made by the Guarantor by surrendering, at or before maturity, its interest in the maturing obligation, in the amount of the demand by the Financing Institution and without regard to the ten-day period specified in this section.

Section 5 (A)

(8) Under the first sentence the Guarantor may, after a purchase and transfer, administer the loan either directly or through the agency of the Reserve Bank. It is contemplated that such administration will usually be conducted by the Reserve Bank.

Section 6

(9) All amounts paid or credited on the obligation after the date of the demand by the Financing Institution or the Guarantor, as the case may be, for a purchase under this agreement and prior to the date of such purchase will be applied, as provided in this section, according to the respective interests of the Guarantor and the Financing Institution as such interests exist immediately after the purchase.

(10) Subject to any special provision which may be contained in Exhibit D, the Financing Institution may make other loans to the Borrower for the purpose of financing war production or reconversion to civilian business or for other purposes, provided the proceeds of the Contracts (as the term "the Contracts" is defined in Paragraph 1 of Appendix I) or inventory allocable to the Contracts are not pledged as security for such loan. The Financing Institution as security for the side loan may take other collateral and provide that the side loan shall not be required to share with the guaranteed loan any banker's lien or right of setoff with respect to funds of the Borrower, exclusive of proceeds of the Contracts, on general deposit with the Financing Institution or specifically pledged as security for such side loan.

Section 7

(11) A schedule of guarantee fees will be prescribed by the Board of Governors of the Federal Reserve System with the concurrence of the Director of Contract Settlement.

Section 8

(12) The word "certificate" in Paragraph (B) (2) includes any certificate furnished by the Borrower in connection with the loan formula.

General

(13) Whenever a number of days is specified in the Guarantee Agreement or in the Loan Agreement the word "days" shall be deemed to mean calendar days.

LOAN AGREEMENT Opening Paragraph

(14) If the Borrower and the Financing Institution have agreed upon a non-firm commitment, the words "in its sole discre

tion" may be inserted before the word "grant". The second sentence of Paragraph 2 applies even in the case of a non-firm commitment and in such a case no figure should be inserted in Paragraph 4.

(15) In the case of a straight loan, the words "at any one time outstanding", should be stricken out.

(16) The note to be used should contain the provisions which appear in the form annexed as Exhibit A to the standard loan agreement, with the blanks appropriately filled in, and may contain such additional provisions, not inconsistent therewith or with the terms of the loan agreement, as the Financing Institution and the Borrower may agree. The note may, for example, contain provisions for sale of collateral in the event of default, allowance for attorneys' fees, etc. Paragraph 1

(17) The following terms are defined in Section 3 of the Contract Settlement Act of 1944:

"(a) The term 'prime contract' means any contract, agreement, or purchase order heretofore or hereafter entered into by a contracting agency and connected with or related to the prosecution of the war; and the term 'prime contractor' means any holder of one or more prime contracts.

"(b) The term 'subcontract' means any contract, agreement, or purchase order heretofore or hereafter entered into to perform all or any part of the work, or to make or furnish any material to the extent that such material is required for the performance of any one or more prime contracts or of any one or more other subcontractors; and the term 'subcontractor' means any holder of one or

more subcontractors.

"(c) The term 'war contract' means a prime contract or a subcontract; and the term 'war contractor' means any holder of one or more war contracts.

"(d) The terms 'termination', 'terminate', and 'terminated' refer to the termination or cancelation, in whole or in part, of work under a prime contract for the convenience or at the option of the Government (except for default of the prime contractor) or of work under a subcontract for any reason except the default of the subcontractor.

"(g) The term 'contracting agency' means any Government agency which has been or hereafter may be authorized to make contracts pursuant to section 201 of the First War Powers Act, 1941, and includes the Reconstruction Finance Corporation and any corporation organized pursuant to the Reconstruction Finance Corporation Act (47 Stat. 5), as amended, the Smaller War Plants Corporation, and the War Production Board.

