Additional information submitted to the subcommittee by-Continued Standard procedure for bank borrowing- Table listing payments of claims for marine insurance. Total volume of business, net earnings after taxes, 1960-64- Excess payments by servicemen on loan accounts. Sample of Federal Services loan solicitation letter, with power of Page 100 123 98 Letter from Better Business Bureau of Columbus, Ga., Inc., 84 Letter from Clayton Norris, president, Federal Services Finance 131 44 Lines of credit by commercial banks to Federal Services Finance Corp., with actual funds borrowed, 1960-65_ McNamara, Hon. Robert, letter to, dated April 27, 1965_ Transcript of interview with Duane J. Sorenson, Columbus, Widnall, Hon. William B., letter from, dated June 11, 1965___ Department of Defense directive on standards of conduct_ _ _ Off-limit action taken by the military services against certain 117 Todd, Hon. Paul H., Jr.: Annual report covers indicating the manner in which Federal 215 White, Hon. Compton I., Jr.: Exhibits and letters relating to the achievements of Duane J. 110 INVESTIGATION INTO FEDERAL SERVICES FINANCE CORPORATION WEDNESDAY, JUNE 9, 1965 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC FINANCE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met at 9:30 a.m., in room 2128, Rayburn House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Minish, Weltner, Hanna, White, Gettys, Todd, Annunzio, and Widnall. Also present: Representative Mize of the full committee. This morning the subcommittee opens hearings in connection with an investigation of Federal Services Finance Corp., a worldwide lending operation which is primarily engaged in the business of financing automobiles and making small loans to enlisted military personnel. My first reaction in connection with this investigation is why the operations of this company were not brought to light a long time ago. The Federal Services operations are well known to every military legal officer contacted by the committee staff. Serious questions were raised in regard to Federal Services' military operations as far back as 1953, but apparently no one has stepped forward to protect military personnel from this company, nor to inform them of its tactics, nor to consider the need for remedial legislation. Investigators of this committee have found a multitude of evidence of worldwide abuse of military personnel-not just isolated casesand I would like to bring to the subcommittee's attention some of the comments that were accumulated by investigators looking into Federal Services. A colonel who serves as a judge advocate general in the Washington area categorized Federal Services as "the most vicious company I have ever dealt with." A legal assistance officer in the Pentagon reported that he had had more trouble with Federal Services than any other company he has dealt with during his 3-year tour of duty in Washington. And a better business bureau official in a southern city commented that Federal Services was responsible for more complaints to his office than any one finance company in the area. He also told investigators that at one point he had to call the local manager of Federal Service into his office and warn him to clean up the operations of his company. The complaints of numerous military personnel regarding Federal Services have stirred the interest of this subcommittee, but I was appalled to learn that Federal Services was operating primarily on lines of credit from banks located throughout the country. Thus, banks are contributing to the unethical-if not illegal-operations of Federal Services. As of March 31, 1965, Federal Services had outstanding nearly $33 million worth of loans from banking institutions across the country. I am submitting for the record a list of banks that have loaned money to Federal Services over the past 5 years. I can't help but wonder how many individual borrowers or small businesses were turned down for loans by these banks, which apparently were more interested in lending money to a finance company than to bona fide local borrowers. The question of the bank's role in Federal Services cannot be overlooked in this investigation. Perhaps the importance of this investigation can be underscored by an excerpt from the recent report by the New York State Commission of Investigation dealing with the loan-shark racket. For the record, I would like to quote two paragraphs from that report: To the average citizen, public banking institutions present an indestructible image of well-regulated reliability and conservatism in financial matters-the last place in the world one would expect to find corrupting and destructive handiwork of the loan shark. Nevertheless, the commission's investigation and hearings revealed the shocking fact that in certain instances, bank funds were being used to finance usurious moneylending operations. This was accomplished through indiscriminate and improper lending practices and the systematic discounting of unsecured and often worthless third party notes. disturbing was the revelation that one New York City bank was used by loan sharks as a base of operations and a source of borrowers. These serious abuses were made possible by the corrupting of bank officials and employees. Also One facet of loan-shark operations uncovered by the investigation presented the gravest potential threat to the financial security of banking institutions. It was found that by various devices, loan sharks were able to obtain and use bank funds as part of their capital for usurious moneylending ventures. Simple mathematics makes obvious the extreme attractiveness of such an arrangement. The vast spread between legal bank rates of interest and the 260 percent or more a year vigorish charges that he imposes, is much too enticing for the loan shark to resist. Here again, the loan shark accomplishes his purpose by corrupting bank officials. I am not going to take time now to outline the types of complaints against Federal Services that have been received by the committee, the Federal Trade Commission, and others interested in this investigation. However, just let me say that these complaints range from Federal Services representing itself as an affiliate of the Federal Government to interest rate charges that amounted to almost 