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(a) The Board of
Governors has clarified and modified its position with respect to the
eligibility of consumer loans and finance company paper for discount
with and as collateral for advances by the reserve banks.
(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., notes due within 1 year) may be taken as an
indication of eligibility. Where information is lacking as to whether
direct consumer loans by a finance company are for eligible purposes,
it may be assumed that 50 percent of such loans are ``notes receivable
which appear eligible for rediscount''. In addition, that language
should be regarded as including notes given for the purchase of mobile
homes that are acquired by a finance company from a dealer-seller of
such homes.
(e) The principles stated above apply not only to notes of a
finance company engaged in making consumer loans but also to notes of
a finance company engaged in making loans for other eligible purposes,
including business and agricultural loans. Under section 13a of the
Federal Reserve Act, paper representing loans to finance the
production, marketing, and carrying of agricultural products or the
breeding, raising, fattening, or marketing of livestock is eligible
for discount if the paper has a maturity of not exceeding 9 months.
Consequently, a note of a finance company the proceeds of which are
used by it to make loans for such purposes is eligible for discount or
as security for a Federal Reserve advance, and such a note, unlike the
note of a finance company making consumer loans, may have a maturity
of up to 9 months.
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