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SEC. 2. Section 12 (f) (1) is amended by striking the word "promptly" in both the first and second sentences, by inserting after the word "default” in the second sentence the words "in the payment of principal or interest,” and by striking the word "it" in the first sentence and inserting in lieu thereof the word “him."

SEC. 3. Section 12 (f) (2) is amended by striking the word “promptly."

SEC. 4. Section 13 (a) is amended by striking the words "section 12” in the first sentence, inserting in lieu thereof the words "this title”, and by inserting the words "in the payment of principal or interest" after the word “default” where it first appears in the first sentence.

STATEMENT OF R. B. MCLEAISH, ADMINISTRATOR, FARMERS' HOME

ADMINISTRATION; ACCOMPANIED BY H. P. SMITH

Mr. McLEAISH. Mr. Chairman, the purpose of H. R. 6914 is to simplify and make more effective the insured farm ownership loan program under title I of the Bankhead-Jones Farm Tenant Act, as amended. As you know, this is the program which helps small farmers acquire or improve family-sized farms.

Under existing provisions of the act, loans must be written with the lender as the mortgagee. It is proposed in this bill to change that provision so that the Government is the mortgagee and the lender only holds the note. The last Congress approved amendments to the Water Facilities Act which authorized the insuring of soil and water conservation loans. Under the simplified provisions of that act, we have been writing all loans with the Government as the mortgagee and it has proved to be much more satisfactory from the standpoint of the lender, the borrower, and the Government. There are several advantages to be gained from this change:

First, it would no longer be necessary to secure the consent of lenders for such actions as subordinations,

partial releases, and actions of this nature. Some lenders object to the necessity for approving these actions. They look upon the loan as fully guaranteed and do not see the necessity for their approval of these actions.

Second, it would be much simpler to assist loans from one lender to another. When the lender is the mortgagee, most States require specific types of assignments which must be recorded in the county in which the property is situated. If the Government were the mortgagee, no assignment forms would be necessary and no recording would be necessary. The lender would merely endorse the note to the purchaser and notify the Government of the transfer. Lenders have no facilities for recording assignments in local communities away from their home office, and for this reason the assignment of mortgages is a very cumbersome process and the effective negotiability of the loans is very much reduced. It would eliminate the recording of assignments and subsequent abstract costs to the bor

rower.

Third, with the Government as the mortgagee, these loans would no longer be classified as real-estate loans in the portfolio of banks and other lending institutions. They would be more properly classified as investments. This is an important difference for lenders who are subject to limitations on the amount of real-estate paper they may hold.

As a part of the change in mortgagees, the provisions for notifying lenders of all defaults by the mortgagor would be modified so that lenders would only be notified of defaults in the payment of prin

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cipal and interest. The act now provides that lenders be notified of all defaults including such things as nonpayment of taxes that are often only of a temporary nature.

The bill would authorize the conversion of insured mortgages now outstanding to the new basis. It would also authorize the conversion of outstanding direct loans to insured loans.

The one additional provision of the bill amends section 12 (f) (1) of the Bankhead-Jones Farm Tenant Act by striking from the first sentence of that section, the word "promptly."

The effect of this change would be to avoid the possible necessity for . transmitting each and every small payment to the lender at the time the payment is received. Some borrowers make payments on their loans at frequent intervals often from milk checks or from the sale of produce from day to day. It is very time consuming and costly for both the Government and the lender to be required to apply these payments exactly at the time received. The proposed amendment would make it possible for the Government to accumulate these payments for a period of perhaps 90 days before applying them to the borrower's account and transmitting them to the lender.

There is one technical change that the committee may desire to consider. This change is on lines 22 and 23, of page 2 of H. R. 6914. The word "therefore" appearing on each line would limit the conversion of outstanding loans to those made or insured prior to the enactment of the bill. This was not our intent when the bill was drafted and submitted to the Congress. Actually, even the loans insured between the date of approval of the bill and the time we could get our regulations out could not be converted. hope the committee will correct this drafting error.

Mr. Chairman, our experience over the last 8 years with this program proves conclusively that the changes proposed in this bill are very desirable and necessary to effective operations. We have had occasion to discuss the program with many lenders and prospective lenders. As a result of these discussions, I am sure that the enactment of this bill would be very helpful and that it would strengthen substantially our ability to assist worthy farm families seeking to purchase farms or to improve those in which they already have an equity. Without these changes, the volume of insured loans may be severely restricted.