100 percent over a 2-year period. I do intend, however, as hearings progress to make public all of these complaints and ask that Federal Services give a full and complete accounting in each instance. At this time, however, I would like to place in the record a copy of a letter sent to Secretary of Defense Robert McNamara asking for a full and complete investigation of Federal Services. The letter outlines the general type of complaints that the committee is interested in looking into. This morning we have two witnesses. The first is Mr. Duane J. Sorenson, of Columbus, Ga., who spent 32 years in the Federal Services organization working up the ladder from trainee to an office manager in Tacoma, Wash. I feel certain that Mr. Sorenson will be able to describe the operations of the company and shed further light on its internal workings. Later we will hear from Sp4c. Allan H. Warner, a soldier stationed at Fort Story, Va. Specialist Warner was asked to testify in order to explain to the subcommittee the type of operation that Federal Services is conducting overseas. I would personally like to thank both of these gentlemen for taking the time to appear before this committee and to lend us their valuable assistance. Their actions are to be commended. Stand up, please, Mr. Sorenson. Do you solemnly swear that the testimony you shall give before this committee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. SORENSON. I do. TESTIMONY OF DUANE J. SORENSON, COLUMBUS, GA. The CHAIRMAN. The witness being duly sworn, will you please identify yourself for the record. Mr. SORENSON. Duane J. Sorenson, Columbus, Ga. The CHAIRMAN. Now, Mr. Sorenson, first state the type of positions that you held with Federal Services and the type of work that you did. Mr. SORENSON. I started with them in January 1961, as a unit manager trainee at Columbus, worked up to a unit manager, and was then promoted to the home office management program in 1963 where I spent 7 months in the home office here in Washington, D.C. From there I opened the Tacoma, west coast, operation in November 1963. The CHAIRMAN. Have you been given particular awards and citations of merit from the company? Mr. SORENSON. Yes. The CHAIRMAN. In recognition of the services rendered? Mr. SORENSON. Yes; I have several, beginning with Columbus, Ga., as well as Washington where I was given substantial raises for my knowledge of the operation, and so on, until I left the company. The CHAIRMAN. We have them here and we will place them in the record at another point. Do you feel that you have a fairly complete knowledge of the operations of Federal Services? Mr. SORENSON. Yes. I believe I have one of the most detailed knowledges of the operation on a day-to-day basis and at the office management levels. The CHAIRMAN. Now, Federal Services is headquartered here in Washington, is that right? Mr. SORENSON. Yes. I believe it is 1701 Pennsylvania Avenue. The CHAIRMAN. 1701 Pennsylvania Avenue. And what type of credit do they extend to servicemen generally? Mr. SORENSON. Personal loans in the United States and overseas and also they purchase retail contracts from the dealers here in the States and overseas also. They purchase contracts through European nationals, agents placed in and around military installations. The CHAIRMAN. They purchase contracts on a discounted interest basis. Mr. SORENSON. Yes. The contracts are purchased on a discounted interest basis. The CHAIRMAN. And that includes, of course, loans on automobiles and things like that. Mr. SORENSON. Yes, sir. The CHAIRMAN. Are some of the loans unsecured except just the allotment of pay? Mr. SORENSON. Yes. They do make personal loans on a wide basis throughout the United States and overseas. The CHAIRMAN. We have received complaints about marine insurance. Could you tell us how the company handles marine insurance? Does it have a company that is owned or does it write insurance for another company? Mr. SORENSON. Yes. They place marine insurance, a $30 charge, on each and every contract purchased overseas. If the man buys a car and he owes, say, $2,000, back here in Washington, D.C., they automatically tack on a $30 charge for marine insurance. This is done after the contract is purchased, so the man in reality owes $2,030 instead of $2,000 which he does not know anything about and there is no policy ever issued. The CHAIRMAN. No policy ever issued. Mr. SORENSON. No, sir. The CHAIRMAN. In other words, they just charge him $30. Mr. SORENSON. Yes, sir. They just tack this on after the contract is purchased here in Washington, D.C. The CHAIRMAN. And he receives nothing for it. Mr. SORENSON. No, sir. He does not receive a policy. The CHAIRMAN. Have they ever had any claims where the serviceman thinks he has been issued insurance but complains because he has not received a policy? Mr. SORENSON. Yes, sir. Unless he pursues it or write for some reason, he doesn't even know unless by chance he should go to the office for some particular reason while he is overseas. The CHAIRMAN. Does the company have many claims against that insurance? Mr. SORENSON. Yes. We averaged probably a claim a week submitted at our local office. The CHAIRMAN. Do they pay them off, adjust them? Mr. SORENSON. We were instructed to forward all the claims to the home office here in Washington, D.C., for processing. The CHAIRMAN. Did they pay some of them off or any of them? Mr. SORENSON. Well, in my time with the company I didn't see but maybe under a half dozen ever paid off. The CHAIRMAN. Does the marine insurance have any legal value of any type since they don't issue any policy? They actually don't have any real insurance, I wouldn't think. Mr. SORENSON. Not that I know of. They say they issue it on some sort of master type policy. I have never seen this policy. I don't believe anyone ever has. The CHAIRMAN. How did the practice of writing this marine insurance come up, Mr. Sorenson? Mr. SORENSON. A fellow by the name of Mr. John Pratt initiated this in the home office here in Washington, D.C., to make some additional money on each and every contract purchased overseas, increase their dollar profit on each account. The CHAIRMAN. How much did it amount to on the average in a year, shall we say? Mr. SORENSON. I would say several hundred thousand dollars. |