The CHAIRMAN. Proceed with the next section.

Dr. MYERS. Title 2 is covered fairly well, I think quite well, in the two items in your analysis. It prohibits the joint-stock land bank from issuing additional tax-exempt bonds, from making new farm loans except that are incidental to refinancing of existing loans. Then the second item-the joint-stock land banks, like other institutions, are faced with the necessity of paying interest on their bonds and unable to collect interest on mortgages-at least on a part of their mortgages. The representatives of those banks feel that orderly liquidation can best be accomplished under their own officers who know their loans, and so this provides for a loan up to $100,000,000 to the joint-stock land banks, on farm security, not to exceed 60 percent of the appraised value of the farm, the loan to be made at 4 percent, on two conditions: First, That they reduce the interest rate on outstanding mortgages to 5 percent (the interest rate on the majority of the joint-stock land bank mortgages is 6 percent; that is the average, I believe, so this represents a reduction from 6 to 5 percent); furthermore, they agree not to foreclose any mortgages for a 2-year period, except in unavoidable circumstances.

The CHAIRMAN. Now I would like to ask a question back on the other section: That reduction to 5 percent must be for the life of the loan?

Dr. MYERS. That is correct for the life of the loan.

Mr. CLARKE. You say the interest rate of the joint-stock land bank is 6 percent. Now what is the actual experience; what does the evidence show it costs the farmers to borrow from the joint-stock land bank?

Dr. MYERS. I think Mr. Bestor can give that information better than I could.

Mr. CLARKE. Now what does it cost the farmer?

Mr. BESTOR. It costs him, under the act, the actual cost of appraising the land and the cost of searching the title

Mr. CLARKE. I am not asking you about appraising the land; I am asking you what it costs the farmer. You know, as well as I do, and a good deal better, that in fees, abstracts, and the rest of it, it piles up better than 8 percent.

Mr. BESTOR. When a farmer gets a loan, I do not care where he gets the loan, he has to provide an abstract of title at his own expense. No individual would loan a man money on a farm unless he furnished an abstract of title.

Mr. CLARKE. Then what is your testimony as to what it is going to cost the farmer?

Mr. BESTOR. I cannot tell you what it is, because that varies with the individual contracts.

Mr. CLARKE. What has it cost, on the average, from your experience?

Mr. BESTOR. The interest charge on loans of most joint-stock land banks has been 6 percent. There has been an additional payment to cover amortization of the principal equal to 1 percent of the loan, so the total payments per year, made in either one or two installments, amount to 7 percent of the loan. The payments made on principal, that is the 1 percent, cannot be considered as part of

the cost of the loan, however. The costs include only the rate of interest paid which is 6 percent or less plus fees to cover, but which may not exceed, actual costs of appraising the property, determining the title, and recording the mortgage.

Mr. CLARKE. When you get all of those pluses added up, what does it amount to?

Mr. BESTOR. Well it costs 6 percent a year for the interest, plus the fees to cover the bank's expenses in putting the loan on the books.

Mr. CLARKE. It costs 6 percent plus, then, you would say?

Mr. BESTOR. Plus whatever it would cost to fix up his abstract, plus the cost of appraising the land.

(The committee thereupon took a recess until 2:30 o'clock p.m.)

AFTER RECESS

(The committee met, pursuant to the taking of a recess, at 2.30 o'clock p.m., Hon. Marvin Jones, chairman, presiding.)

The CHAIRMAN. The committee will come to order, please.

I asked Mr. Bestor to get some information in order to make the record clear on this joint-stock land bank matter.

Mr. CLARKE. Do you want to proceed without a quorum?
The CHAIRMAN. Unless someone raises the question.

Mr. CLARKE. Then I make the point of order of no quorum. It

seems to me that all of the members should be here.

The CHAIRMAN. There is not a quorum here now as only nine members are present.

(Other members of the committee entered the room.)

The CHAIRMAN. There is a quorum present now, Mr. Bestor, and I would like to have you state just what the rate of interest is to the borrower on the joint stock land bank loans?

Mr. BESTOR. The committee knows, of course, that the joint-stock land banks are not making any loans now.

The CHAIRMAN. I understand that.

