multiple purposes in there the bank is lending him money and should not be tied in with his discretion as to whether he buys articles. Mr. MIKVA. Mr. Pyles, I understand that difference. I am not referring to that. Let me ask it another way. You are familiar with the single transaction doctrine as it has been established in other fields of law. Don't you agree that ought to be the test for a "holder in due course"? Mr. PYLES. It could be, yes. Mr. MIKVA. Don't you think that would be a more satisfactory solution than the one referred to on pages 14 and 15, at 28-3809 of the bill? Mr. HUNGATE. Mr. Pyles, are you an attorney? Mr. PYLES. Yes, sir, but not a practicing one. Mr. HUNGATE. That is the same shape we are in. Mr. PYLES. Are you starting on page 14 and 15 or on page 16? Mr. MIKVA. Section 28-3809 on pages 14 and 15. It's 28-3809. Mr. PYLES. Surely. It is definitely referring to a direct installment loan to enable a customer to purchase goods, which I referred to. In many cases a person is coming in and asking for moneys to buy several articles or things of that type. Mr. MIKVA. I understand that. You ought not to be responsible for how he goes out and spends money. That is no argument. But where there is a relationship, whether or not it's for profit and whether or not it's a common control, the seller and the lending institution, ought not the purchaser be able to purchase goods? Mr. PYLES. We discussed that one phrase at some point in the discussions of consumer protection. It's very hard to define the relationship. I agree with the thought which is being expressed, but what relationship can you refer to? For instance, we might have one of our directors who has a business on the side, but there is no relationship in this matter where there would be if you and your brother-in-law were tied in. Mr. MIKVA. In addition to the standards set forth, there is a very simple phrase-I don't remember the exact language the words of art are that where the court finds it's a single transaction, and whether or not any of the other standards are met, there is no due course protection. Mr. PYLES. I don't think we would have any trouble with that. Mr. HUNGATE. Mr. Smith? Mr. SMITH. No questions. Mr. LINK. No questions. Mr. FAUNTROY. I have three questions, Mr. Chairman. Mr. Jennings, I am correct, am I, in understanding that the Association does support all of the consumer protection provisions, including the law in this bill? Mr. JENNINGS. Gentlemen, it does. The D.C. Bankers Association does support them. Mr. FAUNTROY. Secondly, on page 5 of your testimony dealing with the interest rate ceilings, do I understand that the eleven and a half annual percentage rate which will obtain in the District of Columbia, were the law to pass, would that be the simple interest? Mr. JENNINGS. That is simple interest. There is so much trouble understanding it on discount. I think I may have mentioned that the Federal Reserve Board has required, through regulations, that banks advertising for personal consumer loans, if they do use add-on or discount, must then translate it into simple interest terms. Therefore, I thought, and the bankers thought, let's get away from add-on discount. We can compute by means of add-on or discount, but the annual percentage rate may not exceed eleven and one-half percent simple interest per annum. Mr. FAUNTROY. Third, given some delay on the passage of Section 9, what might banks do to relieve the kinds of groups that Mr. Warner mentioned in his testimony that were on the threshold of building? EFFECT OF PARKWOOD DECISION Mr. JENNINGS. That is a very difficult thing to resolve. I might say that since the November 10th decision of the U.S. Court of Appeals, all loans pertaining to the District of Columbia properties, where the loan was closed by anyone in the District of Columbia-and usually it's closed by a mortgage banker-those loans are being held up. We can't do anything about it. We have in our mortgage warehousing loans as collateral to a mortgage banker's note a good many loans that were closed in the District of Columbia. All of those loans had been committed for personal purchase by insurance companies or savings banks, but they have notified us "don't send us any more until this matter is cleared up." So we in turn are holding onto what we have. But for obvious reasons we are not adding to it. Everything is sort of stalemated in the meantime. In connection with Maryland or Virginia, where they are closed there, we are continuing to accept. Furthermore, we have construction loans in the District or in Maryland or Virginia, which ultimately would come into this same problem, where we are committed to make advances up to X million dollars in connection with the construction of either houses in the development area or a commercial or apartment house, there we feel we are committed to continue making the advances to the builders. We don't feel very happy about it. We want this matter corrected as quickly as can be. Most of us--I should think all of us think that the 1913 Loan Shark Act was tortured considerably in connection with a decision. These