Additional Capital for Federal Land Banks

HEARINGS

BEFORE THE

COMMITTEE ON BANKING AND CURRENCY

HOUSE OF REPRESENTATIVES

SEVENTY-SECOND CONGRESS

FIRST SESSION

ON

H. R. 4741 (H. R. 6172)

TO AMEND THE FEDERAL FARM LOAN ACT, AS AMENDED TO PROVIDE FOR ADDITIONAL CAPITAL FOR

FEDERAL LAND BANKS, AND FOR

OTHER PURPOSES

The committee met at 10.30 o'clock a. m., Hon. Henry B. Steagall (chairman) presiding.

The CHAIRMAN. Gentlemen, the meeting this morning has been called to consider H. R. 4741 introduced by me, on December 8, 1931, and which is as follows:

[H. R. 4741, Seventy-second Congress, first session]

A BILL To amend the Federal farm loan act, as amended, to provide for additional capital for Federal land banks, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 5 of the Federal farm loan act, as amended (U. S. C., title 12, ch. 7, secs. 691-697), is amended by adding at the nd thereof a new paragraph as follows:

"It shall be the duty of the Secretary of the Treasury on behalf of the United States, upon the request of the board of directors of any Federal land ank made with the approval of the Federal Farm Loan Board, to subscribe from time to time for capital stock of such bank in an amount or amounts specified in such approval or approvals, such subscriptions to be subject to call whole or in part by the board of directors of said bank upon thirty days' atice with the approval of the Federal Farm Loan Board. The Secretary of the Treasury is hereby authorized and directed to take out and pay for shares aving an aggregate par value equal to the amounts so called; and to enable the Secretary of the Treasury to pay for stock issued hereunder there is hereby Authorized to be appropriated the sum of $100,000,000. Shares of stock issued suant to this paragraph shall be paid off at par and retired in the same ner as the original capital stock of said bank after said original stock outading, if any, has been paid off and retired: Provided, however, That stock ted from time to time pursuant to this paragraph may, in the discretion of the directors and with the approval of the Federal Farm Loan Board, be paid at par and retired in whole or in part; and that said board may require ach stock to be paid off at par and retired in whole or in part out of available res of said bank. The proceeds of all repayments on account of stock ed pursuant to this paragraph shall be held in the Treasury of the Unite:l ates and shall be available for the purpose of paying for other stock thereafter issued pursuant to this paragraph.

S2 Section 23 of the Federal Farm Loan Act, as amended (U. S. C., title 7, secs. 901 902), is amended by adding at the end thereof a new ragraph as follows:

"Effective beginning with the first full semiannual period, ending June 30 or Isenber 31, following the enactment of this paragraph, every Federal land k stall carry to reserve account semiannually a sum not less than 50 per of its net earnings until said reserve account shall show a credit We equal to the outstanding capital stock of said land bank. After said shows a credit balance equal to the outstanding capital stock 10 per of the net earnings shall be added thereto semiannually. Whenever reserve shall have been impaired it shall be fully restored before any divi

dends are paid. No Federal land bank shall declare or pay a dividend or divi dends to shareholders unless approved by the Federal Farm Loan Board Stock owned by the Government of the United States in Federal land bank shall receive no dividends. In the case of Federal land banks the requirement of this paragraph shall be in lieu of the requirements of the first three sentence of this section and of the requiremnts as to percentages of reserves stated i the second paragraph of this section. This paragraph shall not be applicabl to join-stock land banks."

SEC. 3. The first three paragraphs of section 24 of the Federal farm loan act as amended (U. S. C., title 12, ch. 7. secs. 911-913), are amended, effective beginning with the first full semiannual period, ending June 30 or December 31 following the enactment of this Act, to read as follows:

"That every national farm loan association shall, out of its net earnings carry to reserve account semiannually a sum not less than 20 per centum of such net earnings until said reserve account shall show a credit balance equal to the outstanding capital stock of said association. After said reserve shows credit balance equal to the outstanding capital stock 5 per centum of the ne earnings shall be added thereto semiannually.

"Whenever said reserve shall have been impaired it shall be fully restored before any dividends are paid.

"After deduct.ng 20 per centum or the 5 per centum hereinbefore directed to be credited to reserve account, said association may at its discretion declare a dividend to shareholders of the whole or any part of the balance of said ne earnings."

