The chairman of the Senate Banking Committee will introduce legislation next week to phase out bank interest rate ceilings over a 10-year period, congressional sources said yesterday.
Committee officials said Sen. William Proxmire (D., Wis.) and Sen. Alan Cranston (D., Calif.), who is also a member of the committee, would introduce a financial reform proposal in response to actions taken Wednesday by federal bank regulators.
At that time, the Federal Home Loan Bank Board and the Federal Reserve Board raised the interest rate ceilings on passbook accounts in banks and savings institutions and authorized inflation-keyed variable rate mortgages.
The Cranston-Proxmire bill would phase out interest rate ceilings entirely after savings institutions have strengthened their ability to compete with banks through the use of such instruments as broad consumer lending and checking with interest (NOW) accounts.
Proxmire has frequently argued that small savers should be entitled to receive interest rates equal to those offered the saver with $10,000 or more. The best the small saver could get individually under the new regulations is one percent less than the large saver, but only on the condition the small saver's funds are tied up eight times as long.
On the issue of variable rate mortgages (VRMs), Banking Committee staff members said yesterday Proxmire recognized he did not have the votes to reverse the action of the federal agencies, as Rep. Fernand St. Germain (D.R.I.) has vowed to do in the House.
The new regulations caused wide-spread congressional dissatisfaction, both because of their content and because of the way they were handled by the agencies. Some members of Congress were angered at the way Robert H. McKinney, outgoing chairman of the Federal Home Loan Bank Board, appeared to upstage the legislators.
The new administrative regulations were issued just eight days after President Carter had written Congress suggesting legislation to help small savers.
Meanwhile the financial community objected to higher interest rates for savers, while consumer groups objected to mortgage interest rates that can climb as much as 2.5 percent over the life of the loan.
In the five months since federal savings and loan associations in California have been able to offer VRMs, about half have chosen to do so. Between three and 30 percent of the customers have chosen the escalator type over the conventional type mortgage. Recently VRM interest rates have fallen one quarter to one half of one percent below conventional mortgage rates in California.
Jim Harris, president of the Metropolitan Washington Savings and Loan League, said VRMs would probably be offered at lower rates in this area to attract customers. However, Jeffrey Cohen of the Washington Board of Realtors said VRMs would have little impact because District thrifts have so little money available to lend anyway.
Besides raising the interest rates on passbook accounts, creating four-year certificates pegged to Treasury securities, eliminating minimum amounts for certificate accounts, and easing penalities for premature withdrawals, the regulators also authorized depository instituttions to accept pooled funds. These represent the small savers' pathway to high yields. Rates on $100,000 certificates of deposit are now in excess of 11 percent.
Since banks cannot form or promote pools, individuals and organizations must create their own. According to a Treasury official, who asked not to be named, the account holder or nominee's name is usually the only one submitted to the bank and to the Internal Revenue Service. The nominee is charged with distributing the interest to the beneficial owners and reporting their names to the IRS.
The Securities and Exchange Commission has not yet ruled whether agents or those soliciting funds for this type of pooling come under its laws governing investment advisors.