918T CONGRESS 2D SESSION S. 3828 IN THE SENATE OF THE UNITED STATES MAY 12, 1970 Mr. EAGLETON (for himself, Mr. SPONG, and Mr. TYDINGS) introduced the following bill; which was read twice and referred to the Committee on the District of Columbia A BILL To amend the District of Columbia Cooperative Association Act. 1 2 Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, 3 That section 43 of the District of Columbia Cooperative 4 Association Act (D.C. Code, sec. 29-843) is amended by 5 adding at the end thereof the following new sentence: "The 6 Act of February 4, 1913 (D.C. Code, secs. 26-6017 26-611) (relating to licenses for loaning of money) shall not 8 apply to the legitimate business of associations formed under 9 this Act; and with respect to any contract entered into by 10 any such association in the course of its legitimate business 11 with any of its members under which the association is to 2 1 loan money to its member, chapter 33 of title 28 of the Dis 2 trict of Columbia Code (relating to interest rates) shall not 3 apply to such association and its member." Senator EAGLETON. The Chair wishes to announce at this time that this subcommittee will hold a further hearing on this legislation in the near future to hear the views of the District of Columbia government and anyone else concerned with this matter. Our first witness today is Mr. James K. Smith from Louisville, Ky., STATEMENT OF JAMES K. SMITH, PRESIDENT; ACCOMPANIED BY Mr. SMITH. Thank you, Mr. Chairman. I appreciate the opportunity to testify and for inviting us to be here today. Both of the gentlemen you mentioned in your introduction, Mr. Slatt and Mr. Leatherman, are officers of the kinds of institutions we are concerned with. I am going to refer to National Rural Utilities Cooperative Finance Corp. as CFC. I have a prepared statement that I can give you for the record to relate to the Senate bill we're talking about, S. 3828. I appear here today in my capacity as president of the National Rural Utilities Cooperative Finance Corp., a cooperative association incorporated in April 1969 under the District of Columbia Cooperative Association Act as a nonprofit association. The directors and officers, 22 in number, of CFC representing rural electric systems across the Nation, serve as such without compensation. My occupation is that of general manager of Kentucky Rural Electric Cooperative Corporative systems in my State, located in Louisville where I reside. I have served in this capacity since 1948. Prior to that I was engaged in the management of a local rural electric system in Kentucky. I have spent most of my adult life in the rural electrification program and have found my work rewarding and stimulating. In the interest of conserving the committee's time, I offer for insertion in the record of the hearing, following my remarks, a document entitled "Some Facts About CFC," and a paper explaining why CFC requests enactment of the bill before you today. I should like to quote CFC's purpose as stated in its Articles of Incorporation to provide, secure and arrange financing for its members and patrons as required by them for the planning, initiation and execution of their programs, projects and undertakings conducted in accordance with, and in pursuance of their objectives, under the statutes of their respective places of organization and operation, in the United States of America, its territories and possessions, for the primary and mutual benefit of the patrons of the Association and their patrons, as ultimate consumers. The CFC program is national in scope. It is designed to support the national objective of the Rural Electrification Act of 1936legislation which has made possible the remarkable advance in rural electrification since its enactment. The budget crunch in recent years has made it necessary for the rural electric systems to explore sources of financing supplementing direct REA loans from Treasury appropriations. It is estimated that the rural electric systems, in order to meet the demands for electric energy in their service areas, will in the next 15 years need almost twice as much capital as was injected into the program during its first 35 years. Much of this requirement must still be met by direct low cost, long term, Government financing. This financing will continue to be needed by many systems serving low density, economically disadvantaged areas. CFC offers those systems which are able to bear higher capital costs for all or part of their future capital requirements a means of progressively freeing themselves from their complete dependence on Government financing. CFC financing operations must be closely coordinated with those of REA. A substantial part of CFC loans will consist of participations in loans jointly made with REA. We have already made substantial progress in working out coordination arrangements with REA. In fact, we expect to be ready within the next 6 months to begin our financing operations. CFC was organized under the District of Columbia Cooperative Association Act and is headquartered in Washington. This was in recognition of the need for location in close proximity to the REA headquarters. In