The finance charge could be set through a discount or simple interest procedure. Existing interest rates would continue to apply, with respect to direct motor vehicle installment loans, as provided in title 40, chapter 9, of the D.C. Code, except that a bank or other lending institution would be authorized to charge up to 111⁄2 percent per annum.

The bill specifies a maximum rate for "credit service charges" on revolving credit accounts. The rate would be one and one half percent per month on balances under $500 and one percent per month for any amount over $500. Finally, the bill provides the District of Columbia Council with extensive authority to regulate small loan companies operating in the District. The Council's authority, under the bill, would include establishing maximum finance charges, licensing of small loan companies, and regulating the operation of such companies.

On September 22, 1970, the District of Columbia Commission on Interest Rates and Consumer Credit issued a report which, among other things, commented on existing interest rates in the District. After analyzing existing rates in the District and the availability of consumer credit, and considering the rate ceilings proposed by the Uniform Consumer Credit Code, the Commission recommended two alternative courses of action. First, the District of Columbia Council could be authorized by Congress to set interest rates in the District, subject to the approval of the Commissioner, Second, the Congress could enact maximum interest rates as part of a "District of Columbia Consumer Credit Code," patterned after the Uniform Consumer Credit Code.

S. 1938 contains provisions reflecting both alternatives. On the one hand, the bill authorizes the District of Columbia Council to set interest rates in the limited area of small loan companies. On the other hand, the bill establishes in law the interest rate ceilings for certain categories of loans and creates a large number of related consumer protection procedures. The Commissioner believes that interest rates charged in the District are a matter of substantial local concern and, in his opinion, properly the subject of local government responsibility. However, the rates enumerated in S. 1938 appear to be equitable when viewed from the standpoint of existing lending practices in the District, the rates charged in adjoining jurisdictions, and the desirable consequences of competition in the loan marketplace.

S. 1938 also contains a number of provisions which are designed to provide for substantially more consumer protection than in currently available in the District of Columbia. These provisions are derived from a number of sources, including the recommendations of the District of Columbia Commission on Interest Rates and Consumer Credit. Among those provisions are a number of significant procedures for protecting the consumer such as: prohibition of balloon payments, with certain exceptions; prohibition of assignment of earnings; prohibition of confessions of judgment; prohibition of any required payment of creditors' attorney's fees; revision of the holder-in-due course doctrine and the procedure by which claims and defenses may be asserted by a borrower against assignees and lenders; prohibition of referral sales; a "cooling-off" period for home solicitation sales; limitations on debt collection; revisions in garnishment provisions; and various limitations on creditors' remedies and specification of new consumers' remedies.

It should be noted that the bill contains various provisions which are duplicative of existing law, either statutory or contained in Council regulations. Specifically, the bill's provisions relating to the "holder-in-due-course" doctrine, and regulation of small loan companies necessitate changes in the existing District law on the subject, and the bill's provisions relating to prohibition of payment of creditor's attorney's fees, prohibition of balloon payments, prohibition of referral sales, restrictions on repossessions, and limitations on creditor's remedies are duplicative in certain respects of Council regulations. It is suggeted that the Committee may wish to alter any overlapping provisions in a final version of the bill.

Finally, section 9 of S. 1938 is concerned with the exemption of certain lending institutions from the so-called District of Columbia "Loan Shark Law" (D.C. Code, sec. 26-601 et seq.) That Act was designed to regulate the making of small loans in the District by requiring the licensing of persons or organizations engaged in the lending of money at an interest rate in excess of six per cent. The small loan law currently exempts the following businesses from its provisions: national banks, licensed bankers, trust companies, savings banks, building and loan associations, small business investment companies licensed and operating

under the Small Business Investment Act of 1958, real estate brokers, and life insurance companies.

Section 9 of the bill is designed to remedy the current situation in the District of Columbia resulting from the case of In Re: Parkwood, Inc. v. Equitable Life Insurance Co., which, in effect, held invalid any loans made in the District by mortgage bankers and other organizations not specifically exempted from the licensing provisions of the small loan law. Section 9 specifies that the small loan law "shall not be construed to apply to the legitimate business of mortgage bankers and other institutional lenders engaged in making loans secured by real estate, life insurance companies . . . and small business investment companies. . . ." S. 1938 provides a retroactive effective date for section 9 of Feb ruary 4, 1913, the date the small loan law became effective.

While concurring in the need to clarify the application of existing law to mortgage bankers, the lenders specifically affected by the Parkwood case, the Commissioner is concerned that the language of section 9 of S. 1938 may be too broad in scope, thereby exempting certain lending activities which should properly be the subject of regulation. It would appear preferable that the bill specifically spell out he exemptions to the small loan law. A specific exemption for real estate investment trusts is already the subject of separate legislation, H.R. 10523, and is pending before this Committee. The legitimate business of mortgage bankers could similarly be specifically exempted from the provisions of the lending law.

