A-88143, JULY 24, 1939, 19 COMP. GEN. 92

A-88143: Jul 24, 1939

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IS EQUALLY APPLICABLE TO FINANCIAL INSTITUTIONS OPERATING WITH A LARGE NUMBER OF BRANCHES EACH MAINTAINING INDEPENDENT CREDIT AND LOAN OPERATIONS AND GRANTED. KNOWLEDGE OF WHICH IS IN CONSTRUCTIVE POSSESSION OF THE INSTITUTION. 1939: I HAVE YOUR LETTER OF JULY 7. AS FOLLOWS: REFERENCE IS MADE TO YOUR DECISION A-88143. THE FACTS IN THE ABOVE CASE ARE THAT AT THE TIME THE RIGGS NATIONAL BANK ACQUIRED THE LOAN TO BE INSURED UNDER PROVISIONS OF TITLE I OF THE NATIONAL HOUSING ACT. THE LOAN WAS PURCHASED WITH RELIANCE UPON THE QUESTIONS AND ANSWERS IN THE PROPERTY OWNERS CREDIT STATEMENT WHICH THE BANK CLAIMED AS ITS PRIVILEGE UNDER THE PROVISIONS OF REGULATIONS NOS. 10 AND 12. ALTHOUGH A SEARCH OF ITS FILES WOULD HAVE REVEALED THAT THE MAKER HAD ANOTHER LOAN WITH THE RIGGS NATIONAL BANK.

A-88143, JULY 24, 1939, 19 COMP. GEN. 92

FEDERAL HOUSING ADMINISTRATION - INSURANCE OF BRANCH BANK LOANS - GOOD CREDIT CLEARANCE REQUIREMENTS THE HOLDING IN DECISION A-88143, AUGUST 21, 1937, THAT PAYMENT MIGHT NOT BE MADE TO THE LOANING BANK IN CONNECTION WITH A DEFAULTED LOAN INSURED BY THE FEDERAL HOUSING ADMINISTRATION UNDER PROVISIONS OF TITLE I OF THE NATIONAL HOUSING ACT, WHERE THE MAKERS HAD PREVIOUSLY APPLIED FOR AND RECEIVED ANOTHER LOAN THROUGH THE SAME BANK ON WHICH A DEFAULT HAD OCCURRED, BECAUSE THE BANK HAD NOT EXERCISED THE GOOD CREDIT JUDGMENT REQUIRED BY THE ADMINISTRATIVE REGULATIONS, IS EQUALLY APPLICABLE TO FINANCIAL INSTITUTIONS OPERATING WITH A LARGE NUMBER OF BRANCHES EACH MAINTAINING INDEPENDENT CREDIT AND LOAN OPERATIONS AND GRANTED, BY THE FEDERAL HOUSING ADMINISTRATION, BUT ONE CONTRACT OF INSURANCE COVERING ALL BRANCHES, THE FAILURE OF THE INSURED INSTITUTION OR DIFFICULTY IN MAINTAINING COMPLETE CLEARING RECORDS IN ALL ITS BRANCHES AGAINST WHICH LOAN APPLICATIONS MAY BE CHECKED NOT AUTHORIZING GOVERNMENT INSURING OF POOR CREDIT RISKS, KNOWLEDGE OF WHICH IS IN CONSTRUCTIVE POSSESSION OF THE INSTITUTION.

COMPTROLLER GENERAL BROWN TO THE ADMINISTRATOR, FEDERAL HOUSING ADMINISTRATION, JULY 24, 1939:

I HAVE YOUR LETTER OF JULY 7, 1939, AS FOLLOWS:

REFERENCE IS MADE TO YOUR DECISION A-88143, DATED AUGUST 21, 1937, IN CONNECTION WITH THE PAYMENT OF VOUCHER MCP 38748, IN FAVOR OF THE RIGGS NATIONAL BANK OF WASHINGTON, D.C.

THE FACTS IN THE ABOVE CASE ARE THAT AT THE TIME THE RIGGS NATIONAL BANK ACQUIRED THE LOAN TO BE INSURED UNDER PROVISIONS OF TITLE I OF THE NATIONAL HOUSING ACT, THE APPLICATION INDICATED THAT THE MAKER HAD NO OTHER LOAN INSURED BY THE FEDERAL HOUSING ADMINISTRATION. THE LOAN WAS PURCHASED WITH RELIANCE UPON THE QUESTIONS AND ANSWERS IN THE PROPERTY OWNERS CREDIT STATEMENT WHICH THE BANK CLAIMED AS ITS PRIVILEGE UNDER THE PROVISIONS OF REGULATIONS NOS. 10 AND 12, ALTHOUGH A SEARCH OF ITS FILES WOULD HAVE REVEALED THAT THE MAKER HAD ANOTHER LOAN WITH THE RIGGS NATIONAL BANK.

IT WAS HELD BY YOUR OFFICE THAT THE MAKERS HAD PREVIOUSLY APPLIED FOR AND RECEIVED ANOTHER LOAN THROUGH THE RIGGS NATIONAL BANK ON WHICH DEFAULT HAD OCCURRED, THAT THE SECOND LOAN THEREFORE DID NOT CONSTITUTE A GOOD CREDIT RISK, AND THAT THE RIGGS NATIONAL BANK IN AGAIN EXTENDING A LOAN TO THE MAKER HAD NOT EXERCISED THE GOOD CREDIT JUDGMENT REQUIRED BY REGULATION NO. 10. IN THIS CASE THE RIGGS NATIONAL BANK HAD THE INFORMATION READILY ACCESSIBLE ON ITS RECORDS TO CHECK THE VERACITY OF THE INFORMATION THAT THE MAKER HAD APPLIED FOR AN INSURED LOAN UNDER THE PROVISIONS OF THE NATIONAL HOUSING ACT. THIS RULING IS STRICTLY ADHERED TO IN ALL SIMILAR CASES.

