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which he thinks bad policy is being adopted, he has the right at the outset to conduct an investigation and to withhold certification?

Mr. McCONNAUGHEY. That is correct.

Senator RADCLIFFE. I assume that that would mean, if the Governor came to the conclusion that a farmer had deliberately held up payments, that a question of bad faith was brought up.

Senator BYRNES. Isn't there another thing? The local association would prevent him from doing it. That would be an incentive, because wouldn't the cost be charged up to them? If a loss is sustained on that individual farmer who is trying to delay, as we are assuming, payments in order to bring about a scaling down and readjustment of his debts, the loss would be charged up to the associaiton and might make it impossible for the rest of the members to earn a dividend.

Senator RADCLIFFE. The Secretary combats that idea in his argument, and I was just wondering what authority the man had-how absolute his authority was or how qualified it was. You say the associatiòn has come in. What authority would the association have to come in? Suppose the farmer wants to buy his property back. He has a right to buy it back at one price or the other, unless it could be demonstrated to the satisfaction of the Governor that there had been bad faith.

Senator BYRNES. I think the local association, wbich lives beside him, should know that he is imposing on the association and that if he gets away with it is going to lessen their chance of a dividend, and should advise the Governor that this fellow was trying to impose

Senator RADCLIFFE. They would have no authority except to furnish evidence.

Secretary WALLACE. Their real authority is to determine what the productive value is.

Senator BYRNES. They would furnish evidence.

Senator RADCLIFFE. Of course, they would have a real incentive to do that.

Mr. McCONNAUGHEY. That will occur at the very beginning, when application is made. They must first certify or determine whether the application has been filed in good faith. They must further certify to the Governor that the payments due exceed the normal income or productive value of the farm. The Governor, in turn, must make a finding that those facts exist before they can go forward with the procedure of refinancing.

Senator BANKHEAD. How is the new valuation to be made and by whom?

Mr. McCONNAUGHEY. There is no specific provision except that it must be a price to be determined by the Governor on the basis of its productive value or the amount of the mortgage indebtedness.

Senator RADCLIFFE. Whichever is less.
Senator BANKHEAD. But determination rests with the Governor?
Mr. McCONNAUGHEY. That is correct.
Senator BANKHEAD. Does the bank have anything to do with it?

Secretary WALLACE. Undoubtedly, as a matter of regulation, he would operate through the local loan association in considerable measure, but with his own appraisers being the ultimate arbiters.

Senator BANKHEAD. I think, after reading the bill, that you will see that it rests with the bank and the Governor.

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Mr. McCONNAUGHEY. That is on the transfer between the bank and the Corporation.

Senator BYRNES. Senator La Follette, do you desire to interrogate the witness?

Senator LA FOLLETTE. On just one point, Mr. Chairman.

Do you not feel, Mr. Secretary, that the principles involved in the pending bill and your suggested amendments to it are vitally important factors in our efforts to turn back this tendency of the concept of American agriculture as a way of life? Is it not, in other words, one of the factors tending to force people off the land and force them out of ownership; and while we have to attack this problem on many fronts, is it not your belief that the changes in this farm credit system, as embodied in this bill and your suggested amendments to it, are very important factors ?

Secretary WALLACE. Yes; I certainly believe that, Senator.

Senator BYRNES (chairman of the subcommittee). There seem to be no further questions, Mr. Secretary, so we shall excuse you.

Secretary WALLACE. Thank you. Before I leave, may I submit to the committee the bill as we have suggested it should be amended?

Senator BYRNES. Yes.

Senator BANKHEAD. I should like to ask for permission to have the recommended bill as amended placed in the hearings.

Senator BYRNES. Without objection, it will be included in the hearings.

Senator BANKHEAD. And also the report of the Department on the subject.

Senator BYRNES. That also will be included.

(The amended bill and the report of the Department of Agriculture are as follows:)

TEXT OF S. 3509 With CHANGES TO CARRY OUT SUGGESTIONS MADE BY

SECRETARY OF AGRICULTURE

A BILL To reduce permanently the interest rates on Federal land bank and Land Bank Commissioner

loans; to relieve Federal land-bank borrowers of stock liability; to place the Federal land banks on a self-supporting basis; to refund and guarantee the bonds of such banks; to increase the functions and responsibilities of national farm-loan associations and county committees of farmers; to provide for the adjustment and refinancing of farm-mortgage debts; to limit the taking of deficiency judgments; and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited of the “Farm Credit Act of 1940.

