A-19752, SEPTEMBER 30, 1927, 7 COMP. GEN. 250

A-19752: Sep 30, 1927

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IS. SO THAT IT WILL BE 2 PERCENTUM PER ANNUM MORE THAN THE DISCOUNT RATE OF THE FEDERAL RESERVE BANK FOR THE DISTRICT IN WHICH THE LENDING OFFICE IS LOCATED AT THE TIME OF THE NEW LOAN. CONTAINS THE FOLLOWING PROVISION: "/I) THE DIRECTOR OF THE UNITED STATES VETERANS' BUREAU IS AUTHORIZED. TO MAKE LOANS TO VETERANS UPON THEIR ADJUSTED SERVICE CERTIFICATES IN THE SAME AMOUNTS AND UPON THE SAME TERMS AND CONDITIONS AS ARE APPLICABLE IN THE CASE OF LOANS MADE UNDER THIS SECTION BY A BANK. EXCEPT THAT THE RATE OF INTEREST SHALL BE 2 PERCENTUM PER ANNUM MORE THAN THE RATE CHARGED AT THE DATE OF THE LOAN FOR DISCOUNT OF NINETY-DAY COMMERCIAL PAPER UNDER SECTION 13 OF THE FEDERAL RESERVE ACT BY THE FEDERAL RESERVE BANK FOR THE FEDERAL RESERVE DISTRICT IN WHICH IS LOCATED THE REGIONAL OFFICE.

A-19752, SEPTEMBER 30, 1927, 7 COMP. GEN. 250

VETERANS' BUREAU - ADJUSTED COMPENSATION - LOANS TO VETERANS - EXTENSIONS AS THE AGREEMENT BETWEEN THE VETERANS' BUREAU AND THE VETERANS PROVIDING FOR AUTOMATIC EXTENSION OF NOTES COVERING LOANS MADE BY THE BUREAU, WITH THE ADJUSTED SERVICE CERTIFICATES AS SECURITY, AND PROVIDING FOR ADDING THE ACCRUED INTEREST TO THE OLD PRINCIPAL TO MAKE A NEW PRINCIPAL EACH YEAR, IS, IN EFFECT, THE CREATION OF A NEW OBLIGATION EACH YEAR, AND, THEREFORE, A NEW LOAN EACH YEAR, THE "RATE OF INTEREST FIXED BY LAW" WITHIN THE MEANING OF THE AGREEMENT MUST BE DETERMINED AS OF THE DATE OF THE BEGINNING OF EACH LOAN YEAR, IN ACCORDANCE WITH THE STATUTE, SO THAT IT WILL BE 2 PERCENTUM PER ANNUM MORE THAN THE DISCOUNT RATE OF THE FEDERAL RESERVE BANK FOR THE DISTRICT IN WHICH THE LENDING OFFICE IS LOCATED AT THE TIME OF THE NEW LOAN.

COMPTROLLER GENERAL MCCARL TO THE DIRECTOR, UNITED STATES VETERANS' BUREAU, SEPTEMBER 30, 1927:

CONSIDERATION HAS BEEN GIVEN TO YOUR LETTER OF SEPTEMBER 1, 1927, AS FOLLOWS:

SECTION 502 OF THE WORLD WAR ADJUSTED COMPENSATION ACT, AS AMENDED BY ACT OF CONGRESS MARCH 3, 1927, CONTAINS THE FOLLOWING PROVISION:

"/I) THE DIRECTOR OF THE UNITED STATES VETERANS' BUREAU IS AUTHORIZED, THROUGH SUCH OFFICERS AND AT SUCH REGIONAL OFFICES, SUBOFFICES, AND HOSPITALS OF THE UNITED STATES VETERANS' BUREAU AS HE MAY DESIGNATE, AND OUT OF THE UNITED STATES GOVERNMENT LIFE INSURANCE FUND ESTABLISHED BY SECTION 17 OF THE WORLD WAR VETERANS' ACT 1924, AS AMENDED, TO MAKE LOANS TO VETERANS UPON THEIR ADJUSTED SERVICE CERTIFICATES IN THE SAME AMOUNTS AND UPON THE SAME TERMS AND CONDITIONS AS ARE APPLICABLE IN THE CASE OF LOANS MADE UNDER THIS SECTION BY A BANK, AND THE PROVISIONS OF THIS SECTION SHALL BE APPLICABLE TO SUCH LOANS; EXCEPT THAT THE RATE OF INTEREST SHALL BE 2 PERCENTUM PER ANNUM MORE THAN THE RATE CHARGED AT THE DATE OF THE LOAN FOR DISCOUNT OF NINETY-DAY COMMERCIAL PAPER UNDER SECTION 13 OF THE FEDERAL RESERVE ACT BY THE FEDERAL RESERVE BANK FOR THE FEDERAL RESERVE DISTRICT IN WHICH IS LOCATED THE REGIONAL OFFICE, SUBOFFICE, OR HOSPITAL OF THE UNITED STATES VETERANS' BUREAU AT WHICH THE LOAN IS MADE.'

