F.D.I.C. insured state chartered banks may collect. This power would also include the authority to establish penalties for collecting usurious interest.

As to the third issues raised by your question, I must inform you that the Attorney General is charged with the duty and responsibility of defending and upholding the Constitution and the laws of the State of Arkansas. It is my understanding that the draft of the proposed legislation which you enclosed with your request has already undergone substantial amendment. Therefore, I must decline to speculate on the specific draft of the document you enclosed until I can examine the final or at least current proposed wording.

Very truly yours,

JIM GUY TUCKER.

Mr. PENICK. We are a panel of two lenders and two borrowers and a college professor who is our moderator. We have one of the largest lenders on a large corporate borrower and a small lender and smaller financer. The constitution of Arkansas provides not only 10 percent simple interest maximum but 1 point which is extreme is the penalty for usury is voidance of the entire contract.

The borrower does not have to pay principal or interest. He can also keep whatever collateral he may have. This discourages any financial institution from taking any risk as far as usury is concerned. Worthen Bank & Trust bank is the largest financial institution in Arkansas but ranks only 276th in size of financial institutions throughout the United States. Arkansas banks are comprised of 85 percent of banks under $25 million in deposits.

We in Arkansas have been trying to do something about changing the usury law for many years. We have tried three times in recent years. The third attempt is now underway to amend our constitution. In 1953 we tried to amend it. We tried in 1970 in a constitutional convention to amend it. We now have a referendum election that will be voted on in November. There is a difference of opinion on whether or not it will pass. The point I would like to make is we are not asking for congressional help without practically having exhausted every effort we could to find relief.

There is a case now pending entitled First National Bank of Mena, Ark. v. Nowlin which would authorize national banks to discount notes over a long period of time allowing them to earn more than 10 percent. This is on appeal to the Eighth Circuit Court of Appeals in St. Louis.

The other point is that this matter falls most heavily on the larger lending institutions. We are not able to keep the large deposits. Yet we are called upon to finance the larger borrowers of the State. We are not able to do so so the larger financial institutions feel this most severely.

The bank which I represent has been on a funds allocation basis. since February of 1973. Just this week at the request of the comptroller's office we sent him a documented list of declined loans naming borrowers, type of loan, type of collateral, showing $64 million of loans that we would have made if we had had funds available.

The larger banks of the States are heavily involved in the Federal funds markets. We have also sought to utilize the Federal Reserve debt authority. Worthen Bank has three times tried to get relief from Federal Reserve. Last fall when we had the largest crop we ever had, we made an application to the Federal Reserve for agricultural credit in the amount of $20 million. We were declined. They

said it was too much. We reduced it to $12 million. They said it was contrary to monetary policy. We did not get the money. We were only able to finance the crops because they moved through the harvesting process very rapidly. The crops were good and they sold them. In May of this year we again made an application to the Federal Reserve because we had been told that they were reconsidering their attitudes towards making available the discount window to banks in our situations.

We were again declined on the basis that we could not justify those loans.

Business and industry in Arkansas is hurting very badly as you will hear from the gentlemen on this panel. We appreciate your efforts, Senator, in this matter and we think Arkansas is particularly being damaged by not being able to compete in the national money markets for funds to help a growing and developing State that must import all of its capital. At this time I would like to ask Mr. Robert Wickard to give his testimony.

Mr. WICKARD. Mr. Chairman, Wickard & Co., Inc. is a general construction company with business both in residential and commercial construction. I also do considerable development on a personal basis. We do approximately $2 million a year in volume.

Our long record of service in the construction industry has permitted us excellent banking relations in the past. We enjoy solid credit with several of the larger banks in the central Arkansas area. To cite the oppressive effect of the 10 percent usury law on our business, I only have to point to two undeniable facts.

One, as of July 1, 1974, we have only $360,000 worth of construction volume on our schedule. As of this same time 1 year ago, July 1, 1973, we had over $2.1 million.

Two, our work force has had to be cut by a third. Twenty-five people have been laid off due to lack of business. Normally, at this time of year we would be taking on extra summertime help for the peak period of our business.

Let me cite you several example of the kind of construction declines that have caused a serious impact on housing and commercial development for us.