The CHAIRMAN. Mr. McLeaish, let me ask you 1 or 2 questions about this. About this provision with reference to permitting of payments. You have said:

The proposed amendment would make it possible for the Government to accumulate these payments for a period of perhaps 90 days before applying them to the borrower's account and transmitting them to the lender.

Mr. McLEAISH. Yes.

The CHAIRMAN. Now what effect, if any, will that have on the interest that the borrower has to pay? Will he be given credit as of the date of payment or actually the day, or the time, that the payment is transmitted ?

Mr. McLEAISH. What we had in mind, Mr. Chairman, is that if the borrower should make a payment in full on his installment, it would be applied immediately; or if he made a payment of at least $200, it would be applied immediately. But if we do have a number of cases

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in which—as we have, to which there have been objections, there have been payments of $10 or $15 or $5 apiece, within a 90-day period—now it is some of those small payments that we propose to hold for 90 days. On a payment of a substantial amount it would be credited immediately.

The CHAIRMAN. Do you have payments that are that small ?

Mr. McLEAISH. We accept them. In other words, when they bring in a payment to the county office—and it costs $8 or $10 to make a credit on the books of the insurance company

The CHAIRMAN. Did we not pass legislation recently that would authorize—perhaps that refers to some other legislation-authorize payment by the mortgagor in 90 days?

Mr. MCLEAISH. Our payments are actually due in

The CHAIRMAN (continuing). I have reference to a bill that will be reported tomorrow, or will be coming up tomorrow.

Mr. HOPE. Today, I believe.
The CHAIRMAN. Today. That authorizes the payments monthly.

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I did not know that you were receiving payments as small as $10.

Mr. McLEAISH. It has been the practice in the Farmers' Home Administration, when they come in, and when they have the money available, to receive it. In other words, some of them get their payments from their milk checks and they get their payments every 2 weeks.

The CHAIRMAN. In other words, the interest that I was talking about would be negligible?

Mr. McLEAISH. It would not be of any consequence; no.
Of course, the larger payments would be of consequence.
The CHAIRMAN. Any further questions?

Mr. JOHNSON. What will the Farmers' Home Administration have? They had a mortgage before. What will they have now?

a Mr. McLEAISH. They will have a mortgage; the Government will have a mortgage. You see, on our direct loans where we take the loan from the appropriated funds, we take the mortgage in the name of the Government.

Mr. JOHNSON. We guarantee the bank now—all you have now is the security for the payment?

Mr. McLEAISH. The bank has the mortgage now and we are proposing by this for the Government to have the mortgage.

The CHAIRMAN. Mr. Hope.

Mr. Hope. Mr. McLeaish, are you having any difficulty getting funds to carry out this program at the present time?

Mr. McLEAISH. Mr. Hope, with the change in regulations that were made last year, we have greatly improved our commitments.

For instance, for the fiscal year 1954, we only had $8.5 million. This year we have loaned $28 million of insured farm ownership loans and around $15 million of water facilities loans. We have found these difficulties, in conferring with lenders, with the Comptroller of the Currency and others, that if we make these changes in the act, it will greatly facilitate our getting additional funds for this purpose.

Mr. HOPE. You feel that you will have ample funds available if you get the amendment that you are requesting at the present time?

Mr. McLEAISII. Yes; we feel so.

Mr. Hope. Let me ask you this question: Are the local lending agencies given the opportunity to participate in these operations?

Mr. McLEAISH. Yes, they are, both local and national, and these amendments are really pointed more to the local lender, because the local bank is limited on the amount of real estate loans they can make, either because of the total of their capital and surplus or because of the total of their time deposits. Now, these loans, under the new proposed formula, would not be classified as real estate loans. . Mr. HOPE. In the areas where you make these loans, have you

had any system whereby you offer the opportunity to buy the note to the local bank first, or how do you handle that?

Mr. McLEAISH. Just to give you an idea of what we do, we do offer the local lenders an opportunity to commit—in other words, instead of selling loan by loan, they are asked for commitments.

Mr. HOPE. Yes.

Mr. McLEAISH. And then we try to sell, to fill the local demand first. Now, to give you an idea, of the total of $45 million that we have insured this year, $18 million was with local lenders and $26 million has been national lenders.

