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OFFICE OF THE ATTORNEY GENERAL,

Nashville, Tenn., August 5, 1974. Commissioner HUGH F. SINCLAIR, Department of Banking, Capitol Hill Building, Nashville, Tenn.

DEAR COMMISSIONER SINCLAIR: In reply to your request of this office for an opinion as to the earliest possible time the state constitution can be amended by the convention route, Article 11, Section 3 of the Tennessee Constitution provides that the Legislation must submit first to the people at any general election the question of calling a convention. If, at such general election, the voters favor the call of the convention, the delegates must be chosen at the next general election. After the delegates to the convention have acted, if they vote favorably on a change such, then, is submitted back to the people for ratification or rejection “at an election to be held in such manner and on such date as may be fixed by the convention."

The last sentence of such constitutional section prohibits a convention from being held more often than once in six years. Therefore, since the last convention was held in August of 1971, no convention could be held prior to August of 1977. It would depend then on how long the convention lasted as to when the ratification of the convention's action could be effected the time of such ratification vote to be set by the convention itself following its a journment. The earliest such convention could be held would appear, therefore, to be the Fall of 1977.

Paragraph one of the above article and section of the Constitution, which would permit an amendment without holding a convention by appropriate legislative action and ratification of the people, would require an even longer period of time since it is geared to the next gubernatorial election. Very truly yours,

ROBERT H. ROBERTS,

Advocate General.

CONFERENCE OF STATE BANK SUPFRVISORS,

Washington, D.O., July 31, 1974. Hon. THOMAS J. MCINTYRE, U.S. Senate, On Senate Office Building, Washington, D.C.

DEAR SENATOR MCINTYRE: The Conference of State Bank Supervisors desires to express its pleasure at having the opportunity to present its views on S. 3817 which was introduced on July 24, 1974 by Senator William E. Brock.

As the primary regulatory authority for the country's approximately 9,800 state-chartered commercial and mutual savings banks our state banking commissinners are vitally interested in the objectives and implications of S. 3817.

The hill, in part, would amend the National Bank Act (12 U.S.C. 85) to permit national banks in connection with corporate loans to charge at a rate of un to 5% in excess of the discount rate on ninety-day commercial paner in effect at the Federal Reserve Bank in the district where the national bank is located. The Federal Denosit Insurance Act would also be amended in order to nermit federally insured nonmember banks to charge interest on corporate loans up to 5% in excess of the discount rate on ninety-day commercial paper, notwithstanding any provision in a State's constitution or statutes to the contrary. A similar amendment is made to Title IV of the National Housing Act. To give exnression to Senator Brock's intent that S. 3817 he considered as emergency legislation, the bill provides that the amendments cited above would annly to loans made after enactment of the bill “but prior to July 1, 1977." This termination date of July 1, 1977, is intended to give those states desiring to do so, the opportunits to express the will of their residents with respect to whether or not they desire, in view of the current exnerience reflecting money market pressures, to alter their existing usury ceilings.

It is the understanding of the Conference that the bill under consideration by the Subcommittee was designed to assist residents principally in the states of Tennessee, Arkansas and Montana, where constitutional or statutory provisions

in effect have established maximum interest rates of 10% on corporate loans ; that because these ceilings are substantially below today's market rates, Senator Brock felt this situation could ultimately cause unemployment and severe economic repercussions in those geographic areas.

Information secured from the Federal Reserve Banks of Minneapolis and St. Louis would indicate that the 10% usury law provisions in the states of Tennessee, Arkansas and Montana have resulted in contractions of commercial and industrial loans by commercial banks in varying degrees in those states in the period from late April, 1974, to late June, 1974. Late April to June 1974 was selected as a base because that was about the time Fed funds and large denomination C.D. rates exceeded 10% and began to make it more difficult for banks with 10% interest ceiling limitations to justify additional borrowings to support lending at a 10% maximum rate. Weekly reporting member banks in West Tennessee had a 9.5% decline in commercial and industrial loans (C & I loans) during the April to June 1974 period compared with a 1.0% decline for the same period in 1973 when money market conditions were more normal. In Arkansas weekly reporting member banks experienced a 7.4% decline during the 1974 two-month period compared with a 3.1% rise a year earlier. Montana's reporting member banks experienced a 0.2% loan decline during the April to June 1974 period compared with a 2.3% rise in these C & I loans during the same 1973 period.

By way of contrast, weekly reporting member banks nationally were able to maintain about the same rate of growth in C & I loans in the April to June period of 1974 (2.8%) as in 1973.

While commercial banks in both Tennessee and Arkansas show rather significant declines in commercial and industrial loans during the period April to June, 1974, compared to the same period a year earlier, the extent of actual borrowings by corporations in those states is not known. Nor is the Conference in possession of information at this time to indicate the extent to which corporate facilities in those states with parent firms headquartered out-of-state can secure financing through their parent organizations.

