The Federal Farm Loan Act as stated in its title is "An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes." Under the terms of the act there is established at Washington a Federal Farm Loan Bureau under the supervision of a Federal Farm Loan Board consisting of five members including the Secretary of the Treasury. Continental United States, excluding Alaska, is divided into twelve districts in each of which is established a Federal Land Bank with principal office located in such city within the district as the board shall designate. The subscribed capital stock of each land bank may be not less than $750,000. The Act further provides that corporations known as national farm loan associations may be organized in any community where ten citizens owning land desire to borrow an aggregate sum of $20,000. New members, who must be applicants for loans, may be admitted to memberships in an association. Each borrower must subscribe to stock of the association to the amount of 5% of his loan, and no more.

Through the national farm loan associations, applications for loans to its members are made to the Federal Land Bank of the district. The limitations on these loans as stated in a circular issued by the Federal Farm Loan Bureau are as follows:

1. No loan may be made except upon the security of first mortgages.

2. The amount of the mortgage can not exceed one-half the appraised value of the land and 20 per cent of the permanent improvements thereon, which must be insured.

3. The proceeds of the loan must be used for the extinguishment of preexisting indebtedness or for productive purposes, which include the purchase of live stock, fertilizers, equipment, and improvements (see sec. 12, subd. 4, Farm Loan Act).

4. Every mortgage must contain an agreement to pay off the debt (principal and interest) in fixed annual or semiannual installments.

5. The amount of each installment may be fixed by the borrower, but can not be less than sufficient to pay off the debt in 40 years, nor greater than to pay it off in 5 years.

6. The rate of interest charged any borrower can not exceed 6 per cent per annum.

7. The borrower can not be called upon to pay the debt except by the installments he originally fixes unless he defaults, but after five years he may pay off the whole or any portion at his option at any installment period. Under the amortization plan the term of the loan and the amount of each installment are relative; determining one fixes the other.

The amount of loan to any one borrower may not be less than $100 nor more than $10,000. The funds of the national farm loan association are invested in stock of the Federal Land Bank and the Land Bank holds the stock as collateral security for the loans made to the members of the association. Loans shall not exceed twenty times the amount of Federal Land Bank stock subscribed by the association. The Federal Farm Loan Board appoints a farm loan registrar in each land bank district to receive applications for the issuance of farm loan bonds. When an application for the issuance of such bonds has been approved by the Federal Farm Loan Board, farm loan mortgages of not less than the amount of bonds to be issued are deposited with the registrar and assigned to him in trust. The bonds authorized are delivered to the land bank and may be sold by it.

It will be seen that as the stock of a land bank owned by a loan association is held as security for all the loans made to members of the association, and as the association endorses the loans, that the members are using their joint credit and are liable for each others loans to the extent of the capital contributed.

To illustrate the manner in which the system works we may assume that a number of citizens of a district form a farm national loan association for the purpose of borrowing a total amount of $50,000 on farm mortgages. They subscribe $2,500 to stock in the association, which is incorporated and issues its stock for the sums contributed. The stock is retained by the association as collateral security for the loans to be made. The association applies to the district Land Bank for the loans desired by its members and which aggregate $50,000.

A report and appraisal of a committee of the association accompanies the applications for the loans. If passed on favorably by the Land Bank, the loans are granted, and at the same time the association subscribes to Land Bank stock to the amount of $2,500, or 5% of the amount to be loaned. The stock is retained by the Land Bank as collateral. The Land Bank may use its own funds to make the loans, and it may deposit the mortgages with the registrar and obtain farm loan bonds. The farm loan bonds are sold to the public thus providing funds which the Land Bank can use for making more loans. Through the medium of the farm loan associations and the Land Banks, and by the issuance and sale of farm loan bonds, funds for mortgage loans on farms flow from investors to farmers.

The stock of a Land Bank subscribed in connection with a mortgage loan is paid and retired when the loan is fully paid as is also a corresponding amount of the farm loan association's stock. Farm loan bonds are paid at maturity by the Land Bank which issued them. If a Land Bank cannot pay its bonds upon liquidation all the other Land Banks are liable for a proportionate amount of the deficit. Farm loan bonds are free from Federal, State and local taxation.

The act also provides that other corporations known as Joint Stock Land Banks may be formed having powers similar to those of Federal Land Banks.