Maumelle New Town is a HUD-sponsored new city in Arkansas. We were originally scheduled to construct eight homes in this area at approximately $40,000 each and 64 zero lot line homes at about $28,000. We were turned down by three banks and two savings and loans. One savings and loan has finally agreed to commit to two of the eight houses with the understanding that it will not exceed $80,000. No money is to be disbursed in July and only limited finance will be available in August. The balance will be spread out over at least 6 months.

The Foxcroft Townhouse project, a series of medium-priced singlefamily dwellings, estimated at $600,000 in construction costs, has had to be abandoned because of lack of funds.

A 50-unit apartment housing complex of low-income efficiencies and single-bedroom dwellings was to be built on a site of a church in downtown Little Rock. This project, estimated to cost approximately $160,000, has had to be shelved. We still own the land at the cost of $150,000 and have cleared the site, but cannot move.

Countryplace, a townhouse project of 43 medium-priced units, has been shelved recently. Its cost: $2 million.

We also own the property for this project at a cost of $210,000. We are now paying interest on all of this land, but are unable to develop it.

We currently have an option on University Avenue to build a garden type office complex estimated to cost $1.5 million. We are unable to proceed on this project and will lose the option.

We have purchased a 30,000 square feet educational building of a church which was to be converted to office space for a government agency. Since we are unable to secure the $200,000 estimated for remodeling, this project has been temporarily abandoned.

Office and warehouse plans at an estimated cost of $50,000 have been shelved due to no money.

These trends paint a bleak picture for our business. If it continues, and we quite frankly see little relief in sight, housing in the central Arkansas area will suffer a substantial setback.

Growth of commercial office space will face serious cutbacks. Payrolls and the construction-related industries will no doubt suffer similar downturns.

I am presently preparing to go out of State to obtain additional funds. By establishing a Texas corporation in Dallas we hope to borrow funds and channel them into Arkansas.

I have already funded one warehouse project this way. I think this testifies to the fact that I, and others in our business, are willing to pay the money necessary if we can be assured of adequate credit.

I personally am very pessimistic about any early changes in our usury law. I fear that without some immediate relief from a bill such as the one you are proposing the situation can easily worsen and become even more protracted.

Mr. CHERRY. Mr. Chairman, I am Ed Cherry, president of one of the smaller State banks in Arkansas. More specifically located in the Mississippi Delta Craighead County, Jonesboro, Ark.

Our bank, the Bank of Northeast Arkansas, because of location, is devoted to the agricultural lending function as well as commercial and consumer functions of credit.

We are fortunate in that we are surrounded by land which is suited to the production of cotton, rice, soybeans, wheat, milo and last, but not least, cattle.

Our town is located on the top of Crowley's Ridge and has considerable number of rolling hills devoted to the cattle industry.

We also are pleased to have several industrial plants, namely General Electric, F.M.C. Corporation, Walker Manufacturing Company-a division of Tenneco-Crane Company, Colson Corporation, Wolverine World Wide, Inc., A.D.T., Stor-All Manufacturing Company, and Southern Marketing Affiliates, to name just a few.

These things are all being accomplished with a population of less than 30,000.

These remarks are made only to alert you to the fact that our area even though small is, of necessity, large in credit to many varied corporate businesses as well as large agricultural operations.

One of our largest problems begins in the approval of lines of credit to our crop production people in the early spring of each

year.

We approve their needs at a predetermined interest rate of the

crop year.

Credit demands and rates are reviewed on an annual basis. If an increase is necessary in a line of credit, then the rate is adjusted. to the competitive rate at that particular moment.

From March of this year our rate has remained static while our costs have risen dramatically. If money had remained in our area, if Arkansas was not a capital poor State, if our demands had not been so great, we would have no problem. Quite the contrary is the case today.

Our supply of money has dried to the point of being a mere trickle. We are faced with having to go to the Federal funds market for reserves which in the past two weeks has fluctuated from 123% percent to as high as 1412 percent.

Arkansas has many advantages, the least of which is the 10 percent maximum rate on loans to one and all. If you can tell me how I can loan money at 10 percent if I have paid 12 percent, much less 14 percent, I will return to Crowley's Ridge and stay there forever believing there really is a Santa Claus.

