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the United States of any state, territory or possession of the United States or 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 13.

Mr. MIKVA. That says we won't go back and open up old decrees. Mr. THALER. Right. There is no need to do that.

Mr. MIKVA. All you are saying is you won't affect the one decision. Mr. THALER. No. I can't give you that opinion.

Mr. MIKVA. Have there been any other cases deciding the small Loan Shark Act in the District of Columbia in the same manner as the current case?

Mr. THALER. I apologize, I didn't hear the beginning of that question. Mr. MIKVA. With regard to the language you just read, the only case that would be exempted from retroactive application of the law would be a case that has already been decided. Isn't that correct? Mr. THALER. Yes, sir.

Mr. MIKVA. That is only one case.

Mr. THALER. No. There have been quite a number of cases.
Mr. MIKVA. That have been decided the way that one was?

Mr. THALER. No. There was no case. Well, there was no case which rendered a judgment against a large lender such as happened in this case. There were earlier cases. I happened to find out this weekend that one of the cases, Royal v. Levitt, when it went back Mrs. Levitt lost the case. But if she had won the case retroactive legislation might have opened her judgment which would have been possibly unconstitutional.

I don't know whether there are judgments for the borrower in what was then the Court of General Sessions or the District Court. I don't know whether there were judgments for the borrower in those days.

Mr. MIKVA. What about a short statute of limitations in those cases? That has been the way other states have resolved similar cases when cases came up which affected the borrower. The lawyers are surprised. Mr. THALER. If you mean by that. Mr. Mikva, that the borrower would have, say, until June 30 of next year to bring a suit and make the allegations that the Parkwood Decision says he can make, that wouldn't work.

Mr. MIKVA. No. I am talking about this, that no claim can go back longer than three years and no claim can go back for a mortgage that is already paid off and that in any event there would be nothing more than the loss of interest-something like that.

Mr. THALER. If you leave the Loan Shark Law alone, however. Mr. MIKVA. No.

Mr. THALER. You do plug the gap.

Mr. MIKVA. That we agree on. I am asking how much do we want to get the Congress in the business of deciding pending law suits or pending claims?

Mr. THALER. I am not certain how to fully respond to your question. I would be pleased to think about it and submit a memo.

Mr. MIKVA. I would appreciate that.

(The information follows:)

Re S.1938.

Subcommittee on the Judiciary,

Committee on the District of Columbia,

MARTIN, WHITFIELD AND THALER,
Washington, D.C., Dcembr 1, 1971.

U.S. House of Representatives, Washington, D.C.

DEAR SIRS: This is in response to the question put to me at the hearings regarding the substitution of a "shortened statute of limitations" for the provisions of Section 2 of the Bar Association's suggested bill. I do not believe such an approach is a feasible alternative and offer the following comments:

A statute of limitations is a legislative enactment prescribing the period within which (i) an action may be brought upon a specified claim or (ii) specified rights may be enforced. It is an affirmative defense, asserted to bar the remedy sought. Usually it is raised by a defendant, but it could be raised by a plaintiff against a counterclaim. With respect to the "Parkwood problem", the issue of the illegality of a note would probably arise in one of two ways:

(a) The borrower defaults under the note or security instrument and the holder of the note either (i) brings suit against the borrower in a civil action, or (ii) commences foreclosure proceedings, which are then attacked by the borrower either in a civil action, or, as in Parkwood, in a reorganization (or bankruptcy) proceeding.

(b) The borrower, prior to default or after having paid the note in full, brings suit for rescission, damages, etc.

The "Parkwood problem" exists partly because there are hundreds of millions of dollars of notes which are not in default but which are now, as a result of the majority opinion in Parkwood, subject to attack and a declaration that they are void.

A shortened statute of limitations is not a substitute for retrospective relief since it would simply require the borrower to assert his defense or bring his lawsuit sometime sooner than now permitted. But that still leaves the problem of many millions of dollars of potentially void notes.

If the thought is to grant full prospective relief but only bar lawsuits on notes paid in full prior to a recent date, say July 1, 1971, and then create a "gray zone" between July 1, 1971 and the date of enactment of the amendment to the loan shark law, so that any paid in that "gray zone" could be attacked by a borrower (within a designated period of time) that too, would result in many millions of dollars of potentially void notes.

