required to execute at the same time agreements to pay to the holder of the second mortgage in monthly installments sums sufficient to make payments of interest or principal on first or other prior mortgages. This provision, of itself, is not unjust; but the effect is that the second mortgagee or trustee holds the monthly installments for five months or longer, then pays them to the first mortgagee, without crediting the mortgagor with interest on the payments. It adds usury to usury, in many cases.

By section 26 the second mortgage is required to credit the mortgagor with interest on payments made to the mortgagee not for his own account. The penalty for failure to do so is liability for damages in the amount of 20 times the interest withheld, together with costs, attorney's fee, etc.

Section 27 is also a provision not to be found in the uniform act. It is designed to relieve borrowers or mortgagors in the District of Columbia from unjust charges frequently levied on them now when a first mortgage becomes due, and can not be extended or renewed, but must be replaced by a new first mortgage. In such cases, it is necessary to secure release of second or other inferior mortgages, and I am informed that frequently the holders of such obligations charge "commissions," "bonuses," and other fees for simply releasing their liens until a new first trust is placed of record.

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The effect of section 27 will be to require the owners of subordinate mortgages to release temporarily, to allow the recording of a new first mortgage, provided such new mortgage does not exceed the amount of the superior mortgage indebtedness at the time the inferior mortgage was recorded; and the second or other inferior mortgage shall then be reinstated of record by the recorder of deeds without loss of priority over any other lien, debt, judgment, or claim to which it was superior before such release," etc. The mortgage's charge for making such release is limited by the section to one-half of 1 per cent of the amount of the debt secured ($5 per $1,000), which is ample for the work entailed. The penalty for a greater charge is liability to damages of five times the excess, plus costs, and an attorney's fee. Failure to make release as provided in the section will entitle the mortgagor to recover double the amount of damages occasioned by such failure, together with costs and attorney's fee.

Section 28 provides for liberal construction of the act.

Section 29 provides that existing law shall apply to cases not covered by the

act.

Section 30 exempts from operation of the act mortgages and agreements existing when the act takes effect. This is necessary in order not to impair the obligations of contracts.

Section 31 repeals in general laws inconsistent with the act, and in particular repeals sections 539 and 545 of the District Code. Section 539 reads:

If the length of notice and terms of sale are not prescribed by the mortgage or deed of trust, or be not left therein to the judgment or discretion of the mortgagee or trustee, any person interested in such sale may apply to the court, before such sale is advertised, to fix the terms of sale and determine what notice of sale shall be given."

This is really the basis for present "sudden Its repeal is necessary to give effect to the act.

foreclosures in the District.

Section 545 prescribes commissions to be allowed mortgagees and trustees and is repugnant to section 12 of the bill. Its repeal is necessary therefore. Section 32 of the bill establishes the time when the act shall take effect. The date probably should be not more than 30 days after approval or passage of the act.

OTHER LEGISLATION NECESSARY

While undoubtedly passage of the bill submitted herewith would be of public benefit, it would not lessen one of the greatest evils in the mortgage-loan business as at present conducted. That evil is the levying of extortionate and oppressive costs upon the borrower of money secured by second or inferior deeds of trust on real estate. Whereas the commission on a first-trust loan may be as low as 2 per cent; it is doubtful whether any considerable number of second-trust loans are made at a less rate of commission than 20 per cent; and discounts (representing commissions or bonuses) range up to 50 per cent and more. Such transactions are in their essence usurious and against public policy, for they prevent the acquisition of homes by a large number of people; and they even prevent the building of homes and apartments by men who would otherwise engage in that business or expand their activities. because building operations can not be profitably conducted when finance charges are excessive.

There is need in Washington for large-scale building operations, particularly to create homes for the lower-paid Government employees, low-wage laborers, and for the negro population now largely housed in shacks and surroundings that are a disgrace to the capital of a great Nation. There have been many failures among operative builders, however, for the reason that finance charges have consumed profits and capital invested, these charges usually taking the form of discounts on second-trust paper.

The usurious transactions are usually disguised by making pretended sales of notes embodying the excessive commission to an employee, associate, lawyer, or affiliated close corporation. However, even if usury could be established by legal proof, the only penalty provided by present statutes applicable to real-estate mortgage transactions (Sec. 1180, et seq., District Code, 1924) is forfeiture of the interest, and possibly only the excess interest.

The only other deterrent provision of present law is section 1359 of the District Code, reading:

"The title of a person who negotiates an instrument is defective within the meaning hereof when he obtained the instrument or any signature thereof by fraud, duress, or force and fear, or other unlawful means, or for any illegal consideration, or when he negotiates it in breach of faith or under such circumstances as amount to a fraud."

This is part of the negotiable instruments law of the District.

The following is quoted from the report of the grand jury to the Chief Justice of the Supreme Court of the District of Columbia under date of July 1, 1929:

"At present, according to our information, there exists no effective penal statute to enforce the needed prohibition against usury in the District of Columbia. The local statute, as set forth in section 1180 of the District Code, contains no penalty for usury but the forfeiture of the whole of the interest. The prohibitive effect of the statute is very slight.