the interest of uniformity, we intend to provide in our loan contracts with our member systems, located in 46 States, that the laws of the District of Columbia shall be determinative and controlling of the parties' rights and responsibilities thereunder. Two provisions of the District of Columbia statutes trouble us, and it is these provisions with which this bill deals. One is the 1913 act requiring lenders in the District of Columbia to obtain licenses if interest in excess of 6 percent annually is to be charged. This is commonly known as the "loan shark" law, a label which has obviously distasteful connotations. Its purpose is completely foreign to CFC's objectives and CFC's operations designed to meet this objective. The requirements of the act and the regulations implementing it clearly indicate a design to protect persons borrowing small sums on personal security from exploitation by lenders who, deservedly or otherwise, are labeled "loan sharks." It should not be applied to financial transactions between a cooperative and its members in which there is no reason or opportunity for such exploitation. The District's Cooperative Association Act contains provisions which fully protect cooperative members against the evils which the "loan shark" law seeks to protect against. ** There have already been provided numerous exceptions from the "loan shark" law including the legitimate business of building and loan associations. I think it is relevant that CFC has been exempted by the Securities and Exchange Commission from the registration requirements of the Securities Act of 1933 under a provision exempting "any security issued by a building and loan association * similar institution substantially all of the business of which is confined to the making of loans to members." This action recognizes the similarity between the operations of a building and loan association and a cooperative organization such as CFC. If section 26-610 of the District of Columbia Code which lists the exemptions from the "loan shark" law had incorporated the phrase "and similar institution", I am confident that CFC would have qualified thereunder for exemption. The bill supplies the needed authority for such exemption. The second statute which causes us concern limits the interest rate chargeable in written instruments to 8 percent. This is commonly known as the "usury" law. It too is designed to bar exploitation of borrowers who need protection against exaction of excessive interest charges. In most jurisdictions, such laws are not applicable to corporate borrowing. Here in the District of Columbia, the defense of usury is not available to corporations organized under the Business Corporation Act, and interest at rates higher than 8 percent may be received if contracted for in a jurisdiction where such rate is lawful. The bill makes the "usury" law inapplicable to loan transactions between a cooperative and its members. Their relationship and the provisions of the Cooperative Association Act furnish all the protection a cooperative member needs. In conclusion, we hope that the committee will view this bill as we do, as completely consistent with the public interest and purposes of the lenders licensing and interest laws, and will recognize the incongruity of applying these laws to financial transactions between a cooperative and its members. We ask your favorable early action on the bill. I appreciate the opportunity to state my views on the bill and am ready to respond to questions. We also would like to state that we have met with the House committee today on the bill in the House and we have concurred with an amendment that they have suggested there through the Commissioner's office in the bill which limits it a little more from the standpoint that it now is narrowing it down to the phrase of making the exemption apply to cooperative associations which are engaged in utility operations. Senator EAGLETON. Thank you very much. If you have a more complete statement or other data that you wish to apply for the record we will be pleased to receive that too. Mr. SMITH. I have two documents, one is facts about our organization, CFC and the other is information relative to the bill. Senator EAGLETON. Those documents will be made part of the record. (The documents follow:) SOME FACTS ABOUT CFC A little more than one year ago delegates to the NRECA Annual Meeting in Atlantic City, N.J., voted to establish the National Rural Utilities Cooperative Finance Corporation, or CFC. This new cooperative corporation was created to enable rural electrics to supplement with their own funds and private money market resources the annual appropriation for REA loans at 2 percent interest. CFC thus will provide some of the additional loan funds required to meet the systems' growing capital needs. Outlined below is a brief report on the progress made by CFC during the past year, and what is expected for 1970. 1. Organization.-CFC is a cooperative owned by its participating rural electric systems. It is governed by a 22-member board of directors who were named by the NRECA Board. The next board will be elected by geographic region by the member systems. |