Moreover, I can suggest no reasonable basis for the kind of distinction a "shortened statute of limitations" would create. If the Parkwood case had never arisen, the loan shark law would nevertheless have been well deserving of amendment, both retrospectively and prospectively, for purposes of clarification and in a spirit of fairness. It would not seem appropriate to permit even "minor windfalls" to be bestowed upon borrowers because of the fortuitous event that they paid their note or entered into their transaction at some designated time close to the Parkwood decision.

Section 2 of the Bar Association bill does not "go back to 1913", it does not reopen judgments. It simply operates prospectively with respect to all notes and claims, as well as retrospectively with respect to matters not yet finally adjudicated. From the material previously submitted, it is clear that such an approach has the distinct advantage of being both constitutional and unoriginal.

A "shortened statute of limitations" approach is not a substitute for the kind of retrospective relief suggested in the Bar Association's bill and great care would be required to avoid any such approach from resulting in an impairment of full prospective relief.

Very truly yours,

Mr. HUNGATE. Mr. Smith?
Mr. SMITH. No questions.
Mr. HUNGATE. Mr. Link?
Mr. LINK. No questions.
Mr. HUNGATE. Mr. Fauntroy?

MARTIN S. THALER.

Mr. FAUNTROY. I would be interested in knowing how you arrived at the maximum dollar amount, the suggestion of $1,000.

Mr. THALER. Arbitrarily when I submitted the bill to the Committee I had a blank amount in and the thought was perhaps we should make a suggested bill here with a blank amount. The lawyers of the Committee thought this Committee needed some guidance as to what we were talking about. It wouldn't be a half million dollars or large amounts. It should be a small loan law. $1,000 was chosen arbitrarily, the way it's chosen arbitrarily in every state of the Union.

Mr. FAUNTROY. Thank you, Mr. Chairman.

Mr. HUNGATE. Thank you, Mr. Thaler. Thank you very much for your very helpful statement. If you will file the memorandum requested by Mr. Mikva as soon as possible, we would appreciate it. Mr. THALER. Thank you, sir.

Mr. HUNGATE. I would like to call next the Mortgage Bankers Association of Metropolitan Washington, Denzil O. Nichols, Acting President, and Mr. Louis Mann. Is he with you?

Mr. NICHOLS. Yes, sir, he is with me.

Mr. HUNGATE. Do you gentlemen have written statements to file with the Committee?

Mr. NICHOLS. Yes.

Mr. HUNGATE. Without objection they will be made a part of the record at this point and you may proceed as you see fit.

Mr. NICHOLS. In anticipation of the fact that many of the questions that you will want to ask will be legal, I have asked that Mr. Mann sit with me. He will answer those legal questions that come to him. I will confine to my remarks to the business aspects of this problem.

STATEMENT OF DENZIL O. NICHOLS, PRESIDENT, THE MORTGAGE BANKERS ASSOCIATION OF METROPOLITAN WASHINGTON

Mr. NICHOLS. Gentlemen, my name is Denzil O. Nichols, and I am President of The Mortgage Bankers Association of Metropolitan Washington, Inc. (hereinafter called the "MBA"). I am here today to speak in favor of the purposes and policies behind section 9(a) of S. 1938, as passed by the Senate. However, without changing these purposes and policies, I would like to suggest that this Subcommittee take a somewhat different approach from the language which appears in section 9 (a) of S. 1938.

AMENDMENT PROPOSED

In this connection, I would respectfully urge this Subcommittee to amend section 9(a) of S. 1938 to read as Mr. Mann will define to you immediately after I conclude:

"For the purpose of clarifying established law, be it enacted as follows:

1. Add a new section 26-612 to the District of Columbia Code, reading as follows:

26-612-Loans in excess of $200 exempt from operation of this chapter.

(a) Nothing contained in this chapter shall be deemed to apply with respect to loans, or the making of loans, in amounts in excess of $200;

(b) The provisions of subsection (a) of this section shall be deemed to have taken effect as of February 4, 1913."

Mr. Louis Mann, special counsel to the MBA, will follow me with testimony as to the legal aspects of our proposal. I will address myself to the catastrophic business situation now facing the area's financial community.