"The so-called loan shark law, being the act approved February 4, 1913 (37 Stat. L. 657), specifically excepts national banks, licensed bankers, trust companies, savings banks, building and loan associations, and real-estate brokers. and we find that by the very simple subterfuge of procuring licenses as realestate brokers, persons are able to evade the penalties of this law. The situation that permits this evasion of the law should be remedied. This evasion is commonly practiced.

"Investigation was also had into the lending of money on real estate and, due to the peculiar situation with reference to this subject, it was brought out that in certain particular cases borrowers are required to pay exhorbitant amounts to procure loans. The many ramifications of this phase of the subject prompted your grand jury to invite practical real-estate brokers and banking officials to appear before the grand jury, and their suggestions were found most helpful. While no specific recommendation is made in connection with this phase of the subject, the cooperation of the local real-estate board and that offered by the local Bankers' Association, together with the grand jury to follow this body, should successfully formulate practical suggestions for remedying this situation."

Despite the optimism evidenced by this report as to the manner of dealing with the situation, I have not attempted to devise a law prohibiting usurious real-estate transactions. It would be comparatively easy to write a bill based on the present legal limitations of interest in the District (6 per cent and 8 per cent by written contract); limiting commissions, bonuses, attorney's fees, expenses, discounts, etc., and prescribing penalties of fines and imprisonment, including penalties for conspiracy to evade the law.

However, it is my opinion that sufficient information is not now available to furnish a sound basis for a bill that would be useful, helpful, and effective. Before any attempt is made to draft legislation to curb excessive real-estate financing charges, it seems to me necessary to determine, among other things(a) What rates and charges builders are paying now, and why.

(b) What profits banks, loan companies, brokers, and others are making on second-trust and other inferior-lien paper, over a period of years.

(c) Who is engaged in the financing operations (my information is that some of those active in making first loans are also engaged in the secondtrust business, in an "under cover" way).

(d) Actual building costs in Washington in relation to prices of property. (e) What method of second-trust financing has been successful elsewhere (I understand there are second-trust building and loan associations, for instance, in some States).

It may be that the best method of dealing with the situation, from the standpoint of the public interest, would be to permit a higher legal rate of interest, say 10 per cent with a limited commission, on second-trust and other junior real-estate paper, permitting the formation of amply financed secondtrust companies. Such a law would include provisions placing all brokers, attorneys, real-estate agents or others who arrange for loans on real estate under a license system, licenses to expire annually, and to be revocable at any time for violation of the usury statute. Under such a law, record books, correspondence, etc., would be open to inspection by the real estate commission or securities commission; and there would be a provision requiring the licensee to furnish the borrower with an itemized statement of expenses, commissions, etc., connected with the transaction, in a form approved by the supervising authority. There would, of course, be severe penalties for violation of the usury statute, by fine and imprisonment.

The problem is one on which suggestions might be asked from the bar associations, the investment bankers, the real-estate board, operative builders association, and others. But, primarily, the need is for facts concerning the present situation, before effective and beneficial legislation can be drafted. The subcommittee may not desire to proceed in this way at present. Possibly action could profitably be deferred until the subcommittee also has before it for action the bills which I understand will be presented by interested parties allowing a greater amount of interest on what are known as "small loans," treating the problem as a whole, with a usury statute broad enough to cover the various classes of loan transactions, real estate, personal, chattel, character, and other loans.

Valuable information could be furnished, no doubt, by the Bureau of Building and Housing of the Department of Commerce, which I understand has been studying home financing in conjunction with the National Association of Real Estate Boards.

The subcommittee may also wish to give consideration to the requirement, by law, of the statement in certificates of title furnished by title companies of the provisions of the zoning law and regulations applying to the property certified. This would prevent fraud on prospective purchasers who are unaware of restrictions, and intend to use the property for a purpose prohibited by the zoning regulations. Such concealments and frauds are sometimes practiced by unscrupulous real-estate operators on investors from small towns and other places where there are no zoning restrictions, or where restrictions of such character are stated in abstracts of title and title certificates. A member of the Board of Commissioners of the District (Mr. Taliaferro) has several times recommended the statement of zoning restrictions in title certificates, but the suggestion has not been acted upon by the title companies.

I shall be glad to endeavor to furnish whatever additional information the subcommittee may desire.

Very respectfully,

O. H. BRINKMAN.

Mr. BRINKMAN. The general form of trust deed in the District of Columbia provides that upon default in payment or failure to pay taxes or insurance, interest, or principal, or any default of that character, the trustee shall sell the land and the improvements at public auction at such time and place, upon such terms and conditions, and after such previous public notice, with such postponement of sale or resale as to him shall seem best for the interest of all parties concerned.

In other words, the trustee has full power to sell the property with practically no notice. Such notice as he gives is wholly within his discretion and upon any terms that he sees fit.

And in addition to that he is allowed to collect a commission that is not limited by law. It is usually limited, however, in the trust deed by the lender of the money to 5 per cent.