An alternative to the listing of exemptions from the small loan law appears to be provided by S. 1938. The proposed chapter 39 of title 28 of the D.C. Code authorizes the Council to regulate small loan companies in the District of Columbia. Pursuant thereto the Council could be further authorized to determine which lending institutions in the District should be subject to regulation as "small loan companies" and which institutions, because of the nature or size of their lending activities, should be subject to less detailed restrictions.

The Commissioner appreciates the opportunity to comment on S. 1938 and, subject to the various suggestions and reservations heretofore expressed, recommends favorable consideration of the bill.

Sincerely yours,

GRAHAM W. WATT,

Assistant to the Commissioner.

Mr. HUNGATE. Mr. Werner, you have four minutes.

STATEMENT OF RALPH WERNER, GENERAL COUNSEL, DISTRICT OF COLUMBIA REDEVELOPMENT LAND AGENCY

Mr. WERNER. Thank you.

Good morning, Mr. Chairman. My name is Ralph Werner. I am General Counsel of the District of Columbia Redevelopment Land Agency. Thank you for the opportunity to deliver this testimony on behalf of the Agency.

We are here today to testify not on the general provisions of the bill before you, S. 1938 but rather only on one provision of the bill, section 9.

LOAN SHARK ACT

Section 9 would exempt mortgage bankers and certain other lenders located in the District of Columbia from the provisions of the socalled "Loan Shark Act" which was enacted in 1913 and is found in D.C. Code Title 26, Section 601, et seq. Section 9 was added to the bill in response to the decision of the U.S. Court of Appeals for the District of Columbia Circuit handed down on November 10, 1971, in three cases involving the reorganization of Parkwood, Inc. The Court of Appeals ruled that mortgage bankers doing business in the District of Columbia are not exempt from the provisions of the Loan Shark Act and that any loan made by a mortgage banker with an interest

rate exceeding 6 percent is void and unforceable. Any borrower of such a loan could recover all interest paid and one-fourth of the principal amount due on the loan.

Although the precise meaning and applicability of the Loan Shark Act may still be in dispute, we understand that persons and businesses subject to its coverage believe that they cannot make any loans in excess of 6 percent. For several years now, the prevailing interest rates on loans in the District of Columbia secured by real estate have exceeded 6 percent. The current rate on FHA insured loans is 7 percent. On some conventional loans the rate is still higher. Consequently, we fear that the decision of the Court of Appeals, if allowed to stand undisturbed, will force mortgage bankers not to make any further loans in the District of Columbia, at least until interest rates decline below 6 percent. This, of course, is unlikely in the immediate future.

In addition, we are concerned that mortgage bankers may decline to make further advances on outstanding loans bearing interest rates in excess of 6 percent until this matter is clarified.

EFFECT OF PARKWOOD DECISION

The Court's decision promises to have a significant adverse impact on the District's urban renewal program. Mortgage bankers are financing all but one of the urban renewal housing projects--new housing as well as housing sold by the Agency to be rehabilitated-now under construction and all such projects scheduled to start construction or rehabilitation in the near future. In each case, the interest rate exceeds or would be expected to exceed 6 percent. Most of those projects are in the Seventh Street Corridor on sites destroyed in the 1968 civil disturbances.

The Court of Appeals decision has already caused delay in the start of one housing project in the Shaw School Urban Renewal Area. The sponsor of Foster House, a 75 unit apartment building to be located at Rhode Island Avenue and Eighth Street, N.W., was scheduled to close on its FHA insured loan and start construction approximately a week after the Court of Appeals decision. The lender is a mortgage banker. Because of the Court's decision, the lender has refused to make the loan and thus the project has been delayed indefinitely. We are advised that alternate means of financing are being sought but without success to date. There are three other projects in the Shaw School Urban Renewal Area on which construction was anticipated to begin within the next few months. All these projects were to be financed by loans advanced by mortgage bankers. These projects would provide approximately 260 units of housing for low and moderate income families and individuals. However, unless relief is provided or alternate sources of financing located, this housing too will be delayed indefinitely.

In addition to these four projects in the Shaw School Urban Renewal Area, two other housing projects financed by mortgage bankers are under construction, one containing 217 apartments units, Gibson Plaza in the Shaw Urban Renewal Area, and the other containing 184 apartment units, Golden Rule Apartments, in the Northwest One Urban Renewal Area. We have had some indication to the effect that the lenders will not suspend payments of future advances on the con

struction loans. However, as we read the Court's opinion in Parkwood, these loans could be overturned and in that event, alternative means of financing would then have to be found or else the construction would stop.

We are also concerned that the Court of Appeals decision will have the effect of eliminating potential sources of financing for other urban renewal projects-residential and non-residential as well.