"(h) The term 'termination claim' means any claim or demand, by a war contractor for fair compensation for the termination of any war contract and any other claim under a terminated war contract, which regula

tions prescribed under this Act authorize to be asserted and settled in connection with any termination settlement.

"(m) The term 'final and conclusive,' as applied to any settlement, finding, or decision, means that such settlement, finding, or decision shall not be reopened, annulled, modified, set aside, or disregarded by any officer, employee, or agent of the United States or in any suit, action, or proceeding except as provided in this Act."

With respect to the definition contained in paragraph (g) above, the Director of Contract Settlement will from time to time issue a list of "contracting agencies" indicating those which are currently guaranteeing loans under this Act through the agency of the Federal Reserve Banks.

(18) It will be noted that the definition of "terminated war contract" contained in Paragraph 1 of the loan agreement is broad enough to permit borrowings against receivables and inventory under that part of a partially cancelled contract still remaining to be performed; that under Paragraph 5 assignment of all moneys due and to become due under the entire contract may be required; and that the provisions of Paragraphs 7 (c) and 8 apply to all payments under the contract.

(19) Current Commitments on Uncancelled Contracts: If the Financing Institution and the Borrower desire to enter into a firm commitment for the financing of nonterminated contracts existing on the date of execution of the loan agreement when and if such contracts become terminated, a provision may be added to Exhibit D listing such nonterminated war contracts with an agreement by the Financing Institution that such contracts may, upon termination, be added to Exhibit C without further approval.

The addition of terminated war contracts to Exhibit C shall be made by serially numbered supplements filed in 5 copies with the Financing Institution. The supplements shall be in the same form as Exhibit C with the following added at the lower left hand corner thereof:

their inclusion would probably be to make the proposed borrowing in substantial part a loan for production purposes.

The Financing Institution may refuse to permit addition to the list of terminated war contracts contained in Exhibit C of such contracts as are by their terms not assignable, or may require as a condition of the addition of such contracts as to the list that the Borrower obtain an appropriate amendment permitting such assignment. It should be noted that prime contracts providing for payments aggregating less than $1,000 are not assignable under the Assignment of Claims Act of 1940.

Paragraph 2

(21) The notes may be made payable on demand, or may be 90-day notes, or may have such other maturity, not more than three years after the date of the agreement, as the Financing Institution and the Borrower may agree.

(22) Irrespective of whether or not the Financing Institution is under an obligation under the terms of the agreement to extend further credit, the second sentence of Paragraph 2 is intended to give the Borrower the right to borrow again, from time to time, up to the amount of the notes which have been given in consideration of the loan until the final maturity date inserted in Paragraph 2 or until the notes are finally paid pursuant to Paragraph 8 or otherwise, whichever first occurs.

Paragraph 3

(23) The maximum interest rate, as prescribed by the Board of Governors of the Federal Reserve System with the concurrence of the Director, is 5 per cent per annum simple interest, and interest may not be charged at a greater rate either before or after maturity.

Paragraph 4

(24) The maximum commitment fee, as prescribed by the Board of Governors of the Federal Reserve System with the concurrence of the Director, is of 1 per cent per annum, and, accordingly, the commitment fee, if any is charged, may not exceed this rate. (25) No termination fee, service fee, or other fee of a similar character, except charges covering out-of-pocket expenses of a financing institution, may be charged. (26) Out-of-pocket expenses do not include any overhead expenses.

Paragraph 5

(27) The obligation imposed upon the Borrower to make assignments includes the obligation to execute such documents and take such action in connection therewith as the Financing Institution may reasonably require including, in the case of subcontracts, the giving of such notice to the purchasers as may be necessary to perfect the assignments.