are all valid first mortgage loans. There is nothing wrong with them, and to have this whole thing tied up is very, very bad. Mr. FAUNTROY. Thank you, Mr. Chairman. Gentlemen, thanks very much for your contribution. I am going to ask Congressman Smith if he will make a specific point to read your statement. I think it reflects a good deal of diligence in preparation. We want to be fully informed on this matter before we take action. Mr. JENNINGS. Thank you. Mr. HUNGATE. I would like to call Judge Edward Johnson as the next witness. I believe he has won the door prize. He is from Charlottesville. You have a prepared statement here, I believe? STATEMENT OF HON. EDWARD C. JOHNSON, A RETIRED LAWYER AND FORMER JUDGE Mr. JOHNSON. Mr. Chairman and members of this Committee, I speak as an individual investor. But I suspect there are literally thousands and thousands similarly situated. My name is Edward C. Johnson. I am a Virginian, seventy years old, a retired lawyer and former Judge. In 1930 when I had any funds available I began to invest in first mortgage or trusts as they are sometimes called at interest rates of three percent from reputable mortgage bankers in this city. I have continued this practice until recent times by reinvesting such available funds, and as of now I have approximately $50,000 invested in such manner at current interest rates ranging from 412 to 8 percent. In recent times interest rates have been going up and my mortgage banker, who now charges me three-fourths of one percent of the interest to service these investments, has simply made available to me the notes which his office has had available to him for sale, in the usual course of his business dealings. In more than forty years of purchasing what I and others have regarded as the safest and most conservative investments in land and improvements thereon I Never paid one penny less than the face amount of the note purchased, and have always, without exception, paid all accrued interest on these notes before any purchase was made. In no instance have I ever bought a first trust note, as above described, at any discount but on the contrary have always paid par or the full value for each note that I have purchased. Therefore, in the light of a recent local court decision, apparently voiding such purchases and sales as I and many others have made solely for investments in conservative holdings for retirement income, I respectfully ask that this Committee take such appropriate action as the needs appear to justify in order to see that legislation in retroactive fashion be promptly recommended to the full Congress so that such purchases and sales as above described may be validated. Absent such urgent and needed relief, I and thousands of others similarly situated retired individuals stand to lose our life. savings. Thank you, gentlemen. Mr. HUNGATE. Thank you for being with us, Judge. I am particularly pleased because of your statement, in 1930 when you had funds available to invest in mortgages, I had always wanted to meet somebody who had funds available in 1930. Mr. JOHNSON. I can assure you they were very modest, Mr. Chairman. Mr. HUNGATE. Mr. Jacobs? Mr. JACOBS. No questions. Mr. MIKVA. Judge, do you have any trouble with the retroactive problem on the constitutionality? Mr. JOHNSON. I had not given this any real study. I know the constitution provides that states shall pass no legislation impairing the obligation of contracts. I don't see why that necessarily applies to the Congress. Mr. MIKVA. Thank you. Mr. HUNGATE. Mr. Smith? Mr. HUNGATE. Mr. Fauntroy? Mr. HUNGATE. Thank you very much, Judge. We are glad to have you with us, sir. The Chair would like to call Martin Thaler, Chairman of the D.C. Bar Subcommittee on Finance, Securities, Uniform Commercial Code, Bankruptcy and Condemnation. You have a written statement? Mr. THALER. I have a written statement and ask that it be made a part of the record. Mr. HUNGATE. Without objection it is so ordered. (The statement follows:) STATEMENT OF MARTIN S. THALER, CHAIRMAN, SUBCOMMITTEE ON FINANCE, SECURITIES, THE UNIFORM COMMERCIAL CODE, BANKRUPTCY AND CONDEMNATION OF THE COMMERCIAL AND BUSINESS LAW COMMITTEE OF THE BAR ASSOCIATION OF THE DISTRICT OF COLUMBIA [Prepared Statement] I. INTRODUCTION My name is Martin S. Thaler. I am a lawyer engaged in private practice as a member of Martin, Whitfield and Thaler at 1701 Pennsylvania Avenue, N.W., in the District of Columbia. Since 1969, I have served as Chairman of the Subcommittee on Finance, Securities, the Uniform Commercial Code, Bankruptcy and Condemnation of the Commercial and Business Law Committee of the Bar Association of the District of Columbia. I was recently appointed Adjunct Professor of Secured Transactions at the Georgetown University Law Center. I appreciate the opportunity to appear before your Subcommittee to present the views of the Bar Association concerning S. 1938, as expressed in its Resolution adopted November 24, 1971. S. 1938 has as its purposes the enactment of a comprehensive body of law to govern interest rates on consumer credit transactions; the enactment of remedies