Legislation should be enacted quickly to permit the housing projects mentioned above to go forward, just as Congress did in 1970 to permit FHA and VA insured loans to be made in the District when the prevailing interest rate then exceeded the 8 percent limit of the usury law. In addition, this legislation should eliminate any obstacles posed by the Loan Shark Act to loans that mortgage bankers and other legitimate lenders may otherwise be prepared to make on other real estate development projects in the District of Columbia.

AMENDMENT PROPOSED

We endorse Section 9 of the bill. However, we believe that the phrase "other institutional lenders" in subsection (a) is unnecessarily vague and would create confusion. We would suggest that the phrase "other institutional lenders" be deleted and that a more particularized list be substituted in its place, such as "pension funds, real estate investment trusts, foundations, tax exempt organizations, nonprofit corporations and associations, and other similar institutional lenders." With such a modification, the District of Columbia Redevelopment Land Agency urges the enactment of Section 9 of the bill before your Committee.

Thank you for providing us with the opportunity to testify on this important matter this morning.

This testimony has not been cleared by the Office of Management and Budget. It is still under review and we shall notify you as soon as we are advised the Administration's position has been determined. Mr. HUNGATE. Mr. Jacobs.

Mr. JACOBS. I have no questions.

Mr. HUNGATE. Mr. Broyhill.

Mr. BROYHILL. Very briefly, Mr. Chairman.

You mentioned several housing projects in the District. Are you proceeding along as rapidly as possible in developing housing on the land that you have available here in the District of Columbia? Mr. WERNER. Yes, sir, I believe we are.

Mr. BROYHILL. You do not need any additional tools to work with, or help from the Congress to provide sufficient housing here in the District?

Mr. WERNER. I was referring to the agency's effort. We certainly need additional assistance in accelerating the housing which I think by all standards is not proceeding as fast as we would like to have it proceed.

Mr. BROYHILL. What else could the Congress do to help you? There is a lot of comment and criticism being made that there is not enough housing in the District of Columbia for low-income people. Is there anything we can do to make this housing available?

Mr. WERNER. One thing we have found is that the ability of the local housing authority-the National Capital Housing Authority-to pro

duce units, is severely restricted. There are cost limitations which they are not able to exceed, which thereby limits the market for that kind of housing in the District. This, I think, would be national legislation.

We would like to see first the cost limitations on public housing raised, because the other federal housing subsidy programs are geared to that, like Section 235 and 236 programs. There are in addition cost limitations devised.

The housing limitations are reflected in the Department of Housing prototype cost limitations which we feel are unduly low. We are running into a problem concerning the wage rates and the cost of building housing in the District. This is exceeding the cost limitations of the FHA programs themselves. We are finding that to build housing under the Davis-Bacon Wage Rates is becoming prohibitively expensive for persons of moderate income. That is an increasing problem.

Mr. BROYHILL. Mr. Chairman, I will not belabor that further. I think in due course that this committee either through one of its regular subcommittees or by a specially created committee should go into the housing problem of the District of Columbia in depth to see if any further assistance could be provided by Congress to accelerate the construction of adequate low-income housing in the Nation's Capital. We hear a great deal of criticism about it. We hear the problems of having to move people out of the District. That may be necessary and essential. I think the Congress should explore in depth whether or not we have done everything we can do and whether the agencies in the District of Columbia are doing everything they can do to make the maximum number of low-income houses available in the Nation's Capital.

That is all I want to say at the moment, Mr. Chairman. I am going to pursue this aggressively in the future.

Mr. HUNGATE. Do you wish to comment?

Mr. WERNER. We are aware that there are various measures introduced or discussed concerning legislative revamping of the Housing program of the District of Columbia to accomplish the goals you mentioned. We are vitally interested in that. We are developing our own suggestions which we will be pleased to make to you or other persons who are involved in this process that would be helpful to that end.

Mr. BROYHILL. I did not suggest this for any witch-hunting episode. I want to be constructive. We have been hearing this criticism for years and years. I feel we should start using a rifle instead of a shotgun to see if there is something we can do to get this moving.

Apparently we are not doing all we can do or we should do. Maybe Congress should step in and be more helpful in that regard.

Mr. WERNER. I was referring to specific proposals for creating new mechanisms to develop housing with alternate financing vehicles and authorities that would carry out the redevelopment of the city's blighted areas in a faster rate than now being done.

Mr. HUNGATE. Mr. Mikva.

Mr. MIKVA. Mr. Chairman, this is not to be any criticism of our colleague because I share his criticism of the problem. It gets to the problem I was suggesting before. We have a situation where even the hearings are creating a problem. Section 9 of the bill before us almost has nothing to do with the rest of the bill. In the Senate's great wisdom they

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