A-74701, OCTOBER 6, 1936, 16 COMP. GEN. 336

A-74701, OCTOBER 6, 1936, 16 COMP. GEN. 336

FEDERAL HOUSING ADMINISTRATION - LOANS - DEFAULT - REIMBURSEMENT OF LENDING INSTITUTIONS FOR LOSSES SUSTAINED MODERNIZATION LOANS MADE BY FINANCIAL INSTITUTIONS, INSURED BY THE UNITED STATES AGAINST LOSS UNDER THE PROVISIONS OF SECTION 2 OF THE NATIONAL HOUSING ACT OF JUNE 27, 1934, 48 STAT. 1246, MAY, UPON DEFAULT OF THE BORROWER, BE TREATED AS LOSSES FOR THE PURPOSE OF REIMBURSING THE LENDING INSTITUTIONS THE ENTIRE UNPAID BALANCES IN CASES WHERE IT IS CLEAR THAT THE ENTIRE UNPAID BALANCES WILL BE A CLAIM AGAINST THE GOVERNMENT, PROVIDED THE NOTES OR OTHER EVIDENCES OF INDEBTEDNESS, AND ANY SECURITY, ARE ASSIGNED TO THE UNITED STATES.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE ADMINISTRATOR, FEDERAL HOUSING ADMINISTRATION, OCTOBER 6, 1936:

THERE HAS BEEN RECEIVED YOUR LETTER OF AUGUST 13, 1936, AS FOLLOWS:

REFERENCE IS MADE TO YOUR OFFICE LETTER OF MAY 22, 1936, A-74701, CONCERNING THE PAYMENT OF INSURED LOSSES UNDER TITLE I OF THE NATIONAL HOUSING ACT, IN CONNECTION WITH INSTALLMENT NOTES WHICH DO NOT PROVIDE FOR THE ACCELERATION OF MATURITY ON DEFAULT.

THE REGULATIONS OF THE FEDERAL HOUSING ADMINISTRATION PROVIDE THAT AN INSTITUTION MAY APPLY FOR REIMBURSEMENT UNDER THE PROVISIONS OF THE CONTRACT OF INSURANCE AS SOON AS THE NOTE BECOMES 60 DAYS IN DEFAULT, THE PERIOD IN WHICH APPLICATION MAY BE MADE BEING LIMITED TO 13 MONTHS FROM DEFAULT UNLESS COLLECTIONS ARE SUFFICIENT TO JUSTIFY EXTENSION. EARNED CHARGES AT THE FULL RATE CALLED FOR IN THE OBLIGATIONS ARE ALLOWED TO THE DATE OF DEFAULT AND INTEREST AT 6 PERCENT FROM THE DATE OF DEFAULT TO THE DATE OF APPROVAL OF THE APPLICATION. DEFAULT FOR THE PURPOSE OF THIS CALCULATION HAS BEEN DEFINED IN THE REGULATIONS AS THE DATE OF THE FIRST REGULAR INSTALLMENT FOR WHICH FULL PAYMENT HAS NOT BEEN RECEIVED.

IN SUBMITTING ITS PROOF OF LOSS, THE INSTITUTION IS REQUIRED TO GIVE COMPLETE ASSIGNMENT OF THE OBLIGATION IN ORDER THAT THE COLLECTION EFFORTS OF THE FEDERAL HOUSING ADMINISTRATION MAY NOT BE HAMPERED. UNDER YOUR DECISION IT WOULD APPEAR THAT THE FEDERAL HOUSING ADMINISTRATION COULD PAY ONLY THE INSTALLMENTS AS THEY BECOME DUE AND DECLARED A LOSS. IF THIS PROCEDURE WERE FOLLOWED AND THE FEDERAL HOUSING ADMINISTRATION WERE TO PAY THE MONTHLY INSTALLMENTS AS THEY BECOME DUE, THE GOVERNMENT WOULD BE PAYING THE INTEREST CHARGE THE BORROWER WOULD HAVE PAID IF HE HAD PAID HIS REGULAR INSTALLMENTS AND 6 PERCENT INTEREST FROM DUE DATE TO THE DATE THE VOUCHER IS APPROVED FOR PAYMENT. UNDER THE REGULATIONS OF THE FEDERAL HOUSING ADMINISTRATION THE UNEARNED PORTION OF THE INTEREST ON INSTALLMENTS WHICH ARE NOT DUE IS DEDUCTED FROM THE AMOUNT WHICH WOULD HAVE BEEN PAID HAD THE INSTALLMENTS BEEN MET IN THE REGULAR ORDER. THIS INTEREST RATE IS APPROXIMATELY 9.72 PERCENT.

