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BORROWING FROM LAND BANKS

8th. This farm, in our judgment, under the management of the applicant,

produce a sufficient revenue

to sustain the family of the applicant and enable him to meet amortization payments as they become due.
9th. The crop yield, as reported by the applicant, was..
% of the average yield in this section. If above or

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12th. Will the applicant accept the loan as recommended?. Based upon the investigation of the property, its earning power under normal conditions, the solvency, character, and qualifications of the applicant, I recommend that a loan be granted for an amount not to exceed The foregoing is a report of an investigation made the

day of.......

192

race.

Investigator for Loan Committee.

We, the Loan Committee of the National Farm Loan Association, have carefully considered this application and the report of our Investigator, or have personally investigated the security, and recommend that a loan be granted for an amount not to exceed..

No member of this committee nor any person who made the investigation is interested, directly or indirectly, in the loan Bought by the within-named applicant,

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The undersigned, Secretary-Treasurer of the within and above named National Farm Loan Association, hereby certifies that the Board of Directors of said association by a favor ble vote of a majority of the entire directorate, at the casting of which vote no interested director participated in any manner, has approved and recommended to the Federal Land Bank of a loan not exceeding 3.. to the within-named applicant on the land offered in said application, and I further certify that said applicant is a charter member of or has been admitted to membership in said association by a two-thirds, or more, vote of the Board of Directors.

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183

loan, but he is paid all the dividends which accrue and are payable while the stock is outstanding. When the loan is paid the stock is retired at par, one share for each one hundred dollars. A part of the loan can be used to pay for the stock purchased, for the actual cost of appraising and determining the title, and for the legal fees and recording charges imposed by the state.

If there is no farm loan association in the locality, ten or more farmers who wish to borrow not less than $20,000 may unite to form an association. Not less than five directors are chosen and these elect a president, vice-president, secretary-treasurer, and a loan committee of three members. All except the secretary-treasurer must be bonafide residents of the territory in which the association is authorized to do business, and serve without pay unless the Federal Farm Loan Board permits salaries. The loan committee investigates each loan and approves it in writing, an affidavit is made that every requirement has been met, and a subscription to the stock of the Federal land bank of that district is made of 5% of the amount to be borrowed. Upon receiving the articles of association, the affidavit, and the stock subscription, the directors of the Federal land bank send an appraiser to investigate the solvency of the applicants, their character, and the value of their lands, whereupon the Federal land bank sends the application and all papers with their recommendation to the Federal Farm Loan Board, which has the authority to grant a charter to the applicants. It is thus seen that not only do the borrowers buy stock in the association, but that the association must buy a like amount of stock in the Federal land bank of the district. Upon this bank stock the association receives all dividends which accrue and are payable, but it is retired when the corresponding mortgage loan is paid and the borrower's stock in the association is retired.

BORROWING FROM LAND BANKS

185

After an association is organized a new borrower's application is first passed on by the loan committee and the directors of the loan association. If favorably recommended, it goes to the Federal land bank who refer the matter for investigation to one of their own appraisers before deciding upon a loan. If the loan is approved, the funds are sent to the association, which pays them to the borrower upon the receipt of a first mortgage duly executed. The principal factor in appraising such land is its earning power for agricultural purposes. A reappraisal is permitted at any time looking toward the grant of an additional loan. If an applicant for a loan knowingly makes a false statement, or a member of a loan committee wilfully overvalues land, he is punishable by a fine of not over $5000, and imprisonment not exceeding one year, or both.

The national farm loan association is a mutual organization of borrowers who by their officers investigate the applications of each other for loans, see that the law is complied with, and approve, or disapprove, the requests for loans to the Federal land bank in whose district the association is. The association must indorse and be liable to the land bank for the payment of each mortgage loan, each shareholder being responsible, equally and ratably, and not one for another, to an extra amount equal to the stock owned.

The interest charge (no commissions or extras are permitted, except the actual cost of appraising and determining the title, and the legal fees and recording charges of the state) must not exceed 6%, nor more than 1% additional (in Alaska and Porto Rico, 12%) to what the land bank receives for the sale of bonds based upon mortgages; that is, if farm loan bonds are sold at 41%%, the rate to farmers must be no more than 5%. These bonds are free from national, state, and local taxation. They will

therefore be sold at a correspondingly lower interest rate and make the interest charge to the farmer that much less. If when there is no association the Federal land bank uses a state bank to make a loan, a charge for the actual expense of appraising the land, searching its title, and executing the mortgage papers, is allowed and added to the face of the loan to be gradually reduced by amortization payments. The agent bank is allowed 12% a year upon the unpaid principal, as it must indorse and become liable for the loan if it is not paid. This commission is deducted from the dividend which the shares of the borrower in the land bank earn.

The same act provided for the establishment of jointstock land banks (see 221), which are not connected with the Federal land banks and which lend directly to the borrower. The borrower must live in the same state as the bank, or in a contiguous state. There is no restriction as to the use to which the loan is to be put. The individual limit of $25,000 does not apply. The maximum rate of interest is not fixed, but it must not exceed the rate established by their last sale of bonds by more than 1%.

All loans of the Federal land banks provide for amortized repayments running from five to forty (twenty in Alaska and Porto Rico) years; that is, annual or semiannual payments are to be made for the interest and part of the principal, so that the last payment cancels the loan. The loan can be paid off in full after five years. The borrower must carry insurance payable to the mortgagee, as his interest appears, keep the taxes paid, and keep the land free from all liens, under penalty of the entire loan becoming due and payable. Payments, which are past due, carry until paid a simple interest charge of 8% a year.

CHAPTER XII

THE LOANS OF OTHER LENDING INSTITUTIONS

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131. Note and bill brokers. In the large cities some brokers who are experts in judging prime commercial paper are building up a large business in buying and selling it. While many small houses use brokers, it is mainly the large interests. Some brokers require a customer to have at least a half-million of assets. The paper may be the business' own single-name paper—most of it is or notes receivable which have been indorsed. It is issued in denominations of $2500 to $10,000. All paper for brokers must be accompanied by copies of the concern's statement of condition, which should be certified by a C. P. A., and bank and trade references. Banks need only check such paper through trade references and at least two outside banks. It is customary always to employ the same broker. Only a well-known broker who represents the best houses and deals with the best banks should be used. Otherwise one's paper is compromised. The broker may sell on a commission of %% or 14% for three to six months, or he may be powerful enough financially to buy the paper outright. The broker usually sells to the banks without indorsing though he may quietly guarantee it. He usually allows the banker an optional return within ten days.

The use of brokers enables the borrower (1) to have wider borrowing facilities and wider credit, (2) to borrow at lower rates than he can obtain at home, and (3) to keep in reserve his credit at his home bank (this might not be advisable if the bank objects). Banks like to buy such paper (1) for investment if the home demand is slack,

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