Loan Guarantees for Defense Production

FEDERAL RESERVE SYSTEM

12 CFR Part 245

[Regulation V; Docket No. R-0928]

Loan Guarantees for Defense Production

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is proposing to abolish its Regulation V as

obsolete. This consideration does not represent any major policy

change, but rather is intended to eliminate an outmoded regulation and

reduce regulatory burden.

DATES: Comments must be submitted on or before July 29, 1996.

ADDRESSES: Comments, which should refer to Docket No. R-0928, may be

mailed to Mr. William W. Wiles, Secretary, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, N.W.,

Washington, D.C. 20551. Comments addressed to Mr. Wiles also may be

delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. and

to the security control room outside of

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those hours. Both the mail room and the security control room are

accessible from the courtyard entrance on 20th Street between

Constitution Avenue and C Street, N.W. Comments may be inspected in

Room M-P-500 between 9:00 a.m. and 5:00 p.m.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General

Counsel (202-452-3625), Heatherun Allison, Attorney (202-452-3565),

Legal Division; for users of the Telecommunications Device for the Deaf

(TDD) only, Dorothea Thompson (202-452-3544); Board of Governors of the

Federal Reserve System, Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Regulatory Review

Pursuant to Section 303 of the Riegle Community Development and

Regulatory Improvement Act of 1994, the Board of Governors of the

Federal Reserve System (the Board) is conducting a review of its

regulations and written policies in order to improve efficiency, reduce

unnecessary costs, eliminate unwarranted constraints on credit

availability, and to remove inconsistencies and outmoded and

duplicative requirements. As part of this review, the Board is

proposing to abolish Regulation V (12 CFR part 245), concerning the

loan guarantee program under the Defense Production Act of 1950 (50

App. U.S.C. 2061) (the Act). The Board is requesting public comment on

this proposed regulatory change, as well as soliciting the views of the

guaranteeing departments and agencies (as defined in the Act)

consistent with Executive Order 12919 (June 3, 1994) and Executive

Order 10789 (Nov. 14, 1958) (as amended), implementing the Act.

Authority for Regulation V

The Board promulgated Regulation V (12 CFR 245) pursuant to the Act

``to facilitate the financing of contracts or other operations deemed

necessary to national defense production.'' Section 301(a)(1) of the

Act allows the President to authorize ``guaranteeing agencies'' to

enter into guarantees with public or private financing institutions

concerning contracts ``deemed by the guaranteeing agency to be

necessary to expedite or expand production and deliveries or services

under Government contracts for the procurement of industrial resources

or critical technology items essential to the national defense, or for

the purpose of financing any contractor, subcontractor or other person

in connection with or in contemplation of the termination, in the

interest of the United States, of any contract made for the national

defense; * * *'' Section 301(a)(1) of the Act defines ``guaranteeing

agencies'' as the Department of Defense, the Department of Energy, the

Department of Commerce, ``and such other agencies of the United States

engaged in procurement for the national defense as he may designate.''

Exec. Order No. 12,919 (1994) provides that ``the head of each

Federal department or agency engaged in procurement for the national

defense * * * and the President and chairman of the Export-Import Bank

of the United States'' is authorized to guarantee public or private

financing institutions as provided in Section 301 of the Act.\1\ In

furtherance of this authorization, Exec. Order No. 12,919 provides that

``The Board of Governors of the Federal Reserve System is authorized,

after consultation with heads of guaranteeing departments and agencies,

the Secretary of the Treasury, and the Director, OMB, to prescribe

regulations governing procedures, forms, rates of interest, and fees

for [loan] guarantee contracts.'' Exec. Order. No. 12919, 59 FR 29,525

(1994).\2\ The Board exercised this authorization in implementing

Regulation V in the 1950s. Regulation V was modified and streamlined in

1979.

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\1\ The ``head of each Federal department or agency engaged in

procurement for the national defense'' is defined as the head of

each of the departments and agencies listed in Exec. Order No.

10,789 (1958), consisting of the following Departments: Defense,

Army, Navy, Air Force, Treasury, Interior, Agriculture, Commerce,

Transportation, Nuclear Regulatory Commission, General Services

Administration, National Aeronautics & Space Administration,

Tennessee Valley Authority, Government Printing Office, and Federal

Emergency Management Agency. Exec. Order No. 10,789, 23 Fed. Reg.

