Evening star., 1947-06-29
Supreme Court Ruling
Aids Housing Program
Federal Power to Curb Imitation Trends
Seen Bolstered in Home Loan Case
BIZ Gerard D. Reilly

An ominous threat to the power OF the Fed
eral Government to place curb upon infia
tionary trends in the housing field was checked
by the Supreme Court last week in unani-
nous decision reversing a holding by the
District Court for Southern California that the
supervisory powers of the Federal Home Loan
Bank Board over member institutions is un-
constitutional The case, docketed as Fahey
VS.. Mallonee, has been the subject of wide
discussion in banking circles because Of the
novel character of the lower courts opinion.
1t was one of the objectives of Congress in
passing the Home Owners Loan Act of 1888
to establish the same system Of controls over
building and loan societies which the Federal
Reserve Board and the Controller of the Cur
| rency exercise over national commercial banks
At the period the act became effective, the
impact of the depression upon the ability of
home owners to keep up payments on mortgage
notes had made the position of most of these
societies most precarious. The number of mort
cages in default ran into several hundred
thousand. Foreclosures were so numerous that
the market value of real estate was driven down
to such a point that only fraction of the
principal on many defaulted obligations could
be recovered in auctioneers sales The opera
tions of the Home owners Loan Corp in
refinancing distressed home owners enabled
many of these institutions to escape insolvency.
In the light of this experience Congress
thought it necessary, in order to restore con-
fidence in these private credit institutions. to
extend to them the right to obtain Fed
eral savings and loan charters and sys-
tenn of insurance for the money deposited
by the shareholders. In return for receiving
such charters, these institutions then became
subject to periodic examinations by the Fed
eral Home Loan Bank Board, which had the
duty of seeing to it that their affairs were
conducted in accordance with sound banking
practices. The board was also given authority
in Section cd Of the act to issue rules
and regulations to provide for reorganization,
merger or liquidation of these institutions and
to appoint conservators or receivers to take
charge of them.
When the wartime housing shortage brought
about wave of real estate speculation, the
new system was faced with serious test, With
the yield on commercial bonds greatly reduced,
many of these institutions were under tempta-
ton to make loans based upon the inflated
market value of home properties. Particular
vigilance was required with regard to lending
institutions in the Los Angeles area where
housing facilities have been spectacularly over
/ taxed.
The litigation which reached the Supreme
| Court arose out of the appointment OF con-
servator by the Federal Home Bank Admins
tration of the Long Beach Savings and Loan
Association one of the home mortgage So
cieties in this area. The appointment was re-
sisted by the officers of the bank, and when
the conservator took possession an injunction
was sought to return the association to its for
mer management. The theory of the case was
that the statute authorizing the appointment
i~E Uyoc
tional since no standards were prescribed by
Congress for the exercise of this power, and
that the regulations which the bank board had
issued under it provided for hearing after the
conservator took possession instead of before
three judge court was appointed. The con-
servator and the Federal Home Loan Bank
commissioner moved to DISMISS and the trt-
bunal, with only the pleadings and motion
papers before it, held the section unconstitu-
tional. Under the terms of the sweeping in
junction which the court entered, the con-
servator was not only ordered removed but
the Federal authorities were permanently en-
Joined from conducting an administrative hear
ing on the matter.
AS the Supreme Court noted, this drastic
decree was entered even though the Govern
ment alleged that the appointment of the re-
ceiver had been necessitated on the ground
in an unlawful and unauthorized manner, that
its MANAGEMENT was unfit and unsafe, and
that it was pursuing a course which was
ieopardiZing the interests of It's members,
creditors and the public. After the appoint
ment of the receiver, the management OF the
association had demanded a bill of particulars
which the board furnished.
l., these particulars the reasons given for
| the conservator's appointment included with
drawals by the president of the institution
without proper voucher, payment OF salaries
ard fees not commensurate with services rem
dered directors unlawful removal of
cashiers check in the amount Of $4,000 during
an examination by the Federal Home Loan
Bank Examiners, use of the association 1or
personal gain by one or more of the officers,
T and directors Justification of records This
charge was also made that the president OF
the institution had engaged in certain man1p-
ulations of the affairs of another bank.
without taking any evidence. however as to
whether these charges were well founded, the
District Court, since it viewed the statute as
constitutionaIly defective, held that the action
of the Home Loan Bank Board in stepping in
to take charge of the banks affairs was beyond
its powers. In disagreeing with the District
Court, Mr.. Justice Jackson, who wrote the
Supreme Court opinion pointed out tnat the
issue presented was quite different from the
NRA cases upon which the plaintiffs rely. He
distinguished those cases on the ground that
they dealt with delegation of power to
make Federal crimes of acts that had never
been such before and to devise novel rules Of
law in field in which there had been no set
tied law or custom. He found that the dele
cation of such a power was quite distinguish
able from the discretion to make regulations
contemplated in the Home Loan Act. He
noted that the regulations issued were the
conventional ones promulgated by most State
and Federal banking authorities, and that the
field was one in which the accumulated ex-
IL o.l,.i boz nctah ehed Iuau