SEC. 4. The Federal Farm Loan Board is authorized to make such rules and regulations, not inconsistent with law, as it deems necessary or requis te for the effcent execution of the provisions of the Federal farm loan act, as amended (E. S. C., title 12, ch. 7).

[NOTE.-H. R. 4741 is superseded by H. R. 6172, introduced December 17 1931, containing an added section (section 5).]

The CHAIRMAN. The members of the committee who were with u in the preceding council will remember the bill introduced by me during that session and upon which extended hearings were held That bill provided for advancement by the Treasury to the Federal land banks to the amount of $60,000,000, as expressed in the bill. "to enable the banks to grant extensions to borrowers where it was to the interest of the banks and the borrowers to do so."

The Secretary of the Treasury and the Federal Farm Loan Board were opposed to that bill. The first objection urged was that the legislation was necessary, that the funds were not needed. An addi tional objection was based upon the language of the bill, referring to the purpose to enable the banks to grant extensions to borrower of installments due upon mortgages. The gentlemen who were members of the committee at that time will remember what took place and that the committee upon a final vote declined to report the bill.

The board insisted that such a situation would result in compli cations in administering the banks and interfere with the exercise of the discretion of officials in dealing with foreclosures. It way further insisted, as I understand the position of those who opposed the legislation at that time, that the proper practice for the banks is to foreclose the mortgages that become delinquent and disposed of mortgaged accordingly, notwithstanding any losses to be sustained by the bank on account of abnormal conditions.

Unfortunately conditions in the agricultural sections of the country have not improved. As much as we may regret to say it, the truth is they have grown worse. In any event the President in a conference recently called by him at the White House, declared his purpose to

favor legislation providing relief for the Federal land banks to the amount of $60,000,000 to be advanced by the Treasury.

I introduced the bill now before us, H. R. 4741, to a complish substantially what was undertaken in the bill which I introduced last rear and to afford the relief which the President now favors. The bill before us provides for the advancement of $100,000,000 by the Treasury to constitute a revolving fund to be drawn on by any bank upon the application of the officials of the bank, with the approval of the Federal Farm Loan Board, and advancements made by the Treasury are to be covered by capital stock of the Federal land hanks to be issued for amounts so furnished, which capital stock is to be retired in the same manner as the original capital stock in the land banks subscribed by the Treasury so reimbursed. When repaid to the Treasury the money is to remain as a part of the revolving fund subject to be used again in like manner. This is sustantially

what the bill undertakes to do.

There are further provisions which deal with the matter of ace cumulating reserves by the banks and by farm loan associations. It provided that each bank set aside 50 per cent of its earnings to their reserve account until the reserve account equals the capital stock outstanding. There is a similar requirement as to farm loan assoiations. That is the effect of the other language in the bill, which is technical and requires reference to the former act before it may be fully understood. I am giving you the effect of these provisions.

I have lost no time in calling the committee together to consider this bill for the reason it seems to be one of the major measures that will come before us, as to which there should not be serious controversy.

I have introduced a separate bill which relates to the matter of foreclosure by the banks. I drew the bill in much haste and in more or less confusion in the committee room; the language therefore is ot quite like I should desire it. It approaches a matter that is difficult and I think I could express in a better way what I undertook do in the preparation of that bill. I will say in this connection that I think we should provide proper methods and machinery to able the officials of the Federal land banks to grant extensions: of installments on mortgages in cases where foreclosures in the present distressed conditions in the agricultural communities of the untry would entail undue hardship upon the borrower and, as I believe, in many instances losses to the banks. Under the present la the banks are left to choose between two alternatives, when payments on mortgages become delinquent. One is to foreclose; the ther is to carry such mortgages to a suspense account-leaving them spended in mid-air where they can not be used-which interferes with the administration of the bank and with such orderly business ethods as should, in my judgment, be applied. The banks are required to maintain valid mortgages for the protection of the bonds of the bank upon which funds are obtained with which to supply the demands of farmers for loans. To require every mortgage to be taken down and foreclosed or passed to the suspense account where it cannot be used hampers and handicaps the officials of the bank in the conduct of their business and leads to unnecessary confusion and