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A recent Dun & Bradstreet report indicated that, nationally, businesses failing with liabilities of $100,000 or more have increased during the first quarter of 1974, compared to the first quarter of 1973. The number of national failures was reported down.

"The first three months of last year were really bad," Waldron said. “Everybody kept saying retail sales were up and a bunch of people opened little shops. The business just wasn't there."

Enterprises discovering a lack of business, or other reasons for failing, have been primarily in retail clothing sales and construction firms.

"There's a lot of small contractors who have just disappeared,” Waldron said. "Around here, the small retail stores and construction firms are the ones that have been going lately. The highest failure rate that I've ever seen are the western wear stores. The odds of succeeding in that business are extremely low."

He also mentioned the smaller retail carpet stores approaching a difficult time if carpet manufacturers don't solve their raw material supply problems.

"There are so many businesses, that if everything turns out like it's supposed to (higher interest rates and continuing inflation), they will be in trouble," he said.

Rising interest rates caught many building contractors unprepared, he said, adding: “They're having so many problems getting loans. For a while there, you could build all the houses you wanted to, but people couldn't get loans to buy them."

Mismanagement is the villain in most business failures, Waldron believes.

"People let themselves get over-stocked or they get into a market they can't compete in,” he said. He described a Pine Bluff firm that was successful on a local and state basis where the owner manager was able to personally supervise all the details.

When the firm extended into regional and national markets, however, the one man couldn't handle everything himself and could not, or would not, get adequate managerial assistance. He went under.

"They just got in over their head," Waldron said. "That's usually what happens to most of them—they get more than they can handle."

Judge Arnold M. Adams, who presides over the federal bankruptcy court in Little Rock, said : "This year, until June 1, we had more big bankruptcies than in the last three of four years. There's not any substantial increase in the numbers. It's the size."

Judge Adams considers the larger bankruptcy filings to be $300,000 and up.

For the first four months of this year, as compared to 1973, Judge Adams said the only difference in Arkansas has been a large increase in large business filings : “I think in the past they would have held on, or tried to. But hold on and get into what?” he asks?

Judge Adams believes the economic situation—with high interest and inflation, the effort to keep a business afloat and to borrow the necessary capital to keep going-makes people much less inclined to ride out hard times.

Claud Rankin, sales manager for Daniel Construction Co. of Arkansas, said inflation is “tearing us up" adding:

“Inflation and shortages both. Steel items have doubled in prices. Prices are climbing every day. It's getting tough. We normally work with industrial clients and construction right now is booming."

No major construction firms have failed in Arkansas, according to Dun & Bradstreet. It's the smaller firms that are dropping out in that particular business. Manufacturers have been hardest hit in Arkansas. Nationally, failures among manufacturers are up.

Transportation has been pointed out as one industry experiencing difficulty. In Arkansas, Maurice L. Britt, regional administrator of the Small Business Administration in Little Rock, said SBA here has had "some difficulty in the trucking industry-in the loans we've made to truckers. My guess is that they're over the hump now—if they don't encounter any more gasoline or fuel shortages," he said.

Britt explained that since the SBA was dealing with “marginal type loans, naturally our figures are higher than others,” concerning business failure. The SBA helps finance businesses that have difficulty getting capital loans from commercial institutions.

“Right now, right after this energy crisis, and tight money in Arkansas, our delinquencies have increased somewhat,” Britt said. “The figure is right now

running 6.4 per cent. It's higher than it was last year. Next month it may be down a little bit or up a little bit, its hard to say."

The causes of the increased delinquencies with the State are "hard to put your finger on,” Britt said but attributed it to the general business condition. The energy crisis has really hit service stations, camp grouns and other small businesses, he said.

“The other thing, I would think,” he said, would be the higher interest rates. If the interest rate stays up it will dry up lending in Arkansas." The reliance of Arkansas businesses on out-of-state loans is putting them in a bind. It's really going to curtail business if it continues for any length of time."

Britt, a former lieutenant-governor, would not single out a line of business that's failing more than others.

“The Arkansas business activity doesn't act like the nation, usually," he pointed out. “We react a little slower than in the east and west."

STATEMENT OF ANDREW J. BIEMILLER, DIRECTOR, DEPARTMENT OF LEGISLATION AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

The American Federation of Labor and Congress of Industrial Organizations has grave concerns with regard to S. 3817, which is under consideration by your Committee and wishes to make known its position on this bill.

The legislation proposed in S. 3817 would allow national chartered banks, savings and loan associations and state banks whose accounts are insured by Federal agencies to charge interest rates of up to 5% more than the Federal Reserve's discount rate on commercial loans and on loans of $100,000 or more. Such Federal legislation would supersede state usury laws which frequently establish statutory interest rate ceilings for loans of these types which are below the maximum rate that would be allowed pursuant to the proposed legislation. At this time, for example, with a Federal Reserve discount rate of 8%, the ceiing pursuant to S. 3817 would be 13%. That is 3% above the 10% usury limit in Arkansas, for example, and also above the applicable usury limit in many other states.

There would be several probable effects of this legislation.

(1) Interest rates on commercial loans, or on loans of $100,000 or more for other purposes, that are made by local and regional financial institutions during tight money periods would probably be higher than currently. When loanable funds are in short supply, usury laws tend to hold down the interest rates that are charged. If banks were permitted to operate under a 13% limit instead of, as in Arkansas, under a 10% limit, the rates at a time such as the present would probably be closer to 13% than 10%. Many moderate and large size businesses that might borrow for inventory or plant expansion would have to pay higher int est rates. Such higher interest rates become part of the cost of the production of goods and services, and would be passed on to con: sumers in the prices that they are charged. The higher interest rates would thus have an inflationary impact.

(2) Money for residential mortgage loans and small businesses would become even scarcer than it has been in tight money periods. The provisions of S. 3817 would not be applicable directly to home mortgage loans or business loans of under $100,000. Indirectly, however, the bill would contribute to the scarcity of such loan funds as lending institutions could obtain interest rates up to 13% on large business loans. The limited supply of available funds would flow to large borrowers who could pay the higher interest rates. This process would dry up to the supply of funds for home mortgage loans and small business.

The excess of the ceiling interest rate permitted under the bill over effective yields on FHA-insured home mortgage loans is shown in the attached table for prior years and recent months. In earlier years, the ceiling rate permitted under the bill generally would have been two to three percentage points above the yield on FHA-insured mortgage loans, and currently it would be three to four percentage points higher.

(3) Since lending institutions could charge higher interest rates they would tend to make high risk loans on which the borrowers agreed to pay the higher rates.

The Franklin National Bank and a number of other banks, in their eagerness to obtain high yields, have made speculative investments which placed them in a dangerously weak position. Consequently, there has been a notable shaki ness in the financial structure of the country. It is undesirable to create a statutory framework that would encourage depository institutions to engage in highly sneculative ventures with other people's money.

In addition to the foregoing undesirable effects that could flow from the provisions of the proposed bill, there is a question of how much profit lending institutions have to make in their operations. The banking business has been highly profitable with current interest rates. In the second quarter of this year, major banks had year-to-year increases of 16 to 32% in profits after taxes. To permit them to charge 5% more than the interest rates that they have to pay to borrow from the Federal Reserve Banks would assure them of an fustraordinarily high rate of profit.

Furthermore, the 5 point spread between the 8% discount rate and the 13% rate that could be charged would be an enticing opportunity for many banks. It would encourage credit expansion to support questionable enterprises, increasing inflationary pressures in the process.

The Federally chartered or insured savings and loan associations are paying savers between 5% and 742% on their deposits. To allow them to charge 1% interest rates on the loans that they make would permit them to obtain a spread of between 542 and 8 percentage points above their cost of money. Savings and loan associations can operate adequately on a spread of 172 to 2 percentage points between the cost of money to them and the interest rate charged on loans.

For the foregoing reasons, the AFL-CIO strongly opposes the enactment of S. 3817.

COMPARISON OF FEDERAL RESERVE DISCOUNT RATE PLUS 5 PERCENT AND FHA HOME MORTGAGE YIELD

Difference

between discount rate plus 5 percent

and FHA mortgage yield

Federal Reserve

discount rate plus 5 percent

Federal Reserve

discount rate

Year or month

FHA new home mortgage yields

1950 1951 1952 1953. 1954. 1955. 1956. 157. 1958. 1959. 1960. 1961. 1962. 1963. 1964. 1965. 1966. 1967. 1968 1969 1970. 1971 1972. 1973 1974:

January. February. March. April.. May. June

[blocks in formation]

1 Not available.
Sources:

(1) 1950–73 data from "Economic Report of the President" (Feb. 1974), Table C-58, p. 317.
(2) 1974 FHA new home mortgage yield: "Federal Reserve Bulletin" (July 1974),

(3) 1974 Federal Reserve discount rate data: "Federal Reserve Bulletin" (July 1974), chart entitled "Current Rates on Loans to Member Banks."

THE ROBERT MORRIS ASSOCIATES,
PHILADELPHIA NATIONAL BANK BUILDING,

Philadelphia, Pa., August 9, 1974.
Hon. THOMAS J. MCINTYRE,
Chairman, Subcommittee on Financial Institutions,
U.S. Senate, Washington, D.C.

DEAR SENATOR MCINTYRE: I am writing you as president of the Robert Morris Associates, the National Association of Bank Loan and Credit Officers, to voice our support for S. 3817, the bill introduced by Senator Brock and others to amend the National Bank Act, the Federal Deposit Insurance Act, the National Housing Act, and for other purposes.

We believe that it is vital to both the economies of the states directly affected by this legislation and business borrowers within these states that this legislation be enacted by the Congress at this time. While we share the feeling of the sponsors of this bill that ideally the states should determine their own legal framework within which business as well as other lending and borrowing transpire, the urgency for relieving the adverse situation facing business borrowers in these states, calls for action, in this case, at the Federal level.

We understand that S. 3817 has been amended in Committee to make its provisions apply to all business borrowings of $25,000 and over. We support these modifications and are pleased that the Banking Committee has acted favorably on this legislation. We would now urge the Senate to pass the bill and do all in its power to speed its passage through the Congress to avoid the further penalizing of business borrowers in states where usury limits now preclude borrowing in the current economic environment.

We appreciate your considering these views and would also appreciate their inclusion in the public record. Thank you very much. Sincerely,

NORMAN J. COLLINS. O

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