B-164118, DEC. 30, 1969

B-164118, DEC. 30, 1969

HOUSING--LOANS--DEFAULT--EXTENSION OF TIME BANK'S CLAIM FOR REIMBURSEMENT OF LOSS SUSTAINED ON NOTE INSURED PURSUANT TO NATIONAL HOUSING ACT -- BANK CONTENDING EXTENSION AGREEMENT VIOLATING APPLICABLE STATUTORY AND REGULATORY PROVISIONS WAS NOT INTENDED TO EXTEND ORIGINAL TERMS OF CONTRACT -- IS DENIED, AS BANK IN EFFECT SEEKS TO MODIFY OR REFORM AGREEMENT TO REFLECT WHAT IT ALLEGES WAS ITS INTENTION AND OTHER PARTIES' UNDERSTANDING, AND NO BASIS EXISTS FOR PERMITTING REFORMATION, OR FOR VIEWING AGREEMENT AS OTHER THAN EXTENSION OF TERM OF OBLIGATION, SINCE AGREEMENT EXTENDS TERM AND MATURITY OF NOTE BY SUSPENDING REGULAR PAYMENTS AND PROVIDING FOR THEIR RESUMPTION AFTER SUSPENSION PERIOD, BUT FAILS TO PROVIDE FOR EARLY MAKE UP OF SET-ASIDE PAYMENTS.

TO MR. LESTER H. THOMPSON:

THIS IS IN RESPONSE TO YOUR REQUEST OF JULY 3, 1969, FOR OUR OPINION ON WHETHER, IN THE SITUATION PRESENTED, YOU MAY PROPERLY CERTIFY A FORWARDED VOUCHER IN THE AMOUNT OF $353.11 TO REIMBURSE THE INTER-CITY BANK, BENTON HARBOR, MICHIGAN, FOR A LOSS SUSTAINED ON A NOTE OF ROGER LEE AND LOIS B. IRVEN WHICH HAD BEEN INSURED PURSUANT TO TITLE I OF THE NATIONAL HOUSING ACT, AS AMENDED (12 U.S.C. 1701 ET SEQ.). THE DOUBT AS TO THE BANK'S ENTITLEMENT TO REIMBURSEMENT FOR ITS LOSS INVOLVES AN APPARENT EXTENSION OF THE TERM OF THE NOTE IN VIOLATION OF APPLICABLE STATUTORY AND REGULATORY PROVISIONS.

THE PERTINENT FACTS AND CIRCUMSTANCES ARE SUCCINCTLY SET FORTH IN YOUR LETTER AS FOLLOWS:

"THE NOTE WAS DATED SEPTEMBER 21, 1967, AND HAD A FACE AMOUNT OF $579.60 AND PROVIDED FOR 60 EQUAL INSTALLMENTS OF $9.66. THE TERM OF THE NOTE COMPUTED FROM SEPTEMBER 22, 1967, THE DATE THE COMPLETION CERTIFICATE WAS SIGNED WOULD THEREFORE BE 5 YEARS AND 14 DAYS. THIS TERM WOULD HAVE BEEN WITHIN THE MAXIMUM (5 YEARS AND 32 DAYS) PERMITTED UNDER THE TERMS OF THE NATIONAL HOUSING ACT IN EFFECT AT THE TIME THE LOAN WAS MADE, SEE SECTION 2 (B) OF THE NATIONAL HOUSING ACT, AS AMENDED (12 U.S.C. 1703 (B)); 24 CFR 201.2 (D) (2) (I).

"ON JANUARY 3, 1969, AN 'EXTENSION AGREEMENT' WAS ENTERED INTO BY THE BORROWERS AND THE INSURED LENDER IN CONSIDERATION OF AN EXTENSION FEE OF $3.85. THE AGREEMENT PROVIDED THAT THE BALANCE THEN DUE ON THE NOTE OF $461.91 WOULD BE PAID IN 48 EQUAL INSTALLMENTS OF $9.66 COMMENCING ON FEBRUARY 4, 1969, AND THEREAFTER ON THE 4TH DAY OF EACH SUCCESSIVE MONTH. BY THESE TERMS THE APPARENT MATURITY DATE OF THE NOTE WOULD BE EXTENDED FROM THE ORIGINAL MATURITY DATE OF OCTOBER 6, 1972, TO JANUARY 4, 1973, AND THE APPARENT TERM WOULD BE INCREASED FROM 5 YEARS AND 14 DAYS TO 5 YEARS, 3 MONTHS AND 14 DAYS. IN VIEW OF THE DECISION MADE IN CASE NO. B- 164118, DATED AUGUST 14, 1968, THE CLAIM WAS DENIED BY REASON OF AN APPARENT VIOLATION OF THE REQUIREMENTS OF SECTION 2 (B) OF THE NATIONAL HOUSING ACT, AS AMENDED (12 U.S.C. 1703 (B)). THE LENDER HAS APPEALED THE DENIAL ON THE BASIS THAT THE AGREEMENT WAS NOT INTENDED TO EXTEND THE ORIGINAL TERMS OF THE CONTRACT BEYOND ITS MATURITY DATE AND THAT IT ACTED IN THE BELIEF THAT IT WAS COMPLYING WITH THE PROVISIONS OF 24 CFR 201.9 (E) OF THE TITLE I REGULATIONS."

