5. Q. What is the source of the association's capital?

A. The initial paid-in capital for the association is provided by the production credit corporation located in the district. It will subscribe to class A stock in the association in an amount approximately equal to 20 percent of the estimated amount of loans to be made. Class A stock is nonvoting and is preferred as to assets in case of liquidation, but not as to dividends.

6. Q. Is the borrower required to buy stock in the association? A. Yes. Additional capital is provided through the sale to borrowers of another kind of stock called class B stock. Each borrower is required to own class B stock of a fair book value, not exceeding par, equal to $5 for every $100 or part of $100 he borrows. The farmer may purchase the stock with money borrowed from the association. Regardless of the amount of class B stock the borrower owns, it entitles him to only one vote at association meetings.

The farmer does not have to purchase new stock each time he borrows unless the stock he owns has become impaired in value or he wishes a larger loan. With the approval of the directors, a farmer not indebted to the association may sell his class B stock to another borrower or person eligible to become a borrower, or may exchange it at its fair book value for class A stock. Such exchange must be made in any event within 2 years after the holder of such class B stock ceases to be a borrower.

Both class A and class B shareholders participate equally in dividend distribution and are not subject to any stockholders' liability.

7. Q. How much capital is provided?

A. The amount of capital provided through the sale of the two kinds of stock will depend on the volume of loans made by the association. For example, if the production credit corporation estimates that the association will loan $100,000, the corporation will subscribe for class A stock amounting to 20 percent of $100,000, or $20,000. When the association has actually loaned $100,000, borrowers from the association will have paid approximately $5,000 for their class B stock. Thus the total capital paid in to the association would be $25,000.

8. Q. What is the source of the loan funds?

A. The association's capital is not intended to be loaned to farmers, but invested in approved bonds to be deposited with the Federal intermediate credit bank as additional security for borrowers' notes which the association discounts with the bank. The association can discount acceptable notes up to approximately five times its unimpaired capital and guaranty fund. Thus $10,000 of unimpaired capital makes possible about $50,000 of loans.

9. Q. How are associations supervised?

A. Associations are supervised by the district production credit corporation. Subject to the approval of the Governor of the Farm Credit Administration, the production credit corporation prescribes and explains the rules and regulations under which loans may be made by the association. The corporation also determines the form of security for loans. Rules and regulations for the investment of sums in the guaranty fund are prescribed by the corporation, which also must approve the declaration and payment of dividends.

As long as the corporation owns stock in a production credit association the appointment or election of directors, the loan committee, and other employees and agents is subject to the approval of the president of the corporation. During this time he also has power to remove any directors, officers, employees, and agents of the association.

10. Q. Who is eligible for a loan?

A. To be eligible for a loan an applicant must be a farmer. The term "farmer" includes an individual, partnership, or corporation engaged in the business of farming or of breeding, raising, or fattening livestock.

To be an eligible applicant, an individual must devote certain time and energy to the active management of the farming or livestock operations. The enterprise must be conducted so that he reaps the benefits of the operation if it is successful, and suffers the loss if it is a failure. He need not be principally engaged in farming nor reside on the place where the operations are carried on. Where a landlord is entitled only to a fixed return without regard to the success or failure of the farming operations, or where he does not rightfully exercise substantial direction and control in the management of such operations, the tenant, not the landlord, is considered the "farmer." The eligibility of a partnership is governed by the same principles as those governing the eligibility of individuals.

11. Q. What size loans are made?

A. A loan to any one farmer may not exceed 20 percent of the combined capital and guaranty fund of the association unless the collateral is approved by the production credit corporation and the Federal intermediate credit bank. With such approval of the collateral, a loan may be made in an amount not exceeding 50 percent of the combined capital and guaranty fund of the association. No loans for less than $50 can be made.

12. Q. Upon what security are loans made?

A. Generally speaking, primary security must be a first-mortgage lien on personal property, such as livestock, implements, and crops. Real-estate liens are acceptable only as secondary security.

13. Q. What is the maturity of loans?

A. The majority of loans are made for periods not exceeding 12 months. They are intended to be of a self-liquidating character

and in each case will mature at the anticipated time for marketing the crops of livestock through the sale of which the loan is expected to be repaid. But with certain types of loans a renewal of the unpaid balance may be considered for a further period if the security and other credit factors remain satisfactory.

14. Q. What is the interest charged on loans?

A. The rate of interest charged by production credit associations on loans to farmers and stockmen may vary from time to time as the Federal intermediate credit banks change their discount rates. Production credit associations may charge interest on their loans at a rate not more than 3 percent per annum above the discount rate of Federal intermediate credit banks at the time a loan is made. This spread of 3 percent between the rate paid by the association and the rate paid by the borrower goes to the association to cover operating expenses and provide reserves for possible losses. At the present time (May 1, 1934) each of the 12 Federal intermediate credit banks has in force a 22 percent rate, except that the Puerto Rico office of the Federal Intermediate Credit Bank of Baltimore charges 3 percent per annum, in view of the greater cost of conducting business in the island. Thus, the present maximum rate charged by associations in continental United States is 52 percent per annum and, in Puerto Rico, 6 percent per annum.

15. Q. What is the cost of obtaining a loan?

A. In addition to interest charges, the borrower is required to pay an inspection fee and any other direct expenses incurred in closing the loan. But no charge can be made by any officer, employee, or agent of an association for help in preparing applications, notes, mortgages, etc., unless such assistance requires employing or engaging the service of other persons not regularly employed by the

association.

The minimum inspection fee charged any borrower in connection with any loan is $2. However, this is subject to review and change by the corporation. Any inspection fee in excess of $2 must not exceed an amount equal to 1 percent of the loan on the annual basis. 16. Q. How should a farmer apply for a loan?

A. In applying for a loan from a local production credit association, the applicant is required to submit a financial statement and a definite plan for repayment. In addition, he must state how the loan will be used. Before the application is approved, the offered security is examined by an inspector and the loan committee of the association determines whether or not the application should be approved.

In borrowing money from an association, the farmer is required to do five things: (1) Offer adequate security; (2) provide a plan for repaying his loan; (3) submit a financial statement; (4) buy class B stock in the association; and (5) pay reasonable inspection charges and other necessary expenses incurred in closing his loan.

REGIONAL AGRICULTURAL CREDIT CORPORATIONS

The Emergency Relief and Construction Act of 1932 authorized the Reconstruction Finance Corporation to create in any of the 12 Federal land bank districts, when it appeared to be desirable, a regional agricultural credit corporation to make direct loans to farmers and stockmen for agricultural purposes (including crop production), or for the raising, fattening, or marketing of livestock. As production credit corporations and production credit associations are being organized under the Farm Credit Act of 1933, they are taking over the functions of furnishing production credit, and the regional agricultural credit corporations are being liquidated.

SEED LOANS AND CROP PRODUCTION LOANS

Under the President's Executive Order of March 27, 1933, the administration of emergency crop loans was transferred from the Department of Agriculture to the Farm Credit Administration. The Act of Congress approved February 23, 1934, authorized the sum of $40,000,000 to be appropriated for use in making such loans during 1934. The Production Credit Commissioner has been given the responsibility of supervising this fund. Emergency crop loans will be made from the $40,000,000 appropriation only to those applicants who do not have security acceptable to any other lending agencies. If a farmer applicant has adequate security, he is eligible to receive credit for production purposes from local production credit associations created under the Farm Credit Act of 1933.