to cure various abuses that have occurred in consumer sales, financing and collection practices; the delegation to the District of Columbia Council of authority to license and regulate small loan companies; and, as expressed in the bill and the Senate Report (No. 92-500), Section 9 of the bill is designed "[t]o provide an exemption from the usury statute" for institutional lenders. On November 18, 1971, the day before the passage by the United States Senate of S. 1938, the newspapers publicized a decision rendered by the United States Court of Appeals for the District of Columbia on Novmber 10, 1971, in In re Parkwood, Inc. (No. 24,116). That decision, as the Senate Report states, created “an intolerable situation" and caused the inclusion in the bill of Section 9. It is to that portion of S. 1938 that this statement is restricted. II. RESOLUTION OF THE BAR ASSOCIATION OF THE DISTRICT OF COLUMBIA The Bar Association Resolution addresses itself to that portion of S. 1938 which attempts in Section 9, at pp. 45 and 46, to amend the so-called Loan Shark Law of the District of Columbia (D.C. Code, Sections 26-601, etc.). It reads: Whereas, by reason of the decision in In Re Parkwood, Inc. (No. 24,116) (D.C. Cir. November 10, 1971), an emergency exists in the District of Columbia with respect to the applicability of the "Loan Shark Law" (D.C. Code § 26-601, etc.) to numerous persons and institutions and to many millions of dollars of loans: and Whereas, heretofore, since its adoption in 1913, the Loan Shark Law was generally considered by the business community to be inapplicable to many recognized financial institutions engaged in financial transactions of enormous size and of general benefit to the community; Whereas, numerous loan transactions were entered into in good faith in reliance thereon; and Whereas, it is essential that lending transactions in the District of Columbia be conducted with reasonable certainty and continuity as to their legal conse quences, and in particular, the rights, obligations and duties of the parties to such transactions, Now, therefore, be it resolved that the Bar Association of the District of Columbia hereby requests the United States Congress to enact curative legislation forthwith, without delaying to consider a comprehensive revision of the interest laws in general, the need for consumer credit legislation, or any other matter which may well merit the considered attention and judgment of the United States Congress; and it is further Resolved that such curative legislation take the form of a maximum dollar limitation on the loans to which the Loan Shark Law shall apply; and it is further · Resolved that such curative legislation shall state that its provisions shall determine the rights in any action or proceeding pending at the time of enactment; and it is further Resolved that in order to accomplish the above, this Association supports the enactment of legislation in the following form or in such form as shall be substantially similar thereto. A BILL To amend the Act of February 4, 1913, which regulates the loaning of money on security in the District of Columbia. Be it enacted by the Senate and the House of Representatives of the United States of America in Congress assembled. SECTION 1. Section 1 of the Act of February 4, 1913 (37 Stat. 657; D.C. Code, § 26-601), is amended by deleting the words "loaning money" in the first sentence, and substituting in lieu thereof, the words "making loans of money of one thousand dollars or less." SECTION 2. The provisions of Section 1 hereof shall apply to the determination of any action or proceeding pending in any court of the United States, of any State, territory or possession of the United States or of the District of Columbia. on the date of enactment of this Act, whether commenced prior to or after such date of enactment, in which it is alleged that a loan was made in violation of Section 1 of the Act of February 4, 1913. What I now have to say and by responses to your questions should not, of course, be considered the Bar Association's views, but rather an expression of my personal opinions. III. THE LOAN SHARK LAW. A. A BRIEF ANALYSIS. The Loan Shark Law is set forth in Title 26, Chapter 6, of the District of Columbia Code (§§ 26-601 to 26-611). Section 26-201 is the "triggering" or "outlawing" provision. It states that it is illegal to engage in the District of Columbia in the business of making secured loans at greater than 6 percent per annum, unless a license is obtained. (No dollar limitation on the amount of such a loan is expressly set forth). The license tax is fixed at $500 per annum, and certain qualifications for applicants are set forth. Sections 26-602 and 26-603 describe the contents of the application for a license and the procedures to obtain one. Section 26-604 requires the licensed lender to keep certain books and records and to disclose the nature of his assets and liabilities in an annual statement. Section 26-605 provides that a licensed lender may make loans of up to $200 at 1 percent a month. It then sets forth the civil penalties for the receipt by |