Mr BESTOR. Yes.

The CHAIRMAN. And, of course, will make no more loans after this bill is passed.

Mr. BESTOR. That is right.

The CHAIRMAN. As provided in the bill.

Mr. BESTOR. The average rate of interest charged borrowers by the joint-stock land banks, as of the close of 1932, was 5.8 percent. Only 5 or 6 banks made loans in 1932 and the total amount was small.

The CHAIRMAN. Yes.

Mr. BESTOR. The average rate was 5.8 percent.

Now, the charges made the borrower were

The CHAIRMAN (interposing). Let us get the amount of interest, first.

Mr. BESTOR. One percent was paid on the principal.
The CHAIRMAN. One percent on the principal.

Mr. BESTOR. Yes; so that the total amount would average 6.8 per

cent.

The CHAIRMAN. Now, the charges for appraisal and for title examination averaged how much?

Mr. BESTOR. I have not been able to get the average; it varies in different places. The law says that they may only charge the actual cost of the appraisal, the examination of the title, and the recording of the mortgage. They cannot charge the borrower any commission. The maximum charge that I found for the banks I had time to check this noon was $25, which is remitted in case the loan is granted, but is kept in the event it is not, in order to take care of expenses in connection with the application. Other banks, particularly western banks, have a higher maximum.

The CHAIRMAN. Then, on the average, it is much less than private lending agencies have been making?

Mr. BESTOR. The average private lending agency, loaning money for not longer than 5 years, I believe.

The CHAIRMAN. Yes.

Mr. BESTER. If you were to amortize this cost of $25 over a 5-year period, the average cost per year would be $5 and this on a $5,000 loan would amount to only about one tenth of 1 percent a year. When this is added to the average rate of interest, it makes the total cost about 5.9 percent exclusive of the principal payment, which, of course, is not a part of the cost.

As I said before, some of the other banks make somewhat higher charges, but I feel that it would be safe to say that with the possible exception of real small loans, in no case have the total fees exceeded 1 percent of the loan. When such charges are spread over the full length of the loan, which may be as high as 40 years, the cost per year is, of course, very small.

The CHAIRMAN. I recall a loan made on my father's farm a few years ago in which the private lending agency made an interest charge of 6 percent and a commission charge on the serial note of 2 percent, which ran for the life of the loan.

Mr. BESTOR. Yes.

The CHAIRMAN. There is not any charge like that?

Mr. BESTOR. No.

Mr. CLARKE. Of course, Mr. Chairman, we all know, if it were not for such commissions being charged, that we would not have

this bill.

The CHAIRMAN. That is correct, of course.

Mr. CLARKE. That is why we have it.

The CHAIRMAN. That is a point I wanted to make clear.

As I understand the bill, these changes do not apply to the Federal land banks, which are continued in this bill?

Mr. BESTOR. No.

The CHAIRMAN. But they do apply to the joint-stock land banks. Mr. BESTOR. That is right.

The CHAIRMAN. The liquidation of the joint-stock land banks is provided in this bill.

Mr. BESTOR. That is right.

The CHAIRMAN. And no further loans will be made, and those charges that might have been made will not be in the changes. Mr. BESTOR. That is correct, Mr. Chairman.

Mr. PIERCE. One point, Mr. Chairman, about the effect it will have on the bonds of these joint-stock land banks. They would be brought up to par, would they not?

Mr. BESTOR. There are 50 banks, of which 3 are in the hands of a receiver-1 in Chicago, 1 in St. Louis, and 1 in Minnesota-and 1 in voluntary liquidation. Now, the bonds of the banks which are still going are selling at various prices, ranging for the most part from 20 to 60.

Mr. PIERCE. Percent?

Mr. BESTOR. Yes. Twenty to sixty percent of par.

Mr. PIERCE. From 20 to 60.

Mr. BESTOR. Yes.

Mr. PIERCE. And this act would make them worth 100, would it not?

Mr. BESTOR. No; not as I understand the way that it actually works out. A plan was tried in one bank to improve not only its general financial position but also the market value of its bonds. After obtaining a commitment from the Reconstruction Finance Corporation, it agreed to purchase from bondholders one half of their holdings at a discount based on the current market price. Several million dollars of bonds were purchased and retired in this manner, with the result that the bank's financial position was greatly improved and its ability to carry borrowers and withhold foreclosure proceedings increased.