(28) The extent to which assignments should be required prior to or contemporaneously with any borrowing under the first

sentence of this Paragraph will depend upon the credit standing of the Borrower and upon the practical problems of assignment which may exist in a particular case. The Financing Institution may, by an appropriate writing, agree to except specific contracts from the requirement of assignment, in which case notice of the contracts so excepted should be given to the Reserve Bank. The Financing Institution may also provide in Exhibit D for a general exception. For example, Exhibit D may provide that contracts on Exhibit C as to which the "Estimated Amount of Termination Claim" is less than $.. --- need not be assigned unless subsequently requested by the Financing Institution or the Guarantor. If such a provision is included in Exhibit D, the dollar amount of contracts so excluded may, if the Borrower's credit is strong enough to warrant, be made sufciently high so that Paragraph 5 will in effect merely constitute a covenant to assign upon request of the Financing Institution or the Guarantor.

(29) In the case of a weak credit, the FInancing Institution should include, in Exhibit D, a covenant reading substantially as follows:

"At any time upon request of the Financing Institution or the Guarantor, the Borrower will pledge or mortgage as further security for the loan all or any inventory applicable to the Contracts."

Any pledge pursuant to such a covenant should contain a provision for release of inventory so pledged to the extent of payment to the Financing Institution of the cost or proceeds thereof, as the case may be, in accordance with the terms of Paragraph 8 of the loan agreement.

(30) Under the last sentence of this Paragraph, the Financing Institution and the Borrower in suitable cases may agree to a provision in Exhibit D permitting the existence of liens to secure advance payments.

(31) The number of days during which an encumbrance may be permitted to remain on inventory of the Borrower without creating a default, which is to be inserted in the last sentence of this Paragraph, will depend primarily upon the credit standing of the Bor

rower.

Paragraph 6

(32) In the event of a serious dispute between the Financing Institution and the Borrower as to whether the borrowing base is substantially overstated in value, for the purposes of this Paragraph or of Paragraph 8, the parties may, if they mutually desire, request the Guarantor to consider the matter.

Paragraph 7

(33) The Financing Institution may, for example, deem it desirable to require under the first sentence of this Paragraph the furnishing of profit and loss statements, an analysis of surplus, data as to claims under the Borrower's terminated war contracts, and

statements as to the insurance required to be maintained by the Borrower under Paragraph 10.

(34) One copy of each of the statements to be furnished under subparagraphs (a), (b) and (c) may be retained by the Financing Institution, and two copies should be forwarded to the Reserve Bank, which will retain one copy and forward the other to the Guarantor or such person as the Guarantor may designate.

(35) Under the definition of payments, a number of different situations are contemplated:

(a) There may be a sale of inventory specifically approved or authorized by the proper authority. In such case, the payment will be the amount of the proceeds; the date of payment will be the date of receipt of the proceeds by the Borrower.

(b) There may be a retention of inventory approved or authorized by the proper authority with a specific credit allowed on any claim filed. In such case, the payment will be the amount of the credit allowed; the date of payment will be the date of the allowance of the credit.

(c) There may be a sale of inventory approved or authorized by the proper authority under a blanket authority to dispose of inventory at not less than cost or at not less than a stated percentage of cost. In such case, the amount of the payment will be the amount of the proceeds; the date of payment will be the date the proceeds of the sale are received by the Borrower.

(d) There may be a definitive election to retain inventory not approved or authorized by the proper authority with a specific credit against the Borrower's claim where claim has been filed or against his potential claim where none has been filled. Such a definitive election to retain occurs when the Borrower relinquishes the right to include the cost of such inventory in his claim and may be evidenced by written notice to the proper authority, by sale of the inventory without specific credit, by incorporation of inventory in civilian products, or by other means. In such case, the amount of the payment will be the cost of the inventory or, if the act of election is a sale, the proceeds of the sale if that is greater than cost; the date of payment will be the date when the definitive act of election was made.

In the case of a prime contract the "proper authority" to approve or authorize dispos!tions or retentions of property is the contracting agency. In the case of subcontracts the "proper authority" may be the purchaser or the contracting agency or both depending on the circumstances and the applicable regulations. The word "cost" refers to the Borrower's costs or expenditures used in computing the borrowing base.