THE VETERAN'S NOTES, EXECUTED WHEN LOANS ARE MADE PURSUANT TO THE ABOVE STATUTE, CONTAIN THE FOLLOWING CLAUSE:

"ONE YEAR AFTER DATE OF CHECK ISSUED BY THE VETERANS' BUREAU IN CONSIDERATION OF THIS NOTE, I PROMISE TO PAY TO THE ORDER OF THE DIRECTOR, UNITED STATES VETERANS' BUREAU, AT THE PLACE NAMED ABOVE, --- DOLLARS, FOR VALUE RECEIVED, WITH INTEREST AFTER DATE OF SUCH CHECK AT THE RATE FIXED BY LAW UNTIL PAID. IF THE PRINCIPAL AND INTEREST OF THIS NOTE ARE NOT PAID AT ITS MATURITY, I AGREE TO THE AUTOMATIC EXTENSION OF THE NOTE FROM YEAR TO YEAR FOR PERIODS OF ONE YEAR IN THE AMOUNT OF THE PRINCIPAL PLUS INTEREST TO THE END OF THE IMMEDIATELY PRECEDING EXPIRED LOAN YEAR, WHICH TOTAL AMOUNT SHALL AUTOMATICALLY BECOME A NEW PRINCIPAL EACH YEAR, AND SHALL BEAR INTEREST AT THE RATE FIXED BY LAW UNTIL PAID.

"AS COLLATERAL SECURITY FOR THE PAYMENT OF THE OBLIGATION HEREIN ASSUMED BY ME I HAVE DELIVERED TO AND DO HEREBY PLEDGE WITH THE HOLDER OF THIS NOTE MY ADJUSTED SERVICE CERTIFICATE NO. ------ DATED --------- -, FURTHER IDENTIFIED BY NO. A ------. IF THERE IS ANY PART OF THE OBLIGATION HEREIN ASSUMED, WHETHER PRINCIPAL OR INTEREST, UNPAID AT THE DATE FIXED FOR THE MATURITY OF SAID CERTIFICATE, OR AT THE DATE OF DEATH OF THE MAKER OF THIS NOTE SHOULD HE DIE BEFORE THE DATE FIXED FOR THE MATURITY OF SAID CERTIFICATE, THE AMOUNT OF SUCH INDEBTEDNESS SHALL BE DEDUCTED FROM THE AMOUNT OTHERWISE DUE THE BENEFICIARY UNDER SAID CERTIFICATE AND THE AMOUNT SO DEDUCTED SHALL BE PAID TO THE HOLDER OF THIS NOTE.'

WHEN LOANS HAVE BEEN MADE TO VETERANS IN ACCORDANCE WITH THE PRESENT BUREAU PRACTICE, IF AT THE TIME OF MATURITY, PRINCIPAL AND INTEREST ARE NOT PAID, AUTOMATIC EXTENSION OF THE NOTE WILL BE GRANTED AT THE END OF EACH YEAR, PURSUANT TO THE AGREEMENT IN THE NOTE. HOWEVER, AT THE TIME OF EXTENSION IT PROBABLY WILL BE FOUND THAT THE RATE OF INTEREST BEING CHARGED BY THE BUREAU WILL BE DIFFERENT FROM THE RATE CHARGED AT THE TIME THE ORIGINAL NOTE WAS MADE, DUE TO FLUCTUATION IN THE DISCOUNT RATE OF FEDERAL RESERVE BANKS IN THE VARIOUS DISTRICTS.

WITH REFERENCE TO LOANS MADE BY BANKS IT SHOULD BE OBSERVED THAT WHEN THE BUREAU REDEEMS THE NOTE AFTER THE VETERAN HAS FAILED TO PAY PRINCIPAL AND INTEREST AT MATURITY, SECTION 502 (C) OF THE WORLD WAR VETERANS' COMPENSATION ACT PROVIDES FOR THE PAYMENT OF THE RATE OF INTEREST FIXED IN THE NOTE UNTIL IT HAS BEEN CANCELLED AND THE BANK HAS BEEN PAID BY THE BUREAU. IT IS THUS APPARENT THAT THE STATUTE PRESERVES THE ORIGINAL RATE OF INTEREST ON NOTES MADE TO BANKS WHICH ARE NOT PAID AT MATURITY AND ARE REDEEMED BY THE BUREAU.

