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PROBLEMS ENCOUNTERED UNDER STATE USURY

LAWS

WEDNESDAY, JULY 31, 1974

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS,

Washington, D.C. The subcommittee met at 10 a.m. in room 5302 of the Dirksen Senate Office Building; Senator John Sparkman, chairman of the full committee, presiding:

Present: Senators Sparkman and Brock.
Senator BROCK. The subcommittee will come to order.

I first would like to thank the chairman of the committee and the chairman of the subcommittee, Mr. McIntyre, for allowing us to bring this problem before the subcommittee.

This morning our subcommittee commences 1 day of hearings on the problems encountered by commercial borrowers under State usury laws to see if Federal remedial action is necessary and desirable.

Federal policy has brought the prime rate that banks charge their best customers to around 12 percent and banks now borrow from each other in the so-called Federal funds market at 13-14 percent. Under these conditions, corporations who need to borrow sizeable amounts in order to carry on their businesses, simply cannot get money in States like Tennessee and Arkansas, where the State constitutions impose ceilings of 10 percent. In Montana, statutory restrictions equally hard to change make it virtually impossible to get needed funds.

As an emergency measure designed to give these States sufficient time to act and to avoid unemployment and severe economic repercussions, on behalf of myself and the Senators from the affected StatesSenators Baker, Fulbright, and Mansfield-I introduced S. 3817 which will be the focus of these hearings.

S. 3817 would authorize all federally-insured commercial and savings banks as well as savings and loan associations to charge up to 5 percent over the applicable Federal reserve discount rate to all corporate borrowers regardless of State usury rates. Consumer loans and home mortgages are not affected. [Copy of the bill being considered follows:]

(1)

93D CONGRESS

2D SESSION

S. 3817

IN THE SENATE OF THE UNITED STATES

JULY 25, 1974 Mr. BROCK (for himself, Mr. BAKER, Mr. FULBRIGHT, and Mr. MANSFIELD)

introduced the following bill; which was read twice and referred to the Committee on Banking, Housing and Urban Affairs

A BILL

To amend the National Bank Act, the Federal Deposit Insurance

Act, the National Housing Act, and for other purposes. 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That section 5197 of the Revised Statutes, as amended (12

4 U.S.C. 85), is amended by inserting in the first and second 5 sentences before the phrase "whichever may

be the greater”, 6 the following: “or in the case of a loan to a corporate 7 borrower, at a rate of 5 per centum in excess of the discount 8 rate on ninety-day commercial paper in effect at the Federal 9 Reserve bank in the Federal Reserve district where the Bank

10 is located,”.

2

1

SEC. 2. The Federal Deposit Insurance Act is amended

2 by adding at the end thereof the following: 3 "SEC. 24. (a) In order to prevent discrimination against

4 State-chartered insured banks with respect to interest rates,

5 if the applicable rate prescribed in this subsection exceeds

6 the rate such State bank would be permitted to charge in the 7 absence of this subsection, a State bank may in the case of a 8 loan to a corporate borrower, notwithstanding any State 9 constitution or statute, which is hereby preempted for the pur10 poses of this section, take, receive, reserve, and charge on 11 any loan or discount made, or upon any note, bill of ex12 change, or other evidence of debt, interest at a rate of not 13 more than 5 per centum in excess of the discount rate on 14 ninety-day commercial paper in effect at the Federal Re

15

serve bank in the Federal Reserve district where the bank

16 is located, and such interest may be taken in advance, reckon

17 ing the days for which the note, bill, or other evidence of

18 debt has to run.

19 “(b) If the rate prescribed in subsection (a) exceeds 20 the rate such State bank would be permitted to charge in 21 the absence of this paragraph, and such State fixed rate is 22 thereby preempted by the rate described in subsection (a), 23 the taking, receiving, reserving, or charging a greater rate 24 of interest than is allowed by subsection (a), when know

25 ingly done, shall be deemed a forfeiture of the entire interest

3

1 which the note, bill, or other evidence of debt carries with

2 it, or which has been agreed to be paid thereon. If such 3 greater rate of interest has been paid, the person who paid

4 it may recover, in a civil action commenced in a court of

5 appropriate jurisdiction not later than two years after the

6 date of such payment, an amount equal to twice the amount

7 of the interest paid from the State bank taking or receiving

8 such interest.”.

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SEC. 3. Title IV of the National Housing Act is 10 amended by adding at the end thereof the following:

"SEC. 412. (a) If the applicable rate prescribed in this

11

12 section exceeds the rate an insured institution would be per

13 mitted to charge in the absence of this section, such institu

14 tion may in the case of a loan to a corporate borrower, not15 withstanding any State constitution or statute, which is

16 hereby preempted for the purposes of this section, take, 17 receive, reserve, and charge on any loan or discount made,

18

or upon any note, bill of exchange, or other evidence of

19 debt, interest at a rate of not more than 5 per centum in 20 excess of the discount rate on ninety-day commercial paper

21 in effect at the Federal Reserve bank in the Federal Reserve

22 district where the institution is located, and such interest

23 may be taken in advance, reckoning the days for which

24 the note, bill, or other evidence of debt has to run.

25

“ (b) If the rate prescribed in subsection (a) exceeds

4

1

5

the rate such institution would be permitted to charge in the 2 absence of this section, and such State fixed rate is thereby 3 preempted by the rate described in subsection (a), the 4 taking, receiving, reserving, or charging a greater rate of

interest than that prescribed by subsection (a), when know6 ingly done, shall be deemed a forfeiture of the entire interest

which the note, bill, or other evidence of debt carries with it, 8

or which has been agreed to be paid thereon. If such greater

rate of interest has been paid, the person who paid it may 10 recover, in a civil action commenced in a court of appropriate 11 jurisdiction not later than two years after the date of such

7

9

12 payment, an amount equal to twice the amount of the inter

13

est paid from the institution taking or receiving such

14 interest.”.

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SEC. 4. If any provision of this Act or the application of 16 such provision to any person or circumstance shall be held in

17 valid, the remainder of the Act and the application of such 18 provision to any person or circumstance other than that as

19

to which it is held invalid shall not be affected thereby.

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SEC. 5. The amendments made by this Act shall apply to

21

loans made after the date of enactment of this Act, but prior

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