which are kept under refrigeration during the period of a loan not exceeding 6 months.

(2) Commercial and business paper arises out of the process of production, manufacture, or distribution of goods. It is so related to a commercial or business transaction that it is virtually selfliquidating. It is characteristically short term paper. It is intended to circulate like money and therefore is almost invariably negotiable in form. To promote the currency of this type of paper the law merchant adopted its most important principle, i. e., that if this paper is in negotiable form, an innocent purchaser for value will take it free of defenses which might exist between prior parties. Commercial and business paper that is negotiable in form is acceptable for discount at Federal Reserve banks under section 13 of the Federal Reserve Act and regulation A. Title 12, United States Code, section 84 (1), (2), and (3), permits national banks to loan on or purchase such paper without any limitations based on capital or surplus.

Installment consumer paper, however, is quite different from commercial and business paper. It is invariably longer term paper; it is not discountable at Federal Reserve banks under section 13 of the Federal Reserve Act and regulation A; and it is not intended for circulation in the same sense or degree as commercial or business paper. In consumer financing the commodity, the purchase of which is being financed, is the real and ultimate security for the lender. Consequently, it is not as traditional or important that consumer paper should be in negotiable form as that commercial or business paper should be. However, the Comptroller's office has consistently ruled that installment consumer paper purchased by national banks with the full recourse endorsement of the seller or dealer and which was negotiable could enjoy the provisions of title 12, United States Code, section 84 (2) and be acquired without any limitations based on capital or surplus. If the paper is not negotiable, the 10 percent limitation applies and this is too severe. This specific statute was not originally intended to deal with this type of paper. It is believed that all purchased or discounted installment consumer paper acquired from one dealer or seller which bears the full recourse endorsement or unconditional guaranty of such dealer or seller, whether negotiable or nonnegotiable, should be limited as to any one obligor to 25 percent of a bank's capital and surplus.

Whenever a question of the office requirement of negotiability has come up, our files show that it has been with reference to consumer paper which is usually in the form of conditional sales contracts. It is this type of paper that contains the provisions that are needed to protect the lender's security while it is being used and paid for by the borrower, for example, provisions that the borrower will keep the property in repair, keep it insured, pay taxes, etc. When such provisions are included in consumer paper, they definitely make the paper nonnegotiable under the uniform negotiable instruments law and the decisions of the courts. The lender cannot include such provisions in consumer paper and still have the paper considered to be negotiable in form and we cannot permit such provisions to be included in consumer paper and still require that the paper be negotiable in form.

It will be noted that it is not the negotiable form of the paper that makes it safer but rather the circumstances under which it is ac

quired, i. e., by a party who not only pays value for it but also has no knowledge of facts which might give a prior party a defense against the paper. If a bank is in fact an innocent purchaser for value, it is better off holding paper that is negotiable in form rather than paper that is not.

The banks and automobile dealers and other vendors have also worked out dealers' guaranty or repurchase agreements and reserve accounts for the holding of defaulted consumer paper. These arrangements cut down the need of the banks for the protection afforded by the innocent purchaser rule. It is believed that in actual practice the banks rely very much more heavily on these agreements than on the innocent purchaser rule for their protection.

Thus, it will be observed that, although banks may be better protected through the operation of the innocent purchaser rule if they hold negotiable consumer paper rather than nonnegotiable paper, it is open to question whether as a practical matter the actual amount of protection is any greater in the one case than in the other.

Therefore, it is deemed advisable that a new exception be added to section 84 dealing exclusively with installment consumer paper. 24. EXCEPTION TO 10 PER CENT LIMITATION ON OBLIGATIONS COVERING DAIRY CATTLE

Existing Law

Title 12, U. S. C., sec. 84 (U. S. R. S., sec. 5200).