As indicated below, it appears as though the usury law loan constraint problem is significant at the present time in Tennessee, a little less severe in Arkansas, and even less so in Montana. The problem in Tennessee may be more acute because of the greater concentration of industry than in Arkansas and Montana.

Percentage changes in commercial and industrial loans, weekly reporting member

banks, selected areas, last Wednesday of April to last Wednesday of June, selected years Area and year

Percent change Tennessee:

April to June 1973.

- 1.0 1974.

-9.5 Arkansas: 1973.

3. 1 1974.

-7.4 Tennessee + Arkansas: 1973

6 1974

-9. 3 Montana: 1973.

2. 3 1974

2 United States: 1973.

2.8 The Conference of State Bank Supervisors is sensitive to the fact that artificial constraints connected with usury limitations can distort credit flows when rates determined by competition in the marketplace exceed unrealistic usury ceilings. However, state authorities in most instances have taken, or have pursued appropriate corrective measures to achieve greater flexibility in the interest rate structure of their respective states as one means of facilitating efforts of lending institutions to meet credit needs in their communities. For example, some 32 states today have no usury limitations on corporate contract loans, and nearly all other states have modified usury ceilings to ease the pressures of present money market conditions. Only three states, Arkansas, Montana and Tennessee have a 10% usury limitation on corporate loans, with North Carolina having a 10% limitation on such loans in the $50,000 to $100,000 range.

2. 7 1974.

I believe the foregoing illustrates the fact that state and local officials are capable of dealing with problems of this type which are reflective primarily of the fiscal and monetary policy excesses of this country that have extended over the past decade, and have resulted in today's virulent inflation and concomitant high interest rates that adversely affect savers, borrowers and lenders alike in all sections of our country and in virtually every walk of life.

Because almost without exception the States have acted responsibly and in the public interest in this area, the Conference of State Bank Supervisors must express its fundamental opposition to efforts being made through S. 3817 to provide a federal solution to what essentially is a problem affecting only two or three states, and in an area that is properly within the prerogative of the states to determine. The Conference believes, therefore, that remedial action in this area should originate at the state level in the absence of compelling factors that would raise this issue to the level of a national problem.

In addition to abrogating state law without justification, the Conference believes that S. 3817 may be viewed as being premature. It is the understanding of CSBS that Tennessee's usury ceiling of 10% which is a constitutional provision, cannot be changed in the regular order of things prior to a constitutional convention in 1977; that it might be mid 1978 before state legislative action could finalize a constitutional amendment raising the usury limitation. However, it is also the understanding of CSBS that a special session of the state legislature could be called for the purpose of securing statutory relief in this area at an earlier date; such statutory action being subject to review by the Tennessee Supreme Court: The Conference believes that such avenues should be fully explored in Tennessee before Congressional action is pursued in this matter.

With respect to Arkansas which is mentioned as one of those states requiring relief from their present constitutionally-determined usury ceiling, it is the understanding of CSBS that this matter may be resolved at the upcoming November general elections in that state. At that time the residents of Arkansas will have the opportunity' to vote on the questions of placing interest rate controls in the hands of the Arkansas legislative body, instead of having it remain as a section of their State Constitution. Having interest-setting authority transferred to the Arkansas legislature, it is believed, will facilitate efforts to adjust these rates from time to time to meet changing economic conditions.

In the case of Montana, which is mentioned as having a 10% usury ceiling, it is interesting to note that the Montana state legislature in early 1974, according to information received from state banking officials in that state, considered several bills, and amendments to these bills dealing with questions of whether to amend the present 10% usury limits on loans, and whether to exempt corporations from usury limitations. The Montana state legislature took no action during the 1974 session on amending its present usury provisions. It is not know whether these matters will be considered in Montana's next legislative session.

In addition to the foregoing, S. 3817 raises the question of whether under its provisions a usury ceiling would be imposed on corporate loans in some 32 states where no usury limitations now exist for such loans. And, inasmuch as the discount rate is currently 8%, it would appear that S. 3817 could also abrogate state laws in several states with current usury limitations of 12% on corporate loans.

It is noted that Senator William Brock at the time of introducing S. 3817 characterized it as an emergency measure to avoid unemployment and severe

1 American Banker Association publication "State Banking and Financial Data">A Comparison of State Usury Laws as of 12/31/73 shows following states with no usury ceiling for corporate contract loans : Alaska, California, Colorado, Delaware, Georgia (no limit over $2500.), Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine. Maryland (no limit over $5000.), Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Utah, Virginia, Washington, West Virginia, Wisconsin, Wyoming, District of Columbia.

economic repercussion likely to occur as a result of the inability of firms to borrow funds because of current interest restrictions in some states. Therefore, while the Conference opposes S. 3817 in principle, as being an unwarranted usurpation of state law in this area, if the Subcommittee finds this legislation to be warranted, the Conference would urge that the emergency and temporary nature of any legislation enacted in this matter be clearly spelled out in any such bill. This could be accomplished in part by a cutoff provision such as now set forth in Section 5 of S. 3817, limiting the effectiveness of the proposed amendments to no later than June 30, 1977.

