IV. OTHER FIRST MORTGAGE SYSTEMS.

State systems. Most of the states that have developed farm loan systems have shown a tendency to follow the federal law in its general outlines. The majority of the states accordingly limit their loans to about 50 per cent of the value of the land, and make no provision for second mortgages. In a number of cases, the states follow the federal system so closely that the net result is duplicated machinery for accomplishing the same purpose.

It has been urged that the states should develop systems that would supplement the federal system and that the state farm loan bureaus are in a peculiarly advantageous position to advance loans on second mortgages because they are in a position to check up local conditions and to make such loans without undue risk. But whatever reasons have been urged for or against existing methods, the fact remains that present state systems frequently duplicate work done by the Federal Loan Board.

The South Dakota constitution provides that "the State or any county or two or more counties jointly may establish and maintain a system of rural credits and thereby loan money and extend credit to the people of this State upon real estate security in such manner and upon such terms and conditions as may be prescribed by general law." (Art. 13, Sec. 1.)

Under this provision a rural credit system was enacted in South Dakota in 1917. (Rev. Code 1919, Secs. 10, 150-10, 173.) And within a two-year period a little more than $10,000,000 was loaned on the farm lands of that state.

The South Dakota law limits the amount that can be loaned to 70 per cent of the appraised value of the land and 40 per cent of the insured value of the improvements. The maximum amount that can be loaned to any one person is $10,000. The interest rate for farm mortgage loans varies from 51⁄2 to 6 per cent. Under the amortization plan of paying the principal, the borrower actually pays 7.26 per cent annually, in two semi-annual payments on the 6 per cent basis, and 6.88 per cent on the 54 per cent basis. Payment at this rate for a period of 30 years pays all the interest and wipes out the principal. A borrower may pay all or any part of his loan on any interest date after 5 years. There are no commissions of any kind to be paid for securing loans and the borrower gets all the money he borrows; none being retained for stock in the farm land bank, as is the case under the federal system. No liability is incurred by the borrower except for his own loan. In case the borrower is unable to meet the interest payments when due, the Farm Loan Board may, in its descretion, defer these payments for

a reasonable length of time. The interest charge on all overdue payments is 8 per cent.

Money loaned under this law may be used for any of the following purposes: (1) To purchase farm land; (2) to purchase equipment, fertilizers, etc., for the proper and reasonable operation of the mortgaged land; (3) for buildings and other improvements on the land; (4) for paying mortgages or other indebtedness incurred for the purposes provided for in the law.

The South Dakota law follows the general plan of the federal act. It has the same general purpose, and it operates practically in competition with the federal farm loan system.

Amendments to the constitution of North Dakota adopted in 1918 opened the way for the development of state farm loans. Sections 182 and 185 as amended provide the basis for the state farm loan system.

Sec. 182, as amended in 1918: "The state may issue or guarantee the payment of bonds, provided that all bonds in excess of $2,000,000 shall be secured by first mortgages upon real estate in amounts not to exceed one-half of its value; or upon real and personal property of state-owned utilities, enterprises, or industries, in amounts not exceeding its value, and provided further, that the state shall not issue or guarantee bonds upon the property of state-owned utilities, enterprises or industries in excess of $10,000,000.

"No future indebtedness shall be incurred by the state unless evidenced by a bond issue, which shall be authorized by law for certain purposes, to be clearly defined. Every law authorizing a bond issue shall provide for levying an annual tax, or make other provision, sufficient to pay the interest semi-annually, and the principal within thirty years from the passage of such law, and shall specially appropriate the proceeds of such tax, or of such other provisions, to the payment of said principal and interest, and such appropriation shall not be repealed nor the tax or other provisions discontinued until such debt, both principal and interest, shall have been paid. . .

Sec. 185 as amended in 1918: "The state, any county or city may make internal improvements and may engage in any industry, enterprise or business not prohibited by Article 20 of the Constitution, but neither the state nor any political subdivision thereof shall otherwise loan or give its credit or make donations to or in aid of any individual, association or corporation except for reasonable support of the poor, nor subscribe to or become the owner of capital stock in any association or corporation."