8,897 (1958), as amended.

\2\ A similar provision was formerly set forth in Section 302(c)

of Exec. Order No. 10,480 (1953). Exec. Order No. 10,480 was revoked

by Exec. Order No. 12,919 (1994).

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Purpose of Regulation V

The loan guarantee provisions of the Act were intended to permit

defense agencies to enter into defense-related contracts without regard

to whether appropriations had been made for the underlying projects.

Without the appropriations, defense agencies would lack the legal

authority to make progress payments to defense contractors. Without

progress payments, contractors would not have the working capital to

perform their contracts unless they could obtain financing from private

banking institutions, which might be reluctant to lend for the

performance of contracts if the funds for the contract had not been

appropriated. Thus, while the Act contemplates that defense-contract

funding would be obtained from private banks, the loan guarantees

provisions of the Act would enable the funding and therefore the

continued production of items deemed necessary to the national defense

by ensuring private banks of repayment when the contract was completed.

Regulation V sets forth applicable procedures, forms, fees, charges and

rates of interest for these loan guarantees, in which a Federal Reserve

Bank acts as the fiscal agent of one or more specified federal

departments or agencies for the guarantee by that department or agency

of a defense production loan made by a private financing institution.

Decline in Use of Regulation V

The Act and the Executive Orders implementing it have periodically

expired and subsequently been reauthorized. However, in 1975, the Act

was amended to make the guarantee provisions unnecessary for most

practical purposes. These amendments provided that ``all authority

hereby or hereafter extended under title III [relating to expansion of

productive capacity and supply, including loan guarantee provisions]

shall be effective for any fiscal year only to such extent or in such

amounts as are provided in advance in appropriation Acts.'' 50 U.S.C.

App. 2166(a). Thus, under the 1975 amendments, defense agencies that

have authority to authorize loan guarantees have authority to do so

only if funds have been appropriated for the contract in question. Once

funds have been appropriated, however, there is little need for the

guarantee, because the appropriated funds can be paid timely in

accordance with the defense contracts. Notwithstanding the 1975

amendments, the loan guarantee provisions of the Act were not deleted.

No loan guarantees are currently outstanding and no applications for

loan guarantees have been filed for several years.

Current Regulatory Review Proposal

Repealing Regulation V would achieve the objectives of Section 303

of the Riegle Community Development and Regulatory Improvement Act of

1994 by improving efficiency and removing outmoded requirements while

at the same time not adversely affecting the abilities of any parties

to participate in a loan guarantee should the need arise. Repealing

Regulation V would not affect the existence or availability of the loan

guarantee program as provided by the Act. Although the 1975 amendments

to the Act make it unlikely that a loan guarantee application will be

filed, the Board and the Federal Reserve Banks would be able to perform

their fiscal

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agency and application coordination responsibilities under the Act if

such an application were filed using fiscal agency procedures already

in place in other contexts and on a case-by-case basis.

Initial Regulatory Flexibility Analysis

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an

agency to publish an initial regulatory flexibility analysis with any

notice of proposed rulemaking. Two of the requirements of an initial

regulatory flexibility analysis (5 U.S.C. 603(b) (1)-(2)), a

description of the reasons why action by the agency is being considered

and a statement of the objectives of, and legal basis for, the

proposal, are contained in the supplementary material above. The

proposal rule imposes no additional reporting or recordkeeping

requirements and does not overlap with other federal rules. (5 U.S.C.

603(b) (4)-(5).)

Another requirement for the initial regulatory flexibility analysis

is a description of and, where feasible, an estimate of the number of

small entities to which the proposed rule will apply. (5 U.S.C.

603(b)(3).) The proposal will apply to all depository institutions

regardless of size. The proposal seeks to eliminate an obsolete

regulatory provision and does not impose any substantial economic

burden on small entities.

By order of the Board of Governors of the Federal Reserve

System, May 21, 1996.

William W. Wiles,

Secretary of the Board.

[FR Doc. 96-13225 Filed 5-24-96; 8:45 am]

BILLING CODE 6210-01-P