(7) Obligations of any person, copartnership, association, or corporation in the form of notes or drafts secured by shipping documents or instruments transferring or securing title covering livestock or giving a lien on livestock when the market value of the livestock securing the obligation is not at any time less than 115 per centum of the face amount of the notes covered by such documents shall be subject under this section to a limitation of 15 per centum of such capital and surplus in addition to such 10 per centum of such capital and surplus. Recommendation

It is recommended that exception 7 to section 5200 of the Revised Statutes be amended by adding a new sentence which would permit national banks to acquire obligations of dealers in dairy cattle, arising out of the sale of dairy cattle, in the form of obligations of the dealers, or in the form of obligations of purchasers of dairy cattle which bear the full recourse endorsement or an unconditional guaranty of the dealer, to a limitation of 15 percent of capital and surplus, in addition to such 10 percent of capital and surplus.

Reasons

Exception 7 to the basic 10 percent limitation of capital and surplus covers obligations which are secured by liens on range animals (cattle, sheep, goats, horses, mules) or on cattle, sheep, or hogs being fattened for or shipped to market. It does not cover dairy cattle. It is believed advisable that the statute be amended to permit national banks to acquire obligations of dealers arising out of the sale of dairy cattle to a limitation of 15 percent of a national bank's capital and surplus in addition to the present limitation of 10 percent of capital and surplus. Frequently such obligations are not in the form to qualify under either exception 2 or 4 of Revised Statutes 5200 because they are not

negotiable and thus may not qualify under exception 2, or because they have a maturity of more than six months and therefore will not qualify under exception 4. Where they arise out of the sale of dairy cattle they do not qualify under exception 7 in its present form.

25. LOANS SECURED BY OBLIGATIONS OF THE UNITED STATES

Existing Law

Title 12, U S. C., sec. 84 (U. S. R. S., sec. 5200).—The total obligations to any national banking association of any person, copartnership, association, or corporation shall at no time exceed 10 per centum of the amount of the capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund. The term "obligations" shall mean the direct liability of the maker or acceptor of paper discounted with or sold to such association and the liability of the endorser, drawer, or guarantor who obtains a loan from or discounts paper with or sells paper under his guaranty to such association and shall include in the case of obligations of a co-partnership or association the obligations of the several members thereof and shall include in the case of obligations of a corporation all obligations of all subsidiaries thereof in which such corporation owns or controls a majority interest. Such limitation of 10 per centum shall be subject to the following exceptions:

(8) Obligations of any person, copartnership, association, or corporation in the form of notes secured by not less than a like amount of bonds or notes of the United States issued since April 24, 1917, or certificates of indebtedness of the United States, Treasury bills of the United States, or obligations fully guaranteed both as to principal and interest by the United States, shall (except to the extent permitted by rules and regulations prescribed by the Comptroller of the Currency, with the approval of the Secretary of the Treasury) be subject under this section to a limitation of 15 per centum of such capital and surplus in addition to such 10 per centum of such capital and surplus. Recommendation

It is recommended that exception eighth of section 5200 of the Revised Statutes be amended so as to eliminate the words "in the form of notes."

Reasons

Frequently the obligations referred to in exception 8 are not in the form of promissory notes but are repurchase or some other form of binding obligations. These agreements are considered to be of equal stature with a promissory note and therefore should be treated as an obligation as defined in the first paragraph of section 84.

It is believed that the requirement that the obligation in the case of such loans must be "in the form of a note" is too restrictive and that such loans should be permitted when the obligation held by the lending bank meets the definition of the term "obligations."

Existing law

26. BANKING FACILITIES AT MILITARY POSTS

Title 12, U.S. C., sec. 90 (U. S. R. S., sec. 5153).—All national banking associations, designated for that purpose by the Secretary of the Treasury, shall be depositaries of public money, under such regulations as may be prescribed by the Secretary; and they may also be employed as financial agents of the Government; and they shall perform all such reasonable duties, as depositaries of public money and financial agents of the Government, as may be required of them. The Secretary of the Treasury shall require the associations thus designated to give satisfactory security, by the deposit of United States bonds and otherwise, for the safe-keeping and prompt payment of the public money deposited with them, and for the faithful performance of their duties as financial agents of the Government; Provided, That the Secretary shall, on or before the first of January of each year, make a public statement of the securities required during that year for such deposits. And every association so designated as receiver or depositary of the public money shall take and receive at par all the national currency bills, by whatever association issued, which have been paid into the Government for internal revenue, or for loans or stocks: Provided, That the Secretary of the Treasury shall distribute the deposits herein provided for, as far as practicable, equitably between the different States and sections. ***