IT MAY BE ARGUED THAT WHERE A LOAN IS MADE BY THE BUREAU AND EXTENDED AUTOMATICALLY UNDER THE EXPRESS EXTENSION AGREEMENT CONTAINED IN THE NOTE, WHICH PROVIDES THAT THE TOTAL AMOUNT OF THE PRINCIPAL AND INTEREST SHALL BECOME AUTOMATICALLY A NEW PRINCIPAL AND BEAR INTEREST AT "THE RATE FIXED BY LAW" UNTIL PAID, THESE WORDS,"AT THE RATE FIXED BY LAW" REFER TO THE ORIGINAL RATE FIXED BY LAW RATHER THAN TO THE RATE FIXED BY LAW AT THE TIME OF THE EXTENSION. IF THIS VIEW IS NOT ADOPTED, THEN WHEN AN OLD LOAN IS EXTENDED IF THE RATE OF INTEREST ON THE EXTENSION IS TO BE CHANGED TO CONFORM WITH THE RATE THEN BEING CHARGED ON NEW LOANS, NOT ONLY WILL THERE BE ADMINISTRATIVE DIFFICULTY IN MAKING ADJUSTMENT FROM YEAR TO YEAR, BUT THE CONSEQUENT EFFECT WILL BE THAT THE MAKER OF THE NOTE, UNLESS HE KEEPS IN TOUCH WITH THE MONEY MARKET, WHEN HIS NOTE IS EXTENDED AUTOMATICALLY, WILL NOT KNOW WHAT AMOUNT OF INTEREST HE IS ACTUALLY PAYING THEREON.

THE FOLLOWING QUESTION IS THEREFORE PRESENTED: IF IT APPEARS AT THE TIME OF THE AUTOMATIC EXTENSION BY THE BUREAU OF THE VETERANS' NOTES COVERING LOANS MADE BY THE BUREAU, WITH ADJUSTED-SERVICE CERTIFICATE AS SECURITY, THAT THE DISCOUNT RATE OF 90-DAY COMMERCIAL PAPER FOR THE FEDERAL RESERVE BANK OF THE FEDERAL RESERVE DISTRICT IN WHICH THE LENDING BUREAU OFFICE IS LOCATED IS NOT THE SAME AS AT THE TIME OF THE ORIGINAL LOAN OR PREVIOUS EXTENSION, SHALL THE AUTOMATIC EXTENSION BEAR INTEREST AT THE SAME RATE AS THE ORIGINAL NOTE, OR SHALL THE INTEREST RATE BE REDUCED OR INCREASED SO THAT IT WILL NOT EXCEED BY MORE THAN TWO PERCENTUM PER ANNUM THE DISCOUNT RATE OF THE FEDERAL RESERVE BANK FOR THE DISTRICT IN WHICH THE LENDING OFFICE IS LOCATED?

YOUR DECISION AS TO THE QUESTION PRESENTED IS REQUESTED.

THE QUOTED STATUTE, 44 STAT. 1389, AUTHORIZES THE VETERANS' BUREAU TO MAKE LOANS TO VETERANS UPON THEIR ADJUSTED-SERVICE CERTIFICATES IN THE SAME AMOUNTS AND UPON THE SAME TERMS AND CONDITIONS AS ARE APPLICABLE IN THE CASE OF LOANS MADE BY A BANK, EXCEPT THAT A MAXIMUM RATE OF INTEREST IS FIXED FOR LOANS BY BANKS, WHEREAS A DEFINITE RATE OF INTEREST IS FIXED FOR LOANS BY THE BUREAU. SEE QUESTION AND ANSWER 1, DECISION OF MARCH 16, 1927, 6 COMP. GEN. 579, 580. NO EXPRESS PROVISION APPEARS IN THE STATUTE AUTHORIZING EITHER A BANK OR THE VETERANS' BUREAU TO EXTEND OR RENEW A LOAN UPON ITS MATURITY, AND CONSEQUENTLY NO EXPRESS PROVISION APPEARS FIXING THE RATE OF INTEREST DURING ANY SUCH EXTENSION OR RENEWAL. BUT THE AUTHORITY TO EXTEND A LOAN FROM MATURITY MAY BE CONSIDERED AS GRANTED A BANK IN THE PROVISION APPEARING IN SECTION 502 (C) OF THE WORLD WAR ADJUSTED COMPENSATION ACT OF MAY 19, 1924, 43 STAT. 126, THAT "THE BANK HOLDING THE NOTE AND CERTIFICATE MAY, AT ANY TIME AFTER MATURITY OF THE LOAN BUT NOT BEFORE THE EXPIRATION OF SIX MONTHS AFTER THE LOAN WAS MADE, PRESENT THEM TO THE DIRECTOR.' THAT IS TO SAY, THE AUTHORITY GRANTED A BANK TO DELAY PRESENTING A NOTE TO THE VETERANS' BUREAU FOR PAYMENT MAY REASONABLY BE CONSIDERED AS AUTHORIZING A CORRESPONDING EXTENSION OF TIME FOR PAYMENT OF THE LOAN BY THE VETERAN. AND THE STATUTE SPECIFICALLY FIXES THE RATE OF INTEREST DURING THE PERIOD OF DELAY IN PRESENTING THE NOTE TO THE BUREAU FOR PAYMENT, AND CONSEQUENTLY DURING ANY EXTENSION GRANTED BY THE BANK TO THE VETERAN, "AT A RATE FIXED IN THE NOTE UP TO THE DATE OF THE CHECK ISSUED TO THE BANK.'

