate, on the occasion of the approval by the House Banking Committee of the Net Worth Guarantee Act without the amendments that Wylie had offered for that bill. The new bill in the Senate has several features of Wylie’s amendments. (Noble 5/12/1982) According to Sen. Garn, Treasury Secretary Donald T. Regan also contributed to the new bill.
Eventual Fate - On August 19, while under consideration in the Senate Banking Committe, the key provisions of S.2531 will be incorporated into S.2879 and passed to the floor of the Senate the next day. Bill S.2879 will be passed by the Senate on September 24, and ultimately incorporated into H.R.6267, the Garn-St Germain Depository Institutions Act of 1982. (Library of Congress 5/20/2008; Library of Congress 5/20/2008)
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