Pursuant to the authority granted in these amendments to the constitution the state legislature in 1919 established the Bank of North Dakota and also made provision for the issue of real estate bonds based on first mortgages.

The distinguishing feature of the North Dakota law is the state. bank which performs practically the same functions for the state farm. loan system that are performed in the federal system by the federal land bank. Although the bank did not begin business until July 28th, 1919, on December 6th of that year it had made loans aggregating

$1,700,000. Additional loans amounting to $1,300,000 had been approved subject to the borrower furnishing a merchantable title.

In construing section 182 of the constitution as amended, the Supreme Court of the state held that the language of the amended section authorized the issue of $2,000,000 of bonded indebtedness, unsecured except by the faith and credit of the state, in addition to any bonded indebtedness existing at the time of its adoption. (State v. Hall, 173 N. W. 763 (1919). This decision of the Supreme Court, given in mandamus proceedings against the secretary of state to compel him to certify the bonds as within the debt limit, settled the question as to the validity of the bonds, and left the way open for putting the rural credit laws into practical operation.

The state of Oregon adopted a constitutional amendment providing for rural credits in 1916. It furnishes a typical example of legislative details embodied in a state constitution, and reads as follows:

"Constitution, article XI a, Rural Credits, Sec. 1. Notwithstanding the limitations contained in Section 7 of Article XI of this constitution, the credit of the state may be loaned and indebtedness incurred to an amount not exceeding two per cent of the assessed valuation of all the property in the state for the purpose of providing funds to be loaned upon the security of farm lands within the state, subject to the limitations herein contained.

"Sec. 2. The governor, secretary of state, and state treasurer shall constitutute the state land board, which board is hereby authorized and directed to issue and sell or pledge bonds in the name of the state to be known as Oregon farm credit bonds in an amount not to exceed said two per cent of the assessed valuation of all the property in the state, and to place the proceeds in the state treasury in a fund to be known as the "rural credits loan fund."

"Sec. 3. Said bonds shall be issued in denominations of $25.00, $100.00, $500.00, and $1,000.00, and shall be issued in series of $50,000.00, or multiples thereof, drawn to mature in not more than thirtysix years. They shall bear interest at the rate of four per cent per annum and shall be exempt from all taxes levied by the state of Oregon, or any of its subdivisions.

"Sec. 4. Said state land board is authorized and directed to loan the moneys in said rural credits loan fund to owners of farm lands in Oregon upon notes secured by mortgages or deeds of trust constituting first liens on such farm lands in amounts which shall not exceed fifty per cent of the value of such lands, nor $50.00 per acre on such lands, nor less than $200.00 nor more than $5,000.00 to any individual. If pending applications shall at any time exceed the funds available, preference shall be given to loans not exceeding $2,000.00 in amount.

"Sec. 5. Such loans shall not be made except to owners who operate and occupy the lands mortgaged, and shall be made only for the following purposes: (a) The payment for lands purchased; (b) the purchase of livestock and other equipment, and the making of improvements which, in the judgment of said board, will increase the productivity of such lands or add to their value as a farm home in a

degree to justify such expenditure; and (c) for the satisfaction of encumbrances upon such lands, which, in the judgment of said board, were incurred or assumed by said applicant for the aforesaid purposes.

"Sec. 6. Every applicant for a farm loan shall state clearly in his application the purposes for which such loan is desired, and upon its approval by the board this statement shall be deemed a part of the note or contract under which the loan is granted. But no failure to apply such funds to the purposes stated in such application or enumerated herein shall invalidate a loan when once made, nor shall anything herein contained be deemed to prevent any farm owner from selling or leasing lands subject to such encumbrance; but if he shall violate his said contract by applying the moneys borrowed to purposes other than those stated in his application or enumerated herein, or if he shall lease such lands or sell them to any person not fulfilling the conditions and purposes provided for herein, said board is authorized and directed to require the repayment of said loan upon six months notice, and said note or contract shall contain a clause providing therefor.

