A-64000, A-65676, OCTOBER 1, 1935, 15 COMP. GEN. 256

A-64000,A-65676: Oct 1, 1935

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SAID ADMINISTRATION IS NOT REQUIRED OR AUTHORIZED TO COLLECT ON THE ASSIGNED OBLIGATION MORE THAN THE AMOUNT PAID BY IT IN CONNECTION WITH THE INSURED LOAN. IF THE EQUIPMENT AND MACHINERY INVOLVED IN THE SECURED LOAN ARE REPOSSESSED BY THE ADMINISTRATION. AS FOLLOWS: ENCLOSED YOU WILL FIND COPIES OF TWO LETTERS RECEIVED FROM THE NORTH MEMPHIS SAVINGS BANK. THE PROBLEM RAISED MAY BE RESTATED AS FOLLOWS: A NUMBER OF INSURED INSTITUTIONS ARE PURCHASING NOTES COVERING THE INSTALLATION OF ELIGIBLE EQUIPMENT AND MACHINERY FROM DEALERS AND MANUFACTURERS ENGAGED IN MERCHANDISING THE EQUIPMENT. THESE INSTITUTIONS ARE OBTAINING THE LIABILITY OF THE DEALERS OR MANUFACTURERS AS FURTHER PROTECTION. EVERY EFFORT WILL.

A-64000, A-65676, OCTOBER 1, 1935, 15 COMP. GEN. 256

FEDERAL HOUSING ADMINISTRATION - INSURED LOANS - DEFAULT BY BORROWER WHERE A BORROWER HAS DEFAULTED ON A SECURED LOAN FOR ADVANCE OF CREDIT AND THE LENDING BANK HAS ASSIGNED THE OBLIGATION TO THE FEDERAL HOUSING ADMINISTRATION, SAID ADMINISTRATION IS NOT REQUIRED OR AUTHORIZED TO COLLECT ON THE ASSIGNED OBLIGATION MORE THAN THE AMOUNT PAID BY IT IN CONNECTION WITH THE INSURED LOAN, PLUS INTEREST, EXPENSES, ETC., BUT, IF THE EQUIPMENT AND MACHINERY INVOLVED IN THE SECURED LOAN ARE REPOSSESSED BY THE ADMINISTRATION, ANY AMOUNT REALIZED FROM THE RESALE THEREOF IN EXCESS OF THE PAYMENT MADE BY SAID ADMINISTRATION, PLUS INTEREST, EXPENSES, ETC., MAY BE USED TO REIMBURSE THE SURETY OF THE BORROWER AND THE BORROWER.

COMPTROLLER GENERAL MCCARL TO THE ADMINISTRATOR, FEDERAL HOUSING ADMINISTRATION, OCTOBER 1, 935:

CONSIDERATION HAS BEEN GIVEN TO A LETTER OF SEPTEMBER 20, 1935, FROM THE FEDERAL HOUSING ADMINISTRATION, AS FOLLOWS:

ENCLOSED YOU WILL FIND COPIES OF TWO LETTERS RECEIVED FROM THE NORTH MEMPHIS SAVINGS BANK, OF MEMPHIS, TENNESSEE, RAISING A QUESTION WHICH CAN BE ANSWERED ONLY BY A RULING FROM YOU.

THE PROBLEM RAISED MAY BE RESTATED AS FOLLOWS: A NUMBER OF INSURED INSTITUTIONS ARE PURCHASING NOTES COVERING THE INSTALLATION OF ELIGIBLE EQUIPMENT AND MACHINERY FROM DEALERS AND MANUFACTURERS ENGAGED IN MERCHANDISING THE EQUIPMENT. IN ORDER TO PROTECT THEMSELVES FROM DEFAULT BY THE BORROWER, THESE INSTITUTIONS ARE OBTAINING THE LIABILITY OF THE DEALERS OR MANUFACTURERS AS FURTHER PROTECTION, ALONG WITH A CONDITIONAL SALES CONTRACT COVERING THE EQUIPMENT INSTALLED. THE DEALER LIABILITY MAY CONSIST OF AN ORDINARY GUARANTEE RUNNING TO THE INSURED INSTITUTION, OR THE POSTING OF SOME KIND OF SECURITY, SUCH AS A CERTIFICATE OF DEPOSIT REPRESENTING A CERTAIN PERCENTAGE OF THE NOTE OFFERED FOR DISCOUNT. EVENT OF DEFAULT ON THE NOTE, THE NORTH MEMPHIS SAVINGS BANK INTENDS, FIRST, TO ENFORCE THE DEALER'S LIABILITY, AND THEN, TO CLAIM UPON THE FEDERAL HOUSING ADMINISTRATION FOR ANY BALANCE REMAINING DUE. ONCE THE NOTE HAS BEEN ASSIGNED TO THE FEDERAL HOUSING ADMINISTRATION, EVERY EFFORT WILL, OF COURSE, BE MADE TO COLLECT IT. IN CASES WHERE THE FEDERAL HOUSING ADMINISTRATION IS SUCCESSFUL IN COLLECTING THE FULL UNPAID BALANCE OWED BY THE BORROWER, EITHER FROM THE BORROWER, OR BY MEANS OF ENFORCING THE CONDITIONAL SALES CONTRACT, IT MAY RECOVER MORE THAN IT HAS ACTUALLY DISPENSED ON THE CLAIM MADE AND THE COST OF COLLECTING THE NOTE. THE NORTH MEMPHIS SAVINGS BANK WISHES TO KNOW WHETHER THE FEDERAL HOUSING ADMINISTRATION WILL RETURN ANY SUCH EXCESS COLLECTED TO THE DEALER OR MANUFACTURER WHO HAS BEEN REQUIRED BY THE BANK TO MAKE GOOD ON HIS GUARANTEE.