PARKWOOD CASE

On November 10, 1971, the U. S. Court of Appeals for the District of Columbia, in a 2-1 decision, decided the case of In Re Parkwood, Inc., Nos. 24,116-24,118 (D. C. Cir., November 10, 1971). The majority opinion in the Parkwood case apparently concludes that, contrary to the long standing interpretation of the District of Columbia Loan Shark Act (Title 26, section 260601 through 260610) by the District officials in charge of administering it, mortgage bankers engaged in the District in the business of lending money are required to be licensed under the Loan Shark Act, notwithstanding that they are licensed real estate brokers. Moreover, the case apparently holds that the Loan Shark Act applies to all loans, irrespective of their size, and that all persons engaged in the District of Columbia in the business of lending money, unless expressly exempted by the statute, are required to be licensed under the Loan Shark Act.

The MBA is an organization whose members are engaged in first trust real estate mortgage financing in the Washington Metropolitan area. Mortgage bankers are importers of capital. They are a principal vehicle by which money from capital surplus areas find its way into capital deficit areas. This can occur by either of two routes. The mortgage banker may lend his own funds and then sell the loans to an investor, or the mortgage banker may act as a representative of the investor in originating the loan with the investor funding the loan with his own money.

A substantial number of MBA members conduct or have, in recent years, conducted business within the District of Columbia. Replies from 18 of such members indicate that they, in reliance on the real estate brokers' exemption from the Loan Shark Act, have originated mortgage loans aggregating at least one billion dollars, which they have funded with their own money and subsequently sold to investors. These loans have been invalidated or at least placed in serious doubt by the Parkwood decision.

Such loans have been sold to various types of investors, who thus are also seriously affected by the Parkwood decision. A partial summary of the present holders of such notes, most of which are domiciled outside the District, is as follows:

Life insurance companies.

Savings and loan associations.

Commercial banks.

Savings banks____

Federal National Mortgage Association (FNMA)
Pension trust funds---

Government National Mortgage Association (GNMA)

Pledged as securities for loans (warehoused)
Other investors and unallocated__

$470, 378,000 166, 394, 000

8, 000, 000

75, 422, 000

67, 240, 000 3, 430, 000 1,557, 000 31, 902, 000 49, 572, 000

If these loans are declared void and uncollectible, the consequences will bankrupt most, if not all, of the mortgage bankers which originated these loans, and may well produce the same result for lenders and other investors based inside and outside the District of Columbia. The Parkwood case has the same destructive effect on lenders other than mortgage bankers. No one has any precise idea of the total amounts at stake with respect to all such loans, but even a conservative estimate would be in the several billions. Among the organizations which could be affected are, without limitation, union and other laborrelated organizations, pension and profit-sharing funds, funds of fraternal and religious orders, college and university endowment funds, and charitable foundations (including churches of all denominations).

It is critical to note that the devastating consequences of the Parkwood case are not limited to lenders and their customers. The funds pumped into the economy of the Metropolitan Washington area by mortgage bankers and other lenders are essential to a large segment of the area's economy. For example, construction contractors will have to lay off workers and withhold paychecks as a result of mortgage bankers and other lenders being forced by the Parkwood case to cease advancing funds on existing and new construction loans. Similarly, the serious effects of Parkwood on the residential housing market are illustrated by the fact that 30-50% of the transfers of single family residences in this area are financed through mortgage bankers. Already a number of scheduled closings on such houses have been delayed by the Parkwood case.

Mortgage bankers are the principal originators of subsidized medium and low income housing in all major cities, particularly the District of Columbia. The Packwood decision definitely will case an immediate cessation of construction of all projects falling into those categories, particularly "236 projects," "221(d) (3), 221(d)(4) projects," housing for the elderly programs and other programs of the Federal Housing Administration. It is quite possible that the President's directive to build more office buildings in downtown Washing ton rather than to disperse these buildings in the suburbs will be seriously affected by the Parkwood case.

The Parkwood decision has already largely stopped the flow of money into the District of Columbia through mortgage banking and other channels. Among the loans which are adversely affected are construction loans. This will result in the termination of construction on buildings already under way and will have a very depressing effect upon the construction of badly needed new buildings in the District. The elimination of the mortgage banker as a lender in the District of Columbia will significantly, we believe, reduce the supply of money, will significantly reduce competition and will inevitably lead to higher interest rates for all mortgage loans. Indeed, title insurance companies, in recognition of this problem, have already refused to insure loans against the effects of the Loan Shark Act, and have put exceptions top this effect in their policies. This will have the effect of making the mortgages unsaleable. Under the present uncertain state of the law, many lenders will withdraw from the District of Columbia loan market simply because they could suffer the penalty of having their loans declared void. Oviously they will lend their money in a market where

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