THEREFORE, IF THE AGREEMENT ENTERED INTO BETWEEN THE VETERANS' BUREAU AND THE VETERAN HAD ACTUALLY CONSTITUTED AN AGREEMENT FOR EXTENSION OR RENEWAL FROM YEAR TO YEAR OF THE SAME OBLIGATION, THERE MIGHT BE MERIT IN THE CONTENTION OF THE BUREAU THAT THE RATE OF INTEREST FIXED IN THE ORIGINAL NOTE SHOULD CONTROL THROUGHOUT AND DURING EACH SUCCEEDING LOAN YEAR. BUT THE TERMS OF THE AGREEMENT DO NOT PROVIDE FOR THE EXTENSION OR RENEWAL OF THE ORIGINAL LOAN IN THE SENSE THAT THESE TERMS ARE ORDINARILY UNDERSTOOD IN COMMERCIAL TRANSACTIONS, BUT PROVIDE, IN EFFECT, FOR THE MAKING OF A NEW LOAN ANNUALLY. IT IS PROVIDED THAT THE INTEREST ACCRUED AT THE END OF EACH LOAN YEAR SHALL BE ADDED TO THE PRINCIPAL AND THAT THE AGGREGATE OF THE OLD PRINCIPAL PLUS THE ACCRUED INTEREST SHALL CONSTITUTE A NEW PRINCIPAL FOR THE NEXT LOAN YEAR. EVIDENTLY THIS AGREEMENT WAS ENTERED INTO TO EQUALIZE THE GOVERNMENT'S RIGHTS TO COMPOUND INTEREST ON DELAYED PAYMENTS WITH THOSE AUTHORIZED BY THE ORIGINAL STATUTE WITH RESPECT TO COMPOUNDING INTEREST ON PAYMENTS MADE TO BANKS UPON DEFAULT OF THE VETERAN. THE ADDING OF ACCRUED INTEREST TO THE OLD PRINCIPAL TO MAKE A NEW PRINCIPAL CLEARLY CONSTITUTES A NEW OBLIGATION EACH YEAR. IN THE CASE OF LOWRY NAT. BANK V. FICKETT, 122 GA. 489, 492; 50 S.E. 396, CITED IN 8 CORPUS JURIS 425, IT IS STATED:

AN OBLIGATION IS RENEWED WHEN THE SAME OBLIGATION IS CARRIED FORWARD BY THE NEW PAPER OR UNDERTAKING, WHATEVER IT MAY BE. THERE MAY BE A CHANGE OF PARTIES. THERE MAY BE AN INCREASE OF SECURITY, BUT THERE IS NO RENEWAL UNLESS THE OBLIGATION IS THE SAME. WHAT MAKES THE RENEWAL IS AN EXTENSION OF TIME IN WHICH TO DISCHARGE THE OBLIGATION. IF THE OBLIGATION CHANGES, THERE CAN BE NO RENEWAL, BECAUSE THERE CAN BE NO SUCH THING AS THE REESTABLISHMENT OF AN OLD OBLIGATION BY THE CREATING OF NEW OBLIGATION DIFFERENT IN CHARACTER.

THE ACT OF MARCH 3, 1927, SUPRA, PROVIDES THAT THE INTEREST RATE ON LOANS MADE BY THE VETERANS' BUREAU SHALL BE DETERMINED IN THE MANNER THEREIN PROVIDED AS OF "THE DATE OF THE LOAN.' AS THE AGREEMENT BETWEEN THE VETERANS' BUREAU AND THE VETERAN CLEARLY PROVIDES FOR A NEW LOAN EACH YEAR, RATHER THAN FOR THE EXTENSION OR RENEWAL OF THE ORIGINAL LOAN, THE INTEREST RATE MUST BE DETERMINED AS OF THE DATE OF THE BEGINNING OF EACH LOAN YEAR IN ACCORDANCE WITH THE STATUTE, SO THAT IT WILL BE 2 PERCENT PER ANNUM MORE THAN THE DISCOUNT RATE OF THE FEDERAL RESERVE BANK FOR THE DISTRICT IN WHICH THE LENDING OFFICE IS LOCATED AT THE TIME OF THE NEW LOAN.