I deeply regret not having had the opportunity of convening the Arkansas State Bank Commission prior to coming here. As chairman of this Commission I would have liked to report the consensus of opinion of our combined body.

Mr. Adams, our Commissioner, was out of the State as well as myself, so it was not possible.

Because of the ability of banks in States to loan at higher rates, we became concerned about how many of our deposits were leaving our bank to out-of-state competition.

This came about by our customer's ability to negotiate higher rate for $100,000 and over certificate of deposits.

When this increase first began, our assets totaled approximately $14 million. In a period of 90 to 120 days we had documented a loss of 700,000 to competition.

This, then, is our plight. If Arkansas bankers' hands are tied, then all should be treated likewise. If there are advantages in New York, then we should have at least an equal fighting chance.

None of us here from Arkansas can predict with any degree of certainty the outcome of our attempt to remove the 10 percent usury law from our antiquated constitution. This will not be known until our November general election.

In my area it is apparent to me that consumer education on this question will be most difficult and is one reason I feel that the successful removal of this law has less than a 50-50 chance. If my opinions are correct, it becomes imperative for something to be done, particularly before another agricultural crop is started. I am not at all certain how all bankers feel about this bill. However, I wish to quote one statement of Edwin Jones, President of First Union Group of St. Louis.

So long as bankers are divided, legislators are reluctant to work for passage of any kind of banking legislation. When bankers unite and speak with one voice, legislators are willing to weigh proposed legislation on its own merit.

Gentlemen, this has merit.

Thank you.

Mr. PENICK. Dr. John Dominick will now speak.

Mr. DOMINICK. Mr. Chairman, my name is John Dominick; I hold the chair of banking at the University of Arkansas.

I appreciate having the opportunity to discuss with you the impact of Arkansas' 10 percent usury ceiling on the Arkansas economy. The 10-percent simple interest limitation was placed in the Arkansas Constitution in 1874. Its purpose was to assure fair and equitable treatment for borrowers.

With the high interest rates of today, the law has become discriminatory-and those whom the law was designed to protect are now hurt the worst.

The 10-percent ceiling is an arbitrary restraint on interstate commerce and it is a threat to the economic viability of the Arkansas

economy.

(1) To be more specific, the 10-percent ceiling has led to an outflow of funds from the State, thereby reducing the availability of loanable funds to consumers, homeowners and businesses.

The money market is probably the most fluid market in the Nation. During times of high interest rates, Arkansas banks cannot compete in this market for funds on a competitive basis. We cannot sell large CD's at 12 percent and then lend the funds at 10 percent and remain profitable. We can't buy Federal funds at rates of 12-16 percent and expand loans at 10 percent.

Arkansas is a capital-poor State. To sustain our rate of growth we have to rely on out-of-State sources of funds. Two of these sources come from out-of-State loans and the sale of loan participations to out-of-State banks.

With a 10-percent ceiling, why would out-of-State banks want to lend in Arkansas? And why would out-of-State banks want to buy participations in Arkansas? They don't-in fact, the situation is just the reverse. Out-of-State banks are selling loan participations to in-State banks at rates of 12 percent and better. Clearly, this reduces the supply of loanable funds to Arkansas residents.

At the end of 1973 I surveyed large Arkansas-based firms to determine the ability of Arkansas banks to service their credit needs. In total, the 47 respondent firms obtained $156.2 million or 80 percent of their bank loans out of State. As a result of borrowing out of State, these firms had to keep most of their deposit balances out of State. In total, this amounted to $50 million or 75 percent of their deposits. This has the effect of reducing the credit base of Arkansas.

(2) When credit is "tight" and rates are high, high risk loans and costly loans are squeezed. This means that consumer loans, mobile home loans, home construction loans, risk capital loans, and loans to marginal borrowers are curtailed.

A survey of Arkansas banks with deposits in excess of $25 million was conducted in June 1974. 92 percent of the respondent banks reported that they had adjusted their loan policies within the past 90 days due to higher rates. This took the form of requiring more security, fewer loans, shorter maturities, higher rejection rates, and higher compensating balances.