Title 12, U. S. C. sec. 265.-All insured banks designated for that purpose by the Secretary of the Treasury shall be depositaries of public money of the United States (including, without being limited to, revenues and funds of the United States, and any funds the deposit of which is subject to the control or regulation of the United States or any of its officers, agents, or employees, and Postal Savings funds), and the Secretary is authorized to deposit public money in such depositaries, under such regulations as may be prescribed by the Secretary; and they may also be employed as financial agents of the Government; and they shall perform all such reasonable duties, as depositaries of public money and financial agents of the Government as may be required of them. The Secretary of the Treasury shall require of the insured banks thus designated satisfactory security by the deposit of United States bonds or otherwise, for the safekeeping and prompt payment of public money deposited with them and for the faithful performance of their duties as financial agents of the Government: Provided, That no such security shall be required for the safekeeping and prompt payment of such parts of the deposits of the public money in such banks as are insured deposits and each officer, employee, or agent of the United States having official custody of public funds and lawfully depositing the same in an insured bank shall, for the purpose of determining the amount of the insured deposits, be deemed a depositor in such custodial capacity separate and distinct from any other officer, employee, or agent of the United States having official custody of public funds and lawfully depositing the same in the same insured bank in custodial capacity. Notwithstanding any other provision of law, no department, board, agency, instrumentality, officer, employee, or agent of the United States shall issue or permit to continue in effect any regulations, rulings, or instructions or enter into or approve any

contracts or perform any other acts having to do with the deposit, disbursement, or expenditure of public funds, or the deposit, custody, or advance of funds subject to the control of the United States as trustee or otherwise which shall discriminate against or prefer national banking associations, State banks members of the Federal Reserve System, or insured banks not members of the Federal Reserve System, by class, or which shall require those enjoying the benefits, directly or indirectly, of disbursed public funds so to discriminate. All Acts or parts thereof in conflict herewith are repealed. The term "insured bank" and "insured deposit" as used in this chapter shall be construed according to the definitions of such terms in section 1813 of this title. Recommendation

It is recommended that section 5153 of the Revised Statutes be amended by adding a sentence at the end of the first paragraph to provide that national banks upon request of the Secretary of the Treasury may open and operate banking facilities at military posts, camps, and stations under their designation as depositories of public money and financial agents of the Government, without such banking facilities being considered as branch offices.

Reasons

Many banks under their designation as depositories of public money and financial agents of the Government have been requested by the Secretary of the Treasury to open and operate banking facilities exercising limited banking functions on military posts of the Army, Navy, and Air Force of the United States. Requests to provide limited banking services are made by the Secretary of the Treasury in cases where the Department of Defense has determined that banking facilities are necessary at specific military posts. Some of the bank facility offices carrying on the limited banking operations requested by the Secretary of the Treasury and Secretary of Defense are situated in States which prohibit branch banking and, therefore, no legally authorized branch of a national bank may be established under the provisions of section 5155 of the Revised Statutes (12 U. S. C. 36). It is believed advisable that Revised Statute 5153 be amended to permit national banks to open and operate banking facilities exercising limited banking functions at military posts, camps, and stations, when so authorized by the Secretary of the Treasury, without such facilities being considered as branch offices of national banks.

27. RESERVES OF NATIONAL BANKS OUTSIDE THE UNITED STATES

Existing law

Title 12, U. S. C., sec. 144.-Four-fifths of the reserve of 15 per centum which a national bank located in Alaska or in a dependency or insular possession or any part of the United States outside of the continental United States, and not a member of the Federal Reserve System, is required to keep, may consist of balances due such bank from associations approved by the Comptroller of the Currency and located in any one of the central reserve or reserve cities as now or hereafter defined by law or designated by the Board of Governors of the Federal Reserve System.