THE FEDERAL HOUSING ADMINISTRATION FEELS THAT ANY SURPLUS SO COLLECTED SHOULD BE USED TO REIMBURSE SUCH DEALERS OR MANUFACTURERS, IF IT IS POSSIBLE UNDER THE LAWS OF THE UNITED STATES. SINCE THERE ARE NO REPORTED DECISIONS OF THE COMPTROLLER GENERAL COVERING A CASE SUCH AS THIS, IT IS DESIRED THAT YOU GIVE YOUR OPINION ON THIS MATTER.

IN THIS CONNECTION, IT SHOULD BE NOTICED THAT UNDER THE GENERAL PRINCIPLES OF LAW, A GUARANTOR, WHO IS OBLIGED TO MAKE GOOD ON HIS GUARANTEE, THEREUPON BECOMES SUBROGATED TO THE SECURITY HELD BY THE PRINCIPAL. THE FEDERAL HOUSING ADMINISTRATION FEELS THAT IT IS IN THE POSITION OF SURETY FOR BOTH THE ORIGINAL BORROWER AND THE CONTRACTOR OR DEALER WHO GUARANTEES OR GIVES SECURITY TO THE LENDING INSTITUTION FOR THE PAYMENT OF THE OBLIGATION BY THE BORROWER. IN THIS SITUATION, THE ADMINISTRATION WOULD BE ENTITLED TO LIQUIDATE ANY SECURITY OBTAINED AND APPLY THE PROCEEDS, FIRST, TO ITS OWN EXPENDITURES, AND ANY EXCESS THEN TO BE PAID TO THE SURETY FOR THE BORROWER, OR TO THE BORROWER.

IT WILL BE APPRECIATED IF AN EARLY REPLY CAN BE HAD ON THIS MATTER, SO THAT THE NORTH MEMPHIS SAVINGS BANK MAY BE ADVISED HOW TO PROCEED ON THE CASE MENTIONED IN ITS LETTER OF SEPTEMBER 14, 1935.

WHERE THE BORROWER HAS DEFAULTED ON A SECURED LOAN FOR ADVANCE OF CREDIT AFTER HAVING MADE CERTAIN INSTALLMENT PAYMENTS THEREON AND THE LENDING BANK HAS ASSIGNED THE OBLIGATION TO THE FEDERAL HOUSING ADMINISTRATION UPON PAYMENT BY SAID ADMINISTRATION OF THE INSURED LOAN TO THE AMOUNT OF-- - BUT NOT IN EXCESS OF--- THE UNPAID INSTALLMENTS, THE FEDERAL HOUSING ADMINISTRATION IS NOT REQUIRED TO COLLECT ON THE ASSIGNED OBLIGATION MORE THAN THE AMOUNT PAID BY IT ON THE INSURED LOAN, WITH INTEREST, PLUS THE COST OF COLLECTION. THE FEDERAL HOUSING ADMINISTRATION IS NOT REQUIRED OR AUTHORIZED TO ACT AS A COLLECTION AGENCY FOR THE SURETY OF THE BORROWER. HOWEVER, IN THOSE CASES WHERE THE EQUIPMENT AND MACHINERY ARE REPOSSESSED BY THE ADMINISTRATION UNDER THE CONDITIONAL SALES AGREEMENT ASSIGNED TO IT AND ARE RESOLD FOR AN AMOUNT IN EXCESS OF THE PAYMENT MADE BY THE ADMINISTRATION PLUS INTEREST AND PLUS COST OF REPOSSESSION, COLLECTION, ETC., THE BALANCE, IF ANY, MAY BE USED TO REIMBURSE THE SURETY OF THE BORROWER THE AMOUNT PAID BY IT AS SUCH SURETY, AND IF THERE IS ANY FURTHER BALANCE SUCH AMOUNT MAY BE PAID TO THE BORROWER--- THERE BEING NOTHING IN THE NATIONAL HOUSING ACT OF JUNE 27, 1934, 48 STAT. 1246, OR THE AMENDMENTS THEREOF, TO INDICATE AN INTENT THAT THE UNITED STATES SHALL RETAIN SUCH EXCESS COLLECTIONS, IF ANY.