A-91258, JANUARY 26, 1938, 17 COMP. GEN. 604

A-91258: Jan 26, 1938

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

INSURANCE - LOANS - FEDERAL HOUSING ADMINISTRATION - LIABILITY FOR LOSSES RESULTING FROM FORGERIES THERE IS NO LIABILITY UNDER A FEDERAL HOUSING ADMINISTRATION CONTRACT PROPOSING TO INSURE A BANK AGAINST ANY LOSS SUSTAINED BY VIRTUE OF A LOAN TO BONA FIDE BORROWERS UNDER THE NATIONAL HOUSING ACT. IS AS FOLLOWS: REFERENCE IS MADE TO BUREAU VOUCHER NO. THE VOUCHER WAS RETURNED WITHOUT CERTIFICATION. THE PREAUDIT DIFFERENCE STATEMENT EXPLAINING THAT IT IS THE DUTY OF AN INSURED INSTITUTION TO DISCOVER THE AUTHORITY OF AN AGENT TO SIGN A NOTE OR THE LEGAL CAPACITY OF THE SIGNER OF A NOTE TO BORROW. THIS STATEMENT WAS IN ERROR AND THE FOLLOWING IS A CORRECT EXPLANATION OF THE TRANSACTION: THE ERROR WAS DUE TO A MISUNDERSTANDING ON THE PART OF A CLERK WHOSE DUTIES INVOLVE PREPARATION OF THE VOUCHER.

A-91258, JANUARY 26, 1938, 17 COMP. GEN. 604

INSURANCE - LOANS - FEDERAL HOUSING ADMINISTRATION - LIABILITY FOR LOSSES RESULTING FROM FORGERIES THERE IS NO LIABILITY UNDER A FEDERAL HOUSING ADMINISTRATION CONTRACT PROPOSING TO INSURE A BANK AGAINST ANY LOSS SUSTAINED BY VIRTUE OF A LOAN TO BONA FIDE BORROWERS UNDER THE NATIONAL HOUSING ACT, AS AMENDED, 49 STAT. 1187, FOR LOSS SUSTAINED BY THE BANK ON ACCOUNT OF AN ADVANCE OF MONEY UPON A FORGED AUTHORIZATION FOR PAYMENT PRESENTED BY A PERSON OTHER THAN THE PROPOSED BORROWERS OR THEIR AGENT.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE ADMINISTRATOR, FEDERAL HOUSING ADMINISTRATION, JANUARY 26, 1938:

YOUR LETTER OF DECEMBER 3, 1937, IS AS FOLLOWS:

REFERENCE IS MADE TO BUREAU VOUCHER