Paragraph 8

(36) The Government does not undertake responsibility for assisting in the financing of civilian inventory under the provisions of

the Contract Settlement Act of 1944. Therefore, the Financing Institution, if it prescribes a period in excess of three days, should prescribe a reasonably short period within which the payments required by Paragraph 8 are to be made. The Financing Institution may prescribe different periods for payments arising out of the several classes of events upon the happening of which payments are required to be made, and may prescribe a period of grace for small payments. If the credit of the Borrower is not strong, prompt payment should be required, particularly in the event of inventory retention.

(37) If either the Financing Institution or the Guarantor notifies the Borrower of an overstatement pursuant to clause (b) of Paragraph 8, it should forthwith notify the other party to the Guarantee Agreement. Paragraph 9

(38) If the Borrower has subsidiaries and if it is desired to use consolidated net current assets as a basis, this should be specified in Exhibit D. In this event, consideration should be given to whether or not any restrictions imposed upon the parent should also be applied to the subsidiaries.

Paragraph 11

(39) The standard form of loan agreement is designed for use in connection with a straight loan or a revolving credit, a firm commitment or a loan under which the Financing Institution is not obligated to extend further credit, a single bank credit arrangement, or a multi-bank credit arrangement, and for a strong credit or a weak credit. It is recognized that the Financing Institution and the Borrower may wish to add in Exhibit D further provisions appropriate for the particular financing arrangement between them.

(40) Conditions other than those required under Appendix I will be prescribed by the Guarantor or the Federal Reserve Bank only in exceptional circumstances and when they are clearly necessary to protect the Government's interest; but it is expected that the Financing Institution, in the case of a weak credit, will ordinarily insist upon the inclusion of the provision quoted in Explanatory Note (29). Additional conditions. for inclusion in Exhibit D may be agreed upon by the Borrower and the Financing Institution and, if not unreasonable or inconsistent with the standard termination loan agreement, such conditions will not be objected to by the Guarantor or the Reserve Bank.

(41) The Guarantor will have no objection to the insertion of a provision requiring the Borrower to apply first to the Financing Institution before obtaining any other loans. The Financing Institution may also insert an additional provision prohibiting other borrowings, without the consent of the Financing Institution, or placing a ceiling thereon.

(42) In order that additional terms may be clearly distinguished from the provisions of the standard form, all such additional terms should be set forth in Exhibit D or in a rider attached thereto.

(43) In any case where either the Financing Institution or the Guarantor exercises its option under the Loan Agreement to terminate the credit and accelerate the notes, it should forthwith notify the other party to the Guarantee Agreement.

Exhibit B-Paragraph 2

(44) In general, the percentages in the loan formula certificate agreed upon by the Financing Institution and the Borrower will not be questioned by the Federal Reserve Bank or the Guarantor.

(45) If a breakdown between manufacturing and administrative overhead is available, it should be furnished by the Borrower, and in this case the words "and administrative" may be omitted from item (c) and an additional item relating solely to administrative overhead may be added. Similarly, where circumstances warrant, there may also be added a separate item relating to other reimbursable expenditures, provided that a breakdown of such item is furnished and approved. In any of the above cases, the additional items will be lettered (e), (f), etc. If a further breakdown of expenditures is desired, as between fixed-priced and cost-plus-a-fixed-fee contracts or as between prime contracts and subcontracts or as between approved and unapproved subcontract settlements, this may be accomplished by similar procedure. (46) With reference to (aa), amounts "disallowed by the contracting agency" include any part of a termination claim disallowed pursuant to Section 13 of the Act regardless of whether the Borrower has taken an appeal, except to the extent that such appeal is sustained.

Exhibit B-Paragraph 3

(47) It is expected that in all cases the Borrower will exercise due diligence in filling termination claims as promptly as possible. Due to the widely varying factors involved, such as the number of Borrowers cancelled contracts and the relative simplicity or complexity of preparing his claims, it is not deemed feasible to prescribe any uniform time within which claims must be filed. However, where the Financing Institution and the Borrower can agree in advance upon a reasonable time for filing claims, they can of course provide for such a limitation in Exhibit D.

