1 Mr. DOLE. And the suggestions, or the amendments that you make, are made in that spirit, of improving the bill and not crippling the bill?

Mr. BOLLINGER. Definitely, very definitely. We are hopeful that these can be approved by your committee, worked into the bill. We think that we have a real solution to the industry problem.

Mr. DOLE. That is all. Thank you.

The CHAIRMAN. I do not understand what this argument is about. As I see it, you are discussing the rules of the REA which are not involved in this bill at all, because this bill simply sets up a bank that makes loans under the rules set out in this legislation.

Mr. BOLLINGER. Right.

The CHAIRMAN. And it does not change the rules under which the REA is operated.

Mr. BOLLINGER. Right.

The CHAIRMAN. We are criticizing the policy of the REA in requiring a lien on all of the properties of a borrower. As I understand it, this makes it more difficult for the borrower to get private money as has been stated. This is the same rule that you have in the Farmers Home and with all of these other credit institutions. When a man borrows from the Farmers Home, for example, he cannot borrow from the Farmers Home as long as he can borrow from someone else. If he can get conventional credit, he cannot borrow from the Farmers Home, and if he borrows from the Farmers Home and reaches the point where he can get credit from the bank, he can no longer borrow from Farmers Home. At that point Farmers Home will probably have a mortgage on his tractor. The bank making the new loan pays off the old loan and takes a mortgage. What prevents these people who have that good credit, what in the world keeps them from going out and making a conventional loan, if they want a conventional loan? The REA does not refuse to take the money, does it?

Mr. BOLLINGER. I think that you have pinpointed the problem; I think that it ought to be studied in that light. I think that a solution could come from that.

The CHAIRMAN. I say that the REA has never been known to refuse to accept money. Have they?

Mr. BOLLINGER. No. These folks would not be in a position to pay off the loan. It is just that they should be free so that they can raise capital otherwise.

The CHAIRMAN. If they can get more capital, they can pay off. If you have a $100,000 loan and you have $200,000 worth of property, and if you can borrow another $25,000, you can borrow $125,000 as a first lien.

Mr. BOLLINGER. I think that there would be very, very few that would be strong enough financially to do that a very few.

The CHAIRMAN. They do not have to be strong. If they are strong enough to get new and additional credit, they are strong enough to get it all from the bank.

Mr. BOLLINGER. Well, you are going farther than I would say is possible, but the philosophy that you are expressing is the philosophy that I think ought to be followed to the extent possible.

The CHAIRMAN. I am asking you this: Why can you not borrow right now?

You are complaining that it cannot be borrowed; that we are keeping them from financing with the banks; you are complaining of that.

Anybody who has enough equity to get a second lien $25,000 credit with a $100,000 first lien, can get $125,000 first lien credit.

Mr. BOLLINGER. There might be a few that could do this, but you are asking a great deal of that borrower.

Mr. BELCHER. Would you yield?

The CHAIRMAN. Yes.

Mr. BELCHER. My understanding was that they are not willing to loan the $25,000 on the second mortgage; they would be willing to loan it on the first mortgage. And you say that they would loan $125,000 on a first mortgage.

The CHAIRMAN. They would. They would loan $125,000 on the first mortgage, if they loan them $25,000 on a second mortgage behind $100,000 first lien.

Mr. BELCHER. They want it on the first lien.

The CHAIRMAN. That is not what he is complaining about. He is complaining that he already has this loan, and that is the reason that the man could not get it, though he has the credit to go out and get it, but the REA has all of his property mortgaged, and, therefore, he could not use the equities that he has accumulated to make a new loan. All I am saying is this, and I will defer to my banker friend—I think he knows more about this than I do. I have never been a banker but I have been on the borrowing end, and I have been able to get a fellow make me a second-lien loan, but the same man would prefer to take a first-lien loan.

Mr. BOLLINGER. Bear in mind that the loan the man presently has is at 2 percent interest rate. When he converts that to private capital, the $25,000, using your example-plus the $100,000 that he has already borrowed-there is a great deal of change.

The CHAIRMAN. I understand full well why the man does not want to pay off the REA loan. I understand full well why he does not want to pay it off, but I do not understand this talk of this inability to get a private loan if he has security for it.

You have just told us how these people wanted to pay the higher interest rate.