Mr. HOPE. Any local bank or financial institution that wishes to participate in this program has the opportunity to do so?

Mr. McLEAISH. Yes; we welcome it. In fact, we would really appreciate more of that and we feel that with these changes the local lending institutions will come in stronger than they have been able to do in the past.

Mr. HOPE. When I was home last fall, after the Water Facilities Act was passed and provision was made for loans for water facilities, and conservation purposes, I know that a number of the local lending agencies expressed an interest in the matter. I have received no complaints from them, but I just wanted to be sure that they were given the opportunity to participate.

Mr. McLEAISH. Yes, they are.
The CHAIRMAN. Mr. Poage?

Mr. PoAGE. Mr. Chairman, I do not want to condemn the bill, but I do think that what we are actually doing is to wipe out what we knew as the insured program and substituting a program of selling the notes to the Government, with endorsements on it.

You are making the loan and then endorsing the notes.
Mr. McLEAISH. That is what it would amount to, yes.

Mr. Poage. So instead of having the program which originally was contemplated, and I think it was Mr. Pace who wrote this original insurance provision, instead of actually having local agents or national lending agencies going out and making the loans which he contemplated, and it never worked that way, you are making the loans, and then, after you have taken some notes, you put a Government endorsement on it.

That is what you are doing now, is it not, and what is proposed under this bill?

Mr. MCLEAISH. Yes, and that is what we have bene doing all the time. The only thing is that the mortgage went along with the note. There have been a number of transfers of those notes, from one lender to another. When that takes place, Mr. Poage, you have to have an assignment on the record.

Mr. PoAGE. I know.

Mr. McLEAISH. That is quite cumbersome. That goes in the abstract and this borrower is stuck with the abstracting cost.

Mr. POAGE. I think there is much to be said in favor of what

you are suggesting here. I am not criticizing it. I am trying to understand what we are doing, because we had an idea some years ago in this committee, and I think it was suggested by the gentleman from Georgia who was then an active member of this committee, that the thing to do was to do just what we have done on city loans, FHA loans. The FHA doesn't just make the loans but a lot of people have tried to make the loans on city property. They turn the loans over to the FHA and FHA goes over those loans to see whether they meet their requirements and whether or not they will guarantee them.

The CHAIRMAN. Wasn't the one objection we had in mind at the time we authorized these insured loans was to utilize that capital!

Mr. POAGE. I think so. I think the problem is the proposition to do more. To call it an insured program is getting beyond the point. It will not be an insured program but a direct Government lending program and then, after you have made the loans, you are going to try to sell the paper.

Mr. McLEAISH. Actually the way we contemplate it is that we will have the paper sold before we make the loan. That is the way we have operated this past year.

On these FHA loans, the people who make those loans at the outset are people who are geared up to long time lending, such as insurance companies.

We we are aiming at here is to get this to where we can get local banks and institutions of that kind who are not geared to long time lending but who can take this paper without charging it up against their real estate ceiling:

Mr. PoAGE. Doesn't it take it out of the real estate category and have somebody put an endorsement on a real estate note ?

Mr. McLEAISH. The thing that puts it under the real estate category is that the lender takes the mortgage in his name.

Mr. SIMPSON. Doesn't every note in existence and every mortgage in existence state “Pay to Bill Jones or bearer”?

Mr. McLEAISH. The note says so. That takes care of the lender.

Mr. SIMPSON. The person who loans the money in the first instance says "or bearer” and he endorses it and the bearer has it.

Mr. McLEAISH. Yes. Let us say the note is made to the First National Bank of Waco, Tex., or elsewhere. The mortgage is taken to secure that note and the name of the insurance fund.

Mr. Poage. The mortgage is taken in the name of the insurance fund and you turn around and sell the note to the First National Bank. Of course, ordinarily the First National Bank_would get

Mr. McLEAISH. What happens is this: The First National Bank furnishes the money at the outset. We work up the docket, approve the loan, and then send a little notice to the First National Bank to please send us a check for $15,750. That money is put in the local bank. The First National Bank gets the note. They get it at the outset.

Mr. Poage. They get the note?

Mr. McLEAISH. The mortgage to secure that note is taken in the name of the Government to secure the Government for its guarantee.

Mr. Poage. Obviously if the bank were dealing with anybody other than the Government the bank would require that it hold that mort

gage ?

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