[Gen. Reg. 1, Aug. 18, 1944, 9 F.R. 10358].

PUBLIC FINANCING INSTITUTIONS SOURCE: §§ 8040.30 to 8040.38, inclusive, contained in Regulation 9, Dec. 9, 1944, 9 F.R. 14501.

§ 8040.30 Policies, principles and procedures relating to interim financing by

termination loans. The following policies, principles and procedures relating to interim financing by means of termination loans made, participated in, or guaranteed by the Reconstruction Finance Corporation and the Smaller War Plants Corporation (hereinafter called public financing institutions) are prescribed.

§ 8040.31 Authority of public financing institutions to engage in interim financing. To the extent permitted by law, such public financing institutions, as contracting agencies, are authorized to act with all authority granted by the Contract Settlement Act of 1944; and without limiting the generality of the foregoing:

(a) To make direct loans; and

(b) To issue guarantees to, enter into direct present participations with, or enter into repurchase agreements or deferred participations with, any public or private financing institution for the purpose of financing any war contractor, or any person who is or has been engaged in performing any operation deemed to be connected with or related to war production, in connection with or in contemplation of the termination of one or more war contracts or operations.

§ 8040.32 Authority of services on TLoan guarantees to public financing institutions. The War Department, the Navy Department and the Maritime Commission (hereinafter called the services) are authorized to issue to public financing institutions through the Federal Reserve Banks as fiscal agents of the United States T-Loan guarantees of the following types:

(a) A T-Loan guarantee of direct loans made by a public financing institution;

(b) A T-Loan guarantee of the entire loan made by a public financing institution directly and presently participated in by a private financing institution:

(c) A T-Loan guarantee of the entire loan made by a private financing institution directly and presently participated in by a public financing institution.

§ 8040.33 Applicability of § 8040.1. To the extent not inconsistent with §§ 8040.31 to 8040.38, inclusive, the provisions of § 8040.1 and procedures established in connection therewith, including those relating to interest and fees, shall

govern the issuance of T-Loan guarantees to public financing institutions.

§ 8040.34 Prior approval of guarantor required in all cases. Notwithstanding the provisions of § 8040.1(b), applications for guarantees of T-Loans made or participated in by a public financing institution shall be submitted through established channels for prior approval of the guarantor as in the case of nondelegated T-Loan guarantees of loans made by private financing institutions. Since duplication of effort by Government agencies should be avoided, the Federal Reserve Banks are not required to investigate, review or comment upon such applications prior to submission to the guarantor, Provided, That the guarantor may make such investigation and obtain from the applicant, the Federal Reserve Banks, or other sources, such information relating to the application as it deems necessary to protect the Government's interest.

§ 8040.35 Limitation on guarantees to public financing institutions. In no event shall any of the services issue a T-Loan guarantee in favor of a public financing institution pursuant to §§ 8040.31 to 8040.38, inclusive, if it appears that a private financing institution will promptly finance the war contractor, in an amount and subject to terms not substantially less favorable to the contractor, either without a guarantee or under a direct T-Loan guarantee issued to it by any one of the services.

§ 8040.36 T-Loans to refinance unguaranteed loans. The services may in their discretion guarantee T-Loans made by or participated in by a public financing institution, even though the proceeds of such T-Loans are to be used to refinance unguaranteed loans made by or participated in by such public financing institution, provided that such TLoans shall be made only in an amount justified by the borrower's termination claims.

§ 8040.37 Deferred participations or repurchase agreements. Nothing in this part shall require the services to guarantee or agree to purchase a deferred participation interest or repurchase agreement of a public financing institu tion entered into in connection with & loan made by a private financing institution.

§ 8040.38 Information and certification from public financing institutions.