Mr. BOLLINGER. Yes, sir.

The CHAIRMAN. And suggested the REA loan kept them from paying the higher interest rate. The REA never kept any man from paying a higher interest rate if he wanted to pay it. All he has to do is to get somebody to take that loan and pay the higher interest rate. Mr. BOLLINGER. Yes, sir.

The CHAIRMAN. If he has the equity.

He is talking about where they have accumulated additional equity. He is talking about where they have built up additional equity. Of course, he could not go out and get a loan even at 12 percent if he does not have the equity, but if he has the equity he can get the loan at a higher interest rate.

Mr. Myers?

Mr. MYERS. I think that what Mr. Bollinger is suggesting here is that the REA should relinquish their first lien in two ways: either take an equal amount, which is not in the best interest of the Federal Government's security, and then release part of the collateral so that

84-234-67

somebody else can make the loan. They do not want to give up 2 percent. That is the first thing. They want to keep their loan of $25,000. But you would like to see the REA release enough security or collateral so that somebody else can come in and make some supplemental financing. Is that not what you are actually saying? This is the first thing.

Mr. BOLLINGER. Yes, sir.

Mr. MYERS. They want half a loaf. They each want to have their cake and eat it. This is true. They could give it up. I do not think that any banker would come in and make a second mortgage; I do not know of any bank that can make a second mortgage legally. They cannot come in and take a second mortgage with collateral that is already pledged to the REA.

What you are asking is that the REA relinquish part of the security. Mr. BOLLINGER. That is what I am suggesting. I think it would be a great help. I am not certain that it can be done.

The CHAIRMAN. Let me ask you: Why should the REA reduce its security. You want the REA to carry it and you want the REA to make the low-interest-rate loans and take all of this risk, whereas we say to the one-gallus farmer down here in the country who has a loan with the Farmers Home Administration--we say to him, "Now, you can get credit from the bank and you pay us off and let the bank carry you." And the bank does in many instances when he gets in better shape. They take a lien on the same tractor that the Government had and pay off the Government. Why should not the telephone companies do as much as the poor one-gallus farmer does?

Mr. BOLLINGER. I think that it is a legitimate criticism, but I do know something about the ability of these companies to pay.

The CHAIRMAN. All right. Is it any better than that one-gallus farmer?

Mr. BOLLINGER. It is comparable.

The CHAIRMAN. All right. Why do you want better treatment than that which you extend to that farmer?

Mr. BOLLINGER. I subscribe fully to your criticism of my suggestion. I think it is all right, but I think that my suggestion would help this borrower finally to get into the position, as you say that he ought to get into right away, and I think that it would help him. Maybe he could gradually get over there if this would help him.

Let me give you an idea why some of the borrowers are in a little bit of a difficult strait: In 1964-this would be in 1965, I got from the North Dakota Public Service Commission some figures on three companies in North Dakota. These are all borrowers. Here is the percent of debt to net plant at the end of 1964, 128.6-debt to net plant, 115.8 percent, 103.2 percent, while my operation up there was 49 percent. Now, with the 49 percent debt ratio I would be free to do what you are suggesting, Congressman Poage, but when you get into such straits as the others were, no.

The CHAIRMAN. They would not be able to borrow from anybody else under those circumstances. There is no collateral. Obviously, there is no banker or any credit institution of any kind that will make such a loan. If you do not have any equity, you cannot expect to get a loan.

Mr. MYERS. How do you get that way?

I do not think that we are going far enough here, if we get into that shape.

Mr. BOLLINGER. These are from North Dakota sources.

Mr. KLEPPE. It is always possible to do this with Government funds. Mr. MYERS. I do know that the Farmers Home Administration does do some of this. I do not know why they do it. Anytime that you borrow from two sources, there is a possibility of trouble. Neither side knows exactly what is happening. I do not think that it is really fair. I do not completely agree with your testimony here. I think that you should go one route or the other, preferably this financing that does not come from the Treasury, if they can do it. But the Farmers Home Administration does do some of this. They release collateral once in a while, and they do it in anticipation of their getting out themselves. They do not do it unless they see that in the very near future that they can get out. I must give them credit for that. They tell their borrowers not to borrow from the FHA if they can borrow from private sources. I do compliment them for that. Not everyone does this. The Farmers Home Administration, in my experience locally in Indiana, has done a pretty good job of doing this. And I think they do it, always in anticipation of getting out of it.