UNDER YOUR PROCEDURE THE FEDERAL HOUSING ADMINISTRATION PAYS THE INCREASED INTEREST RATE, TOGETHER WITH THE EXPENSE OF HANDLING CASES IN CONNECTION WITH EACH INSTALLMENT AS IT BECOMES DUE AND PAYABLE, WITH A CORRESPONDING ANNOYANCE AND DISSATISFACTION TO THE INSURED INSTITUTION WITH THE PROGRAM OF THE FEDERAL HOUSING ADMINISTRATION. THE CONTRACT OF INSURANCE WITH THE INSURED INSTITUTION HAS ALWAYS BEEN INTERPRETED TO COVER THOSE LOSSES WHICH ARE ORDINARILY IN COMMERCIAL USAGE CHARGED AGAINST THE RESERVE FOR BAD DEBTS AND TO REQUIRE COMPLETE ASSIGNMENT OF ALL RIGHTS OF THE INSTITUTION AGAINST THE MAKER OF THE OBLIGATION SO AS NOT TO ACT AS A DETRIMENT AGAINST THE UNITED STATES.

IN VIEW OF THE FACT THAT THE INSURED INSTITUTIONS HAVE SUSTAINED A LOSS IN ACCORDANCE WITH COMMERCIAL PROCEDURE, AND IN ORDER TO AVOID FURTHER LOSSES AND INCREASED PAYMENTS FROM THE UNITED STATES, IT IS DESIRED AS A PRACTICAL MATTER, WHEN IT BECOMES APPARENT THAT THERE IS NO HOPE OF OBTAINING FURTHER PAYMENTS FROM THE BORROWER, THAT THE FOLLOWING PROCEDURE BE INSTITUTED AS A BASIS FOR ESTABLISHING THE LOSSES:

1. WHERE THE DEBTOR HAS BEEN ADJUDGED BANKRUPT, EITHER BY VOLUNTARY OR INVOLUNTARY PETITION, HAS EXECUTED AN ASSIGNMENT FOR THE BENEFIT OF CREDITORS, TAKEN ADVANTAGE OF ANY INSOLVENCY LAWS, OR HAS DISAPPEARED FROM THE JURISDICTION AND HIS WHEREABOUTS ARE UNKNOWN, OR WHERE THE DEBTOR IS DECEASED AND THE ESTATE IS APPARENTLY INSOLVENT, THE LENDING INSTITUTION SHALL BE PERMITTED TO MAKE CLAIM FOR THE FULL UNPAID BALANCE OF AN ELIGIBLE OBLIGATION IF ONE OR MORE INSTALLMENTS ARE, AT THE TIME OF CLAIM, SIXTY DAYS OR MORE IN DEFAULT.

2. WHERE THREE OR MORE INSTALLMENTS ARE 60 DAYS OR MORE IN DEFAULT, AND THE COLLECTION EFFORTS OF THE INSURED INSTITUTION DISCLOSE THAT THE DEBTOR HAS REFUSED OR IS UNABLE TO PAY HIS OBLIGATION, THE LENDING INSTITUTION SHALL BE PERMITTED TO MAKE CLAIM FOR THE FULL UNPAID BALANCE OF THE INSURED OBLIGATION.