THE TITLE I REGULATIONS REFERRED TO STATE THAT AN AGREEMENT TO DEFER PAYMENTS ON A NOTE PREVIOUSLY REPORTED FOR INSURANCE WILL NOT AFFECT THE INSURANCE COVERAGE ON THE LOAN PROVIDED THE AGREEMENT, AMONG OTHER THINGS, "SHALL NOT EXTEND THE FINAL MATURITY OF THE OBLIGATION BEYOND THE MATURITY DATE OF THE OBLIGATION AS PROVIDED BY ITS ORIGINAL TERMS." 24 CFR 201.9 (E).

THERE THUS IS INVOLVED THE QUESTION OF WHETHER THE AGREEMENT OF JANUARY 3, 1969, WHICH BEARS THE CAPTION "PAYMENT EXTENSION AGREEMENT," EXTENDED THE TERM OF THE NOTE IN VIOLATION OF THE STATUTORY AND REGULATORY PROVISIONS, OR MERELY DEFERRED PAYMENTS WITHOUT AN EXTENSION OF THE TERM OR MATURITY OF THE OBLIGATION.

IN ITS LETTER OF JUNE 13, 1969, TO THE ASSISTANT COMMISSIONER COMPTROLLER, FEDERAL HOUSING ADMINISTRATION, THE BANK STATES THAT THE EXTENSION AGREEMENT FORM USED IN THIS CASE "WAS A MEANS ON OUR PART OF 'SETTING ASIDE' TWO (2) MONTHLY INSTALLMENTS FOR THESE CUSTOMERS ON A TEMPORARY BASIS ONLY, AND WAS NOT INTENDED TO EXTEND THE ORIGINAL TERMS OF THE CONTRACT BEYOND ITS MATURITY DATE." THE LETTER FURTHER STATES: "THE EXTENSION FORM IN QUESTION IS ONE WHICH WE USE FOR ALL OTHER TYPES OF LOANS, AND THE CUSTOMERS WERE FULLY ADVISED THAT IN ACCORDANCE WITH FHA REGULATIONS ANY SUCH 'SETTING ASIDE' OF PAYMENTS WOULD HAVE TO BE MADE UP PRIOR TO THE ORIGINAL MATURITY DATE OF THE CONTRACT."

UNFORTUNATELY THE EXTENSION AGREEMENT DOES NOT PROVIDE NOR CALL FOR AN EARLY MAKE UP OF "SET ASIDE" PAYMENTS. RATHER IT EXTENDS THE TERM AND MATURITY OF THE NOTE BY A SUSPENSION OF THE REGULAR MONTHLY PAYMENTS AND PROVIDING FOR THEIR RESUMPTION AFTER THE SUSPENSION PERIOD. THE BANK IN EFFECT SEEKS TO MODIFY OR REFORM THE EXTENSION AGREEMENT TO REFLECT WHAT IT ALLEGES WAS ITS INTENTION AND THE UNDERSTANDING OF THE OTHER PARTIES THERETO.

THE RIGHT TO REFORM AN AGREEMENT SUCH AS HERE INVOLVED WAS CONSIDERED IN OUR DECISION OF AUGUST 14, 1968, TO WHICH YOU REFER, AND AS IN THAT CASE WE DO NOT FIND A BASIS FOR VIEWING THE EXTENSION AGREEMENT AS OTHER THAN AN EXTENSION OF THE TERM OF THE OBLIGATION IN VIOLATION OF THE APPLICABLE STATUTORY AND REGULATORY PROVISIONS.

ACCORDINGLY, THE CLAIM OF THE BANK SHOULD BE REJECTED, AND YOU ARE ADVISED THAT THE VOUCHER INVOLVED, RETURNED HEREWITH TOGETHER WITH YOUR CLAIM FILE, MAY NOT BE CERTIFIED FOR PAYMENT.