The CHAIRMAN. And they will probably finance others, that is, for a given period of time.

Mr. MYERS. It is always with a written agreement that both the FHA and the financing bank understand the arrangements.

Mr. DOLE. Will you yield?

Mr. MYERS. Certainly.

Mr. DOLE. I am not certain just what the value of the property might have been and what the loan might be. I do not see any reason that the security be 10 times the amount of the loan. I think that as long as the agency is protected it is all right when the mortgage is three times the amount of the loan, that is, the property value, and they are protected. They do this with a person or corporation in the private sector. There they have a first lien on it.

Mr. MYERS. If the debt ratio is over 100 percent, they should not. Equity is not there.

Mr. KLEPPE. Will you yield?

Mr. MYERS. I vield.

Mr. KLEPPE. If you are on the lender side of the loan, it does not make any difference what the collateral is if the borrower expects to pay it off. All of the collateral in the world does not make any difference, so long as he expects to pay it off. What we are talking about here is the possibility of allowing a borrower to go out and get additional funds if he already has an REA loan. This is what we are talking about here. And I think you indicated that it might, you thought, not be impossible but probably improbable. You think that is exactly where the difficulty is, because the borrower who has the 2-percent loan does not want to give it up and another lender is not going to come in and share that kind of an arrangement on a second-mortgage basis. This is not in the cards. I do not personally see how we can write this legislation, that is, the bill that we have under consideration. I, personally, Mr. Chairman, do not see how we can incorporate such a facility in this bill.

Mr. BOLLINGER. This was merely a suggestion, you understand. It does not have anything to do with the bill itself. It is a suggestion on how we might improve the lot of some of these borrowers.

Mr. KLEPPE. I was just trying to draw this thing to a head, because I think we have kind of gotten off the line a little bit.

Mr. MYERS. I have one more question along the collateral end of it. On page 8, you talk about lifetime equipment depreciation. What is the lifetime of this equipment, the average of it, from your experience, the experience of the three of you?

Mr. FEGAN. I can give you an example, in my own company.

My father purchased the telephone company in 1910. In 1912, it was completely rebuilt. In 1929 it was completely rebuilt. In 1953, it was completely rebuilt.

Mr. MYERS. About 25 years?

Mr. FEGAN. Yes, sir.

Mr. MYERS. You are depreciating your Pioneer Co. at something around 3.75 percent per year. You do not depreciate it fast enough, do you?

Mr. BOLLINGER. We have increased it with the urging of the Commission. We have increased that just recently, with the urging of the Commission.

Mr. MYERS. Thank you.

The CHAIRMAN. Mr. Jones?

Mr. JONES of Missouri. My first experience with a telephone company loan was several years ago. I was rather amazed at the time, because the applicant for the loan was an individual. He owned the telephone company. He was expanding. And his difficulty was that he was seeking a loan-I forget the exact amount, but the REA people were proposing an increase in the amount of that loan. I had considerable trouble getting the REA to agree to lending him less money than they wanted to give him. Is that an unusual situation, or not?

Mr. BOLLINGER. I have been told of many instances just like that. We have never borrowed any money, in our own company, even though we have got 32 exchanges with fewer than 750 telephones, all of which would qualify for loans. We never borrowed any, so I have not had personal experience, but friends of mine have told me stories similar to this one you have just recounted.

Mr. JONES of Missouri. They finally made the loan for the amount. that the man wanted, and since then he has made other loans.

What he was afraid of, or the thing that was disturbing him was that they were forcing this money on him faster than he could possibly use it; also, they were trying to encourage him to go into areas where he felt that there was not the possibility of earning a return on his money. We finally got that resolved, but it was with some difficulty that we got the REA to agree to this smaller loan. Since then he has made, I think, two or three other loans and has had a very satisfactory operation.

I just wondered if it was typical.

Mr. BOLLINGER. Typical in my State.

Mr. JONES of Missouri. That is all.

Mr. WAMPLER. Mr. Bollinger, I want to commend you on your statement this morning, and I also want to generally associate myself with the remarks of my colleague from Kansas, Mr. Dole.