3. IN ANY EVENT, WHERE THE PERIOD PRESCRIBED BY REGULATION NO. 15 FOR THE FILING OF CLAIMS IS ABOUT TO EXPIRE, AND REASONABLE EFFORT TO COLLECT HAS BEEN UNSUCCESSFUL IN OBTAINING THE COLLECTION REQUIRED BY SAID REGULATION, THE LENDING INSTITUTION SHALL BE PERMITTED TO CLAIM FOR THE FULL UNPAID BALANCE UNDER ITS CONTRACT OF INSURANCE.

ON ACCOUNT OF THE PAYMENT OF INTEREST IN CONNECTION WITH INSURED LOSSES AND THE NECESSITY FOR SPEEDING COLLECTION EFFORTS, IT IS DEEMED ADMINISTRATIVELY ADVISABLE, IF IN ANY WAY PRACTICABLE, TO PAY THE ENTIRE INSURED LOSS IN ONE SUM SO AS TO RECEIVE COMPLETE AND FULL ASSIGNMENT OF ALL RIGHTS AGAINST THE MAKER IN ACCORDANCE WITH USUAL COMMERCIAL PRACTICE.

IN THE DECISION OF MAY 22, 1936, A-74701, IT WAS POINTED OUT THAT SECTION 2 OF TITLE I OF THE NATIONAL HOUSING ACT OF JUNE 27, 1934, 48 STAT. 1246, AUTHORIZED THE INSURANCE OF FINANCIAL INSTITUTIONS "AGAINST LOSSES WHICH THEY MAY SUSTAIN" ON MODERNIZATION LOANS, AND THAT, ACCORDINGLY, THERE APPEARED NO AUTHORITY FOR REIMBURSING SUCH INSTITUTIONS ON UNMATURED NOTES BECAUSE SUCH NOTES, NOT BEING YET DUE AND PAYABLE, COULD NOT BE REGARDED AS REPRESENTING LOSSES OF THE INSURED INSTITUTIONS. HOWEVER, IN VIEW OF THE CIRCUMSTANCES STATED IN YOUR LETTER, AND HAVING PARTICULAR REGARD TO THE NECESSITY FOR CONSERVING THE INTERESTS OF THE UNITED STATES IN ATTEMPTING PROMPT COLLECTION ON DEFAULTED LOANS (REQUIRED TO BE ASSIGNED TO THE GOVERNMENT UPON REIMBURSEMENT OF THE INSTITUTIONS) IN CASES WHERE THE FACTS CLEARLY INDICATE THAT THE ENTIRE UNPAID BALANCE WILL BE A CLAIM OF THE INSTITUTION AGAINST THE GOVERNMENT, AND, AS THE UNITED STATES IS SUBSTANTIALLY IN THE POSITION OF A GUARANTOR OF SUCH LOANS SO THAT THE INSTITUTIONS ARE NOT REQUIRED TO MAKE ANY SPECIAL EFFORTS TOWARD COLLECTION, BUT MAY FALL BACK ON THE GOVERNMENT AND LEAVE TO THE GOVERNMENT THE WHOLE RESPONSIBILITY FOR COLLECTION, YOU ARE ADVISED THAT THERE WOULD APPEAR NO OBJECTION TO TREATING DEFAULTED LOANS OF THE THREE CLASSES SET FORTH IN YOUR LETTER AS LOSSES FOR THE PURPOSE OF REIMBURSING THE LENDING INSTITUTIONS THE ENTIRE UNPAID BALANCES OF SUCH LOANS, UPON THEIR ASSIGNMENT OF THE NOTES, OR OTHER EVIDENCES OF INDEBTEDNESS, AND ANY SECURITY, TO THE UNITED STATES. VOUCHERS COVERING REIMBURSEMENT OF THE INSURED INSTITUTIONS IN SUCH CASES SHOULD BE SUPPORTED, OF COURSE, BY A STATEMENT OF THE FACTS RELIED UPON TO TAKE THE TRANSACTION OUT OF THE GENERAL RULE THAT UNMATURED NOTES MAY NOT BE RECOGNIZED AS REPRESENTING LOSSES OF THE LENDING INSTITUTION.