IN INSTANCES WHERE FINANCIAL INSTITUTIONS OPERATE WITH A LARGE NUMBER OF BRANCHES, SUCH AS TH BANK OF AMERICA, WITH EACH BRANCH MAINTAINING INDEPENDENT CREDIT AND LOAN OPERATIONS. IT IS POSSIBLE FOR A BORROWER BY FALSIFYING HIS CREDIT STATEMENT, TO OBTAIN MORE THAN ONE LOAN THROUGH INDEPENDENT BRANCHES OF THE SAME LENDING INSTITUTION WITHOUT THAT FACT BEING DISCLOSED. IN THE CASE OF SUCH FINANCIAL INSTITUTIONS THE FEDERAL HOUSING ADMINISTRATION GRANTS ONLY ONE CONTRACT OF INSURANCE COVERING ALL BRANCHES. IT IS NOT THE POLICY OF THE FEDERAL HOUSING ADMINISTRATION TO ISSUE CONTRACTS OF INSURANCE TO INDIVIDUAL BRANCHES OF THE FINANCIAL INSTITUTIONS.

AS ADVANCES OF CREDIT ARE MADE THE REPORTS OF LOANS ARE FORWARDED BY THE INDIVIDUAL BRANCHES TO THE FEDERAL HOUSING ADMINISTRATION FOR RECORD OF INSURED AMOUNT IN ACCORDANCE WITH THE REGULATIONS. WHEN LOSSES OCCUR THE PAPERS ARE PREPARED AND FORWARDED BY THE INDIVIDUAL BRANCHES TO THE HOME OFFICE OF THE FINANCIAL INSTITUTION, WHERE THE APPLICATIONS FOR INSURED LOSS ARE PREPARED AND FORWARDED TO THE FEDERAL HOUSING ADMINISTRATION IN WASHINGTON, D.C. IT WILL BE OBSERVED THAT THE INDIVIDUAL BRANCHES OPERATE INDEPENDENT LOAN AGENCIES, BUT THE FEDERAL HOUSING ADMINISTRATION ISSUES ONLY ONE CONTRACT OF INSURANCE FOR THE BRANCHES AS A WHOLE, AND LOSSES ARE CHARGED AGAINST THE GENERAL RESERVE OF THE FINANCIAL INSTITUTION.

IT MAY WELL BE URGED THAT, STRICTLY SPEAKING, THE KNOWLEDGE OF ONE BRANCH IS THE KNOWLEDGE OF THE BANK AS A WHOLE, I.E., ALL BRANCHES. SOME OF THE BANKS OPERATING BRANCHES, HOWEVER, ASSERT IT WOULD BE IMPRACTICAL FOR ONE BRANCH TO KEEP ALL BRANCHES INFORMED OF ITS TRANSACTIONS. THEREFORE, INFORMATION IS REQUESTED IN INSTANCES WHERE INDIVIDUAL BRANCHES OPERATE INDEPENDENT CREDIT WHETHER SUCH TRANSACTIONS ARE GOVERNED BY YOUR DECISION A-88143, AUGUST 20, 1937, OR WHETHER EACH BRANCH MAY RELY UPON THE PROVISIONS OF REGULATIONS NOS. 10 AND 12, SO THAT SUCH TRANSACTIONS WILL BE INSURED, WITHOUT RELIANCE UPON THE PROVISIONS OF SECTION 2 (E) OF THE NATIONAL HOUSING ACT, AS AMENDED,EVEN THOUGH THE BORROWER HAS OBTAINED AND DEFAULTED ON A PREVIOUS LOAN THROUGH AN ENTIRELY SEPARATE BRANCH OF THE SAME FINANCIAL INSTITUTION.

NOTWITHSTANDING THAT THE BRANCHES OF A SINGLE FINANCIAL INSTITUTION MAY OPERATE INDEPENDENTLY AS LENDING AGENCIES, SINCE ONLY ONE CONTRACT OF INSURANCE IS MADE WITH THE PARENT COMPANY, THE INFORMATION AVAILABLE TO ONE OF THE BRANCHES MUST BE CONSIDERED AS CONSTRUCTIVELY AVAILABLE TO ALL BRANCHES AS WELL AS THE HOME OFFICE, REGARDLESS OF WHETHER ALL APPLICATIONS FOR LOANS AT THE RESPECTIVE BRANCHES BE CLEARED OVER A COMMON CREDIT FILE OR RECORD. THE FAILURE TO MAINTAIN SUCH CLEARING RECORDS BY THE INSURED INSTITUTION MAY NOT BE ACCEPTED AS SHIFTING THE RESPONSIBILITY TO SAFEGUARD THE INTERESTS OF THE INSTITUTION TO THE FEDERAL GOVERNMENT BY REASON OF THE INSURANCE CONTRACT, AND SUCH CONTRACT MAY NOT BE CONSTRUED AS INSURING THE INSTITUTION AGAINST POOR CREDIT RISKS, KNOWLEDGE OF WHICH IS IN POSSESSION OF THE INSTITUTION AT THE TIME THE LOAN IS MADE. ACCORDINGLY, IT MUST BE HELD THAT THE DECISION OF AUGUST 21, 1937, A- 88143, IS FOR APPLICATION TO THE SITUATION DESCRIBED IN YOUR SUBMISSION.