"Sec. 7. Such loans shall be repaid with interest accruing in semiannual or annual instalments on the amortization plan, such instalments being fixed at such sums as will cover the interest rate and will liquidate the debt in a period to be agreed on between said board and the applicant, such period to be not less than ten nor more than thirtysix years; but any debtor may liquidate any part or all of his indebtedness in amounts of $50.00 or multiples thereof upon any amortization payment date.

"Sec. 8. The rate of interest on loans shall be 5 per cent per annum, provided that in case any series of said farm credit bonds is sold at an average of less than par, the board may charge upon such farm loans as are made from the proceeds of the series so sold below par a rate of interest in excess of 5 per cent, but which shall not exceed by more than 1 per cent the rate which the state must pay for the funds actually obtained from the disposal of its said bonds. The board, however, shall require each applicant to pay an initial charge of 1 per cent of the loan granted, the minimum charge to be $10.00 to cover the cost of appraisal and examination of title.

"Sec. 9. All surplus funds accruing from the operation of the system of rural credits herein provided for, after paying interest accruing on the aforesaid bonds, and all operating and other expenses arising from the administration of said system of rural credits, shall be placed in the state treasury and become a part of a fund to be known as the 'rural credits reserve fund.' Said rural credits reserve fund shall be loaned on farm lands in the manner herein provided for the rural credits loan fund, and the interest accruing from loans made. from said rural credits reserve fund shall be added to it and become part of it. The said rural credits reserve fund shall be irreducible except that it may be drawn upon to reimburse the state for loss incurred in the administration of said system of rural credits.

"Sec. 10. The legislative assembly shall provide in such detail as it shall deem advisable for the carrying out and administering of the

provisions of this amendment, and shall provide adequate safeguards against the use of such loans as an aid to the purchasing and holding of lands for purposes of speculation. Such safeguards shall include clear definitions of the terms 'operate' and 'occupy' used herein. In the absence of such legislation, and subject to the same after its enactment, the state land board shall proceed to administer said system of rural credits under rules and regulations provided by itself, but subject to the provisions herein contained.

"Sec. 11. The provisions of the constitution and laws of Oregon in conflict with this amendment are hereby repealed insofar only as they conflict herewith. The provisions of this amendment shall be selfexecuting, and shall take effect and be in operation sixty days after their approval and adoption by the people of Oregon."

A number of states that have no specific constitutional provision for rural credit systems, have authority to invest state funds in first mortgage loans on farm lands.

The constitution of Minnesota as amended in 1916, provides that the permanent school and university fund of the state may be invested in "first mortgage loans secured upon improved and cultivated farm lands." (Art. 8, Sec. 8.) Such loans may not exceed 30 per cent of the actual cash value of the land mortgaged. No legislation to carry out this provision has been attempted.

In Arizona a constitutional provision requiring the state treasurer to keep certain "moneys invested in safe interest-bearing securities" (Art. 10, Sec. 7) has likewise left the way open for loans, and in 1917 the Arizona legislature made provision for the investment of state funds in first mortgages on farm lands. The loans are made under regulations prescribed by the governor, secretary of state, and state treasurer, and the amount loaned on any farm may not exceed onehalf of the actual valuation.

The farm loan system in Oklahoma is closely connected with the administration of state and school lands. Under article 11, section 6 of the constitution, provision is made for investing permanent common school and other educational funds in first mortgages upon good and improved farm lands. Loans are limited to 50 per cent of the reasonable value of the lands without improvements. In 1919 the legislature made provision for county loan boards, and further prescribed the conditions upon which loans could be authorized on first mortgage security, and also the manner of procuring second mortgages from the home loan fund.

Legislation enacted in Montana in 1915, Chap. 28 and in 1917, Chap. 124 (amended in 1919, chap. 174) makes provision for farm loans on improved farm land, from moneys belonging to the state permanent common school funds and all other permanent state, educational, charitable, and penal institution funds.

Applications for loans on farm lands from the state funds must be made to the secretary of the state board of land commissioners, on forms approved by the attorney-general, and it is the duty of the of the board of land commissioners to fill such applications as rapidly