INTEREST RATES

Sec. 2. (a) The rate of interest payable on all loans or mortgages on farm land and on all contracts for the sale of farm land made or acquired prior to the effective date of this Act, or made or acquired on or after such date and prior to July 1, 1946, by any Federal land bank under the Federal Farm Loan Act, as amended, or by the Land Bank Commissioner, under section 32 of the Emergency Farm Mortgage Act of 1933, as amended, or by the Federal Farm Mortgage Corporation (hereinafter referred to as the “Corporation”) shall be 342 per centum per annum for all interest payable on installment dates occurring after the effective date of this Act; and the interest payable with respect to all such loans, mortgages, and contracts made or acquired during any calendar quarter after June 30, 1946, shall be at a rate, not less than 3 per centum per annum, to be fixed for such quarter by the Governor of the Farm Credit Administration (hereinafter referred to as the “Governor”), with the approval of the Secretary of the Treasury, which the Governor determines may reasonably be expected to reimburse the Federal land banks, or such Corporation, as the case may be, for the cost of the capital required for loans, mortgages, and contracts, held by the Federal land banks or by the Corporation during such quarter, plus an amount necessary for expenses of admin

istration and for reserves against losses, which shall not exceed 132 per centum per annum.

(b) If the interest at the average rate estimated by the Governor to be payable during any calendar quarter prior to July 1, 1946, by any such bank, or by such Corporation, on its outstanding bonds and other obligations (exclusive of capital stock and paid-in surplus) exceeds interest at a rate of 2 per centum per annum on the principal amount of such bonds and obligations, the Secretary of the Treasury shall pay to such bank or to the Corporation the amount of such excess. There is hereby authorized to be appropriated, out of any money in the Treasury not otherwise appropriated, for each fiscal year prior to the fiscal year beginning July 1, 1946, such sums as may be necessary to make such payments.

(c) Subject only to review and approval by the Governor, each Federal land bank and the Corporation, at the end of its fiscal year, after all its necessary expenses and cost of operation for such fiscal year have been provided for, shall apply their net earnings then remaining, first, to making up any losses in excess of its reserves against unforeseen losses and assets of doubtful value; second, to the elimination of any impairment of its paid-in capital and paid-in surplus; third, to the creation and maintenance of reserves against unforeseen losses and assets of doubtful value in such amount as its board of directors shall prescribe, subject to the approval of the Governor; fourth to the transfer of assets or earnings to other Federal land banks or to the Corporation, pursuant to the authority of this Act; fifth, to the payment of 25 per centum of the amount then remaining to the United States as a franchise tax; sixth, to the payment of an amount equal to the franchise tax hereinabove provided into its earned surplus account; and seventh, to the payment of the remaining net earnings into its undivided profits account. The amounts paid as franchise taxes to the United States by the Federal land banks or by the Corporation shall be paid into the miscellaneous receipts of the Treasury. Existing balances of any reserves heretofore established by any Federal land bank pursuant to any statutory requirement shall be transferred to the surplus account of such bank. Should a Federal land bank or the Corporation be dissolved or go into liquidation, after the payment of all debts and other obligations as herein before provided, any surplus remaining shall be paid to and become the property of the United States and shall be paid into the miscellaneous receipts of the Treasury:

(d) Subject to the approval of the Governor, at the end of any fiscal year any Federal land bank may declare a dividend out of its undivided profits established in accordance with paragraph (c) of this section. Any such dividend shall be distributed pro rata on the basis of the unmatured principal balances of all mortgages and real estate sales contracts held by such bank at the end of the fiscal year as of the close of which the dividend shall be declared and shall be paid to the owner of the mortgaged real estate or the vendee under the contract of sale, as the case may be, in the following manner, to wit: such dividend with respect to each such mortgage or contract shall be held by the bank as a conditional payment made with respect to such mortgage or contract indebtedness subject to the terms and conditions of paragraph Eighteenth of section 13 of the Federal Farm Loan Act, as amended, insofar as such terms and conditions are applicable and subject also to any rules or regulations, not inconsistent with law, prescribed by the Governor.