Another provision of the ordinary trust deed generally used in the District of Columbia is that if the amount that is in default is paid before there has been a sale under the foreclosure the trustee may

collect half of the commission provided in the trust deed, so that he usually can collect about 22 per cent of the debt secured by the trust deed. The result is that it makes it almost impossible in many cases for the borrower of the money, the home owner, to prevent the sale of his property at foreclosure because of this excessive fee.

During the past week a case of that kind came to my attention. A woman, a borrower who had executed a trust deed, owed interest amounting to nearly $300, which was overdue. The property was advertised for sale in one of the local newspapers, and on the day after the notice appeared for the first time she went to the trustee and tendered to him in cash the amount of the interest plus the cost of one day's advertisement, amounting to about $6.40, and asked that the remaining advertisements be canceled and that the foreclosure sale be stopped.

The trustee refused to do that, refused to take the money, and refused to cancel the sale. He continued to advertise the property and attempted to hold a sale under the mortgage.

His refusal was based on the ground that she should also tender to him the amount of his commission under the trust deed of 22 per cent, which in this instance amounted to $225.

In other words, for simply inserting an advertisement in the newspaper of the sale of the property he wanted $225. Of course, it was impossible for her to pay that. She had done everything she could merely to raise the interest which she had tendered him, and he proceeded to sell the property, or attempt to sell it, at a sale.

He also refused to discontinue the advertising of the property and ran up a bill for advertising amounting, I think, to $64.

So that, by reason of the trustee's action, which was based on the trust deed, she would be required to pay, in order to prevent the sale, about $300 more than the interest due, which represented nothing except a strict adherence to the terms of the trust deed.

This is merely one instance of the harsh provisions of the law here, or the lack of law here. Other similar cases have come to my attention, and I am convinced that there needs to be regulation not only of the method of foreclosure but of the fees charged in cases of foreclosure.

Senator BLAINE. I might suggest in connection with that situation, Mr. Brinkman, that on account of the general publicity given to these prospective measures my office has become a veritable centralized point into which these complaints come, and they are so many and so frequent that it is actually an astounding thing.

There is no single week goes by that there is not some widow comes with her complaint, showing the harshness with which the so-called foreclosure proceedings are carried on.

Unprincipled men take advantage of these situations and coerce them into making settlements on rents that these men have collected and appropriated to their own use; coerce them into giving a second and third trust, and they do it by holding over their heads the threat that they will see that the mortgage is foreclosed, or they may be the agent for the mortgagee and actually threaten that it will be foreclosed.

I never went through such a distressing situation as I have gone through on these matters since the question has been called to the public's attention.

These complaints come by letter sometimes, but they more often come by the actual presence of women, principally women, but there are a number of cases of men too, of course. But it does seem that the widows are the ones who are exploited. And so far as I have gone into the matter-I have not gone into the matter closely or thoroughly--I would say that these matters are carried on by men whose acts the local real-estate board would condemn and the bankers would condemn. But there are abroad in this District a great many of the type of men who will exploit people because there is no protection for the mortgagor.

I want to make that statement. I do not want to give testimony before the committee, but that does seem to be the general situation. Go on.

Mr. BRINKMAN. The chairman of the subcommittee has brought to my attention a number of these complaints and I have investigated them and I find that the condition is as stated by the chairman.

Senator BLAINE. Let me say that here is a case just yesterday. A woman has considerable property, a widow, and the real-estate agent, who seemed also to be interested in mortgages, collected the rents, misappropriated them, did not apply them upon the quarterly payments due on the mortgage, and he brought about a notice of sale of the property under the the deed of trust, and then in effect forced the woman to execute a note in settlement of the differences, in a very large sum.

There is not any question in my mind that in this particular case there was a gross fraud perpetrated. If it were not for the general settlement I rather assume there would lie a criminal action for misappropriation of funds.

And then after receiving this trust deed the chances are still very strong that she will have her property sold, although she claims she has an equity of not less than $12.000 in a property that yields $750 a month rental. There seems to be terrible exploitation. I do not know.

Mr. BRINKMAN. In the case that I have mentioned the trustee refused upon my request to even give the name of the original mortgagee or of the present holder of the notes secured by the trust deed, so that it was impossible to go to the holder of those notes or the owner of the indebtedness and make any effort to secure a release from the onerous provisions of the trust deed. The trustee held the sole power apparently to foreclose that mortgage in any way that he say fit, and refused to say who really held the indebtedness. There is no control whatever here over the trustees under the law. They can do just about as they see fit to do.

As I have said, the situation in the District of Columbia is exceptional. It is not the rule in most States. In 28 States foreclosure of mortgages is by action in court which, of course, takes considerable time, and there are only 10 States that foreclose by unregulated power of sale with no redemption period.

Senator BLAINE. Will you name those States?

Mr. BRINKMAN. I can not name them, but they can be found in the 1922 report of the Commissioners on Uniform State Laws in its 1922 handbook, page 200.

And there are only 17 States out of the 48 that have no period of redemption. However, eight of those States provide fore