My understanding is that some such plan will be worked out by the joint-stock land banks if this bill becomes a law, that they will be able to borrow this money and agree that they would ride along with the borrower in order that the borrower might pull through. That would enable the bank to continue liquidation in an orderly

way.

Mr. HOPE. Mr. Chairman, may I ask one question?

The CHAIRMAN. Mr. Hope.

Mr. HOPE. I have just one further question there, Mr. Bestor. Is it contemplated that the joint-stock land banks will come in under the provisions which are given to the lending agency and accept these Federal land banks' bonds? Or must they be scaled down in order to come in under the provisions of the bill? Mr. BESTOR. They come in just like any other agency.

Mr. HOPE. This is the only provision that is made for them?
Mr. BESTOR. No.

Mr. HOPE. They have all of the rights of any other lending agency?

Mr. BESTOR. That is right.

Mr. MARSHALL. One question, Mr. Chairman.

The CHAIRMAN. Mr. Marshall.

Mr. MARSHALL. It has not been shown to me yet that the farmer is going to get the benefit of this legislation; that the joint-stock land banks be required to accept their bonds in satisfaction of the mortgage. In other words, can the fellow who owes the mortgage buy in the bonds of the bank and turn them over in satisfaction of the mortgage, and require the bank to accept said bonds?

Mr. BESTOR. I think, Mr. Chairman, without discussing the merits of the proposition, which would take some time, there seems to be this to be said on that point, that the practical result would be to place them in receivership. And, when put in receivership, the usual experience is that everybody suffers, including the borrower and

the bondholder. If they were compelled to accept the bonds, there would be nothing for most of the banks to do but go into receivership, unless they received outside help. They would have no way in which to meet their obligations if they were compelled to accept bonds in substantial amounts instead of cash.

The CHAIRMAN. You do not think that the joint-stock land banks could liquidate all of them?

Mr. BESTOR. It would not permit an orderly liquidation, and to force an immediate liquidation would be a rather disastrous thing, I think. Such a change would virtually convert long-term obligations into demand obligations and, in addition, would raise other questions of constitutionality.

The CHAIRMAN. Are there any other questions on section 201 of the bill?

If there are none, we will go to title 3, which is found on page 14 of the bill, the second half of page 2 of your outline.

Dr. MYERS. Yes.

The CHAIRMAN. That is what part of the bill?

Dr. MYERS. That is title 3, beginning on page 14, at the top of the page, section 301, allotting $200,000,000 of the Reconstruction Finance Corporation's funds for loans through the farm loan commissioner, to be used for the following purposes; this having been made.

To enable the farmer to redeem and/or repurchase farm property lost through foreclosure during the period of two years after the passage of the act.

And second, to reduce and refinance junior obligations; and, third, to provide working capital. These loans to be under the supervision of the farm commissioner, using the machinery of the Federal land banks. The loans to be made direct to farmers with no loan in excess of $5,000, the total of the first and second mortgage, if any, not to exceed 75 percent of the value of farm and farm property. Repayment in 10 equal annual installments, plus interest, at 5 percent, but no payment on principal required for first 3 years.

The first proposition on which loans can be made seems perfectly clear; that is, to enable the owners who have lost their places through foreclosures to be able to redeem or repurchase, presumably, under this plan. That is, a first mortgage would be obtained from the Federal land bank, under the proviso in title 1, and then to make an additional second mortgage. The sum of the two mortgages not to exceed 75 percent of the normal value, if the property could be purchased on that basis.

The object, of course, of the act is to give the owner an opportunity to redeem, through purchase, his farm home.

The object of allowing a junior obligation, seems to me, to rest upon these facts: If you arrange for the financing or refinancing of the first mortgage, there remain many farms with chattel mortgages, notes, and perhaps some have obtained judgments against the property, so that in many instances the first mortgage, as provided, has made it possible for the farmer to carry his payments along, and then the man who is holding the chattel deed of trust on the tools will come in and leave the farmer with his farm but no tools to operate it with.