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: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board is repealing its Regulation V on loan guarantees for

defense production as obsolete. This action does not represent any

policy change, but rather eliminates an outmoded regulation and reduces

regulatory burden.

EFFECTIVE DATE: October 9, 1996.

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:

I. Background

Pursuant to Section 303 of the Riegle Community Development and

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

the Federal Reserve System (the Board) to conduct 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, the Board proposed to repeal Regulation V,

concerning the loan guarantee program under the Defense Production Act

of 1950 (50 U.S.C. app. 2061) (the Act). The Board requested public

comment on this proposed regulatory change on May 28, 1996 (61 FR

26471). Board staff also solicited 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

(November 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. 12919 (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. 12919 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 29525

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

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

1979.

---------------------------------------------------------------------------

\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. 10789

(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, General Printing Office, and Federal

Emergency Management Agency. Exec. Order No. 10789, 23 FR 8897

(1958), as amended.

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

of Exec. Order No. 10480 (1953). Exec. Order No. 10480 was revoked

by Exec. Order No. 12919 (1994).

---------------------------------------------------------------------------

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

[[Page 52876]]

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.

Repeal of Regulation V

Repealing Regulation V will 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 will 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 will be able to perform

their fiscal agency and application coordination responsibilities under

the Act in the event such an application is filed using fiscal agency

procedures already in place in other contexts and on a case-by-case

basis.

II. Overview of Comments Received

The Board received 5 comment letters on the proposal. The comment

letters consisted of 4 letters from Federal Reserve Banks and one

letter from the National Aeronautics and Space Administration. In

addition, in response to its solicitation of the views of

``guaranteeing agencies'' under the Act, the Board received a letter

from the United States Government Printing Office and a letter from the

Department of Agriculture. All commenters expressed support for the

proposal.

III. Description of the Final Rule

The final rule deletes 12 CFR 245 as obsolete.

IV. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, the

Board hereby certifies that this final rule will not have a significant

economic impact on a substantial number of small entities. The final

rule does not impose any requirements, but rather deletes an outmoded

regulation as obsolete.

V. Paperwork Reduction Act of 1995

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

Ch. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under

the authority delegated to the Board by the Office of Management and

Budget. No collections of information pursuant to the Paperwork

Reduction Act are contained in the final rule.

List of Subjects in 12 CFR Part 245

Federal Reserve System, Government contracts, Loan programs-

National defense, National defense.

For the reasons set forth in the preamble, and in accordance with

its authority under 50 U.S.C. app. 2061 et seq., the Board of Governors

of the Federal Reserve is amending Title 12 of the Code of Federal

Regulations, Chapter II as follows:

PART 245--[REMOVED]

1. Part 245 is removed.

By order of the Board of Governors of the Federal Reserve

System, October 3, 1996.

William W. Wiles,

Secretary of the Board.

[FR Doc. 96-25867 Filed 10-8-96; 8:45 am]

BILLING CODE 6210-01-P