(e) At the direction of the Governor any Federal land bank or the Corporation, to any extent that the Governor deems such bank or Corporation has resources available therefor, shall transfer any of its assets to any Federal land bank upon such terms and conditions as may be prescribed by the Governor.

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GUARANTY OF FARM-LOAN BONDS

SEC. 3. All farm-loan bonds (including consolidated farm-loan bonds) issued on or after the effective date of this Act by or on behalf of any Federal land bank under the Federal Farm Loan Act, as amended, shall be issued in such amounts, in such forms and denominations, shall have such maturities, shall bear such rates of interest, shall be subject to such terms and conditions, and shall be issued in such manner and sold at such prices, as may be approved by the Governor and the Secretary of the Treasury. Such bonds shall be fully and unconditionally guaranteed, both as to interest and principal, by the United States, and such guaranty shall be expressed on the face thereof. Such bonds shall be lawful investments, and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority or control of the United States, or any officer or officers thereof. In the event that the Federal land banks shall be unable to pay upon demand, when due, the principal of, or the interest on, such bonds, the Secretary of the Treasury shall pay to the holder the amount thereof, which is hereby authorized to be appropriated, and thereupon, to the extent of the amount so paid, the Secretary of the Treasury shall succeed to all the rights of the holders of such bonds. The Secretary of the Treasury, in his discretion, is authorized to purchase any such bonds, and for such purpose the Secretary of the Treasury is authorized to use as a public-debt transaction the proceeds from the sale of any securities hereafter issued under the Second Liberty Loan Act, as amended, and the purposes for which securities may be issued under such Act, as amended, are extended to include any purchases of such bonds. The Secretary of the Treasury may, at any time, sell any of the bonds acquired by him under this section. All redemptions, purchases, and sales by the Secretary of the Treasury of such bonds shall be treated as public-debt transactions of the United States. No such bonds shall be issued in excess of the assets of the Federal land banks, including the assets to be obtained from the proceeds of such bonds, but a failure to comply with this provision shall not invalidate the bonds or the guaranty of the same. The Federal land banks shall have power to purchase such bonds at any price and at any time. No collateral shall be required to be deposited with any farm-loan registrar as security for any such bond and the limitations prescribed by the Federal Farm Loan Act with respect to the issuance of farm loan bonds shall not apply to bonds issued under the authority of this Act.

REFINANCING OF FARM-LOAN BONDS

SEC. 4. (a) As soon as practicable after the effective date of this Act the Corporation and each Federal land bank shall surrender to the Governor for cancelation, all farm-loan bonds (including consolidated farm-loan bonds) held by it which bear interest at a rate higher than the average rate of interest, computed as of the end of the calendar month next preceding such date, borne by all interest-bearing obligations of the United States then forming a part of the public debt, and shall receive in exchange therefor farm-loan bonds of an equal face amount which are guaranteed as provided in section 3 of this Act and which bear interest at a rate not in excess of such average rate of interest.

(b) All outstanding farm-loan bonds, not heretofore called for redemption, issued by the Federal land banks or any of them shall, on and after the effective .date of this Act, be fully and unconditionally guaranteed, both as to interest and principal, by the United States to the same force and effect as if such guarantee were expressed on the face thereof. In the event that the Federal land banks shall be unable to pay upon demand, when due, the principal of, or the interest on, such bonds, the Secretary of the Treasury shall pay to the holder the amount thereof, which is hereby authorized to be appropriated out of any monies in the Treasury not otherwise appropriated, and thereupon, to the extent of the amount so paid, the Secretary of the Treasury shall succeed to all the rights of the holders of such bonds; and the Secretary of the Treasury shall have all the authority, powers and duties with respect to such bonds as he has under section 3 of this Act with respect to bonds issued under the authority of this Act.

STOCK LIABILITY ABOLISHED

SEC. 5. No borrower from any Federal land bank who receives a loan after the effective date of this Act, through any farm-loan association or otherwise, shall be required to subscribe to or pay for any capital stock of such bank, or of the national farm-loan association through which such loan is made, either out of funds deducted from the amount of his loan or otherwise; and no national farm-loan association through which any loan is made after such date shall be required to subscribe to or pay for any capital stock in such bank, or to endorse, or otherwise become liable upon, any such loan.

RETIREMENT OF CAPITAL STOCK

Sec. 6. (a) As soon as practicable after the effective date of this Act, each Federal land bank shall, as hereinafter provided, pay off the claims of its retired shareholders and pay off and retire all outstanding shares of its capital stock held by any national farm-loan association or by any borrower from such bank; and each national farm-loan association shall, as hereinafter provided, pay off the claims of its retired shareholders and pay off and retire all outstanding shares of its capital stock held by any borrower through such association.

(b) The capital stock of each Federal land bank and each national farm-loan association shall be paid off and retired at par, and the proceeds of such stock shall be disposed of as provided in subsection (c). Thereafter, and as soon as practicable, each national farm-loan association shall apply its remaining assets to the indebtedness, if any, of such association to the Federal land bank and other creditors, and if any assets remain after such indebtedness has been paid, such remaining assets, including any legal reserve funds, shall be distributed to the retired shareholders of the association whose stock has been retired pursuant to this section, in proportion to the shares of stock held by each such retired shareholder on the date his shares were retired. After the association has applied its assets to the payment of its indebtedness, if any, as hereinabove provided, such association shall have no further liability to the bank by reason of its endorsement of loans made by the bank at any time through such association.

(c) The par value of the shares of stock of any borrower from a Federal land bank or of any borrower through a national farm-loan association shall be paid off by crediting the par amount of the stock so retired as a payment on the indebtedness of such borrower to the bank and if such amount exceeds such indebtedness the excess shall be paid in cash to such borrower: Provided, however, That such credit or payment shall be made only with the consent of the person entitled to the stock proceeds (a) where the loan is not in default, or (b) except with the approval of the Governor where the owner of the stock or beneficial interest therein is not the owner of the mortgaged real estate, and provided that if such consent, when required under this section, is not obtained, the par value of such stock shall be paid in cash to the person entitled thereto: And provided further, That the payment in cash of proceeds of stock in any national farm-loan association as herein provided shall be subject to all prior rights of creditors of the association other than a Federal land bank.

(d) Each Federal land bank and each national farm-loan association shall make payment to each of its retired shareholders whose loan has been fully repaid and who has not received full credit for, or the full proceeds of, his stock in the bank or association on the basis of the amount of the par value of his stock less the amount of the credit for, or proceeds of, his stock which he has already received. Such payments shall be made notwithstanding any releases or assignments of stock to any Federal land bank or national farm-loan association previously executed by any such retired shareholders. Each Federal land bank shall pay to the national farm-loan associations within its district such amounts as may be necessary to enable them to pay the amounts required to be paid by such associations under this section. Any amounts which any Federal land bank is required to pay in carrying out the purposes of this section may be paid out of its paid-in surplus and to the extent of any paid-in surplus so used the bank shall be relieved of any obligation to repay paid-in surplus.

(e) The Governor is authorized to make such rules and regulations as may be necessary for carrying out the provisions of this section.

NATIONAL FARM-LOAN ASSOCIATIONS

SEC. 7. (a) As soon as practicable after the date of enactment of this Act, the Governor shall determine the extent to which farmer participation in the Federal land bank system can be increased, and the operating expenses of the Federal land banks and the Corporation reduced, by the delegation of functions now exercised by such banks and such Corporation to national farm-loan associations, and the Governor is authorized to make such rules and regulations as may be necessary to provide for such delegation of functions. The Governor is also authorized to delegate to any such association any of the functions vested in him under the provisions of sections 11 (b), and 13 (a), of this Act. Subject to the approval of the Governor each Federal land bank and the Corporation (1) may pay an association such amount as the bank or the Corporation finds to be necessary to reimburse the association for the cost of performing any functions so delegated to it, and may make reasonable advances to an association for such purpose and (2) at the end of any fiscal year may pay as a premium to each association such additional amount as will reflect the savings and economies resulting from the efficiency with which the association's operations have been conducted during the preceding year. In determining the amount of the premium to be paid to any association, consideration shall be given to the percentage of losses and delinquencies among the loans of members of the association as well as to the number of mortgages, contracts for sale of real estate, and parcels of real estate serviced by such association. The amount so paid to an association as a premium may be distributed on an equitable basis to the members of the association in such manner as its directors may prescribe with the approval of the Governor.

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