In addition, the Conference considers it essential that legislative language accompanying any bill enacted as the result of the introduction of S. 3817, spell out in unmistakeable terms that the legislation is designed solely to serve an emergency situation; that it is intended to give those states desirous of acting in this area sufficient time in which to do so, and that it is not intended to set a pattern or precedent of extending federal regulaiton into areas such as interest rates, which historically have been, and should be retained, as the rightful prerogative of the states to determine. Sincerely,

LAWRENCE E. KREIDER,

Executive Vice President-Economist. Senator BROCK. Mr. McLellan, First National Bank of Great Falls, Mont. I've been up there, hunted up in that territory; had a real good time, didn't shoot a thing.

STATEMENT OF ADRIAN 0. MCLELLAN, PRESIDENT, FIRST

NATIONAL BANK, GREAT FALLS, MONT. Mr. McLELLAN. I'd like to have you back.

Senator BROCK. It is the prettiest country in the world. Almost as pretty as east Tennessee.

Mr. McLELLAN. Mr. Chairman, my name is Adrian O. McLellan. I am president of the First National Bank of Great Falls, Mont., and also the Montana Bankers Association Governmental Relations Committee Chairman on National Affairs. I am appearing today on behalf of this organization comprised of all 150 banks in Montana.

At the Montana Bankers Association's annual membership meeting on June 24, 1974, a resolution to support legislation authorizing banks to charge up to 5 percent over the Federal reserve discount rate on certain loans was adopted. This proposed legislation was subsequently introduced by Senators Brock, Baker, Fullbright and Mansfield as S. 3817. We are grateful for Senator Mansfield's interest in the problems of the citizens of Montana, as well as the Nation, as evidenced by his taking a direct and active role in the cosponsorship of this bili.

Montana loan statutes provide that parties may agree in writing for the payment of any rate of interest, not exceeding the rate of 10 percent per annum, and such interest shall be allowed, according to the terms of the agreement, until the entry of judgment. Only three States, Montana, Tennessee, and Arkansas, have 10 percent ceilings on loans to corporations. All other States have a greater limit, including 31 States which have no ceiling at all on loans to corporations.

The 10 percent ceiling on loans to corporations was of no great concern to the financial institutions of Montana until recent months, when the interest rates nationally surged upward, and the prime rate continued to climb until it reached its present 12 percent. Money, like any other commodity, gravitates to the highest bidder in a free market. Money normally on deposit in Montana and available for local borrowers is flowing to banks and other financial institutions in those States that can charge corporations higher rates of interest, and in turn pay the highest rate of interest to depositors.

38-252 0.74 - 3

Montana does not have large banks. The largest bank has deposits of approximately $140 million. Banks that have felt the greatest pressure from the lack of lendable funds in the past few months are those banks in the $50 million to $140 million in deposits category. These banks have the greaest loan demand, both from their direct customers and for overline loans to smaller banks in Montana. To satisfy this loan demand to a reasonable extent, several of these banks have had to borrow Federal funds at rates as high as 14 percent recently. Since there is no ceiling on interest rates paid on certificates of deposit in excess of $100,000, many of these banks are paying as high as 1114 percent on certificates of deposit to cover their loan demand.

In spite of these high rates being paid on certificates of deposit, funds are still leaving the State in sizable amounts and going into certificates of deposit in other States where greater rates can be paid. For example, our bank has lost almost $6 million in certificates of deposit in the past few months to out-of-State banks.

Banks in other Montana cities have experienced the same out-flow of deposits. For example, one of the banks in another Montana city reported a loss of $18 million in certificates of deposit of $100,000 or more in the past months to out-of-State banks.

Deposits normally available to Montana banks and other financial institutions from State and local governments is also flowing out of State. Montana's State Board of Investments placed only about 25 percent of their investable total funds in Montana investments during the 1972–73 fiscal year, and the percentage has decreased in the past fiscal year. Almost 100 percent of the repurchase agreements issued have been placed in out-of-State banks by the State Board of Investments, and these agreements cover from $50 to $100 million in funds. Again the appeal of higher yields pulls this money out of State as Montana banks simply cannot bid as high, being limited to a 10 percent usury ceiling on corporation loans.

During this same period of time, when our bank and others were losing deposits, total loans went up. A compilation of bank call figures for Great Falls illustrates this very well. A year ago—in the June 30, 1973 call figures, as published—the total deposits of the seven banks in Great Falls went up $5 million from the previous call period on March 28, 1973. The loans also went up $5 million, so the increase in deposits and the increase in loans were about identical in that period of 1973.

This year, however, clearly reflects an increase in loan demand as well as an outflow of deposits. On the June 30, 1974 call the total deposits, compared to the deposit figures of April 24, 1974, were down $9,400.000, while the total loans in Great Falls banks were up about $7,700,000—a spread of over $17 million in that brief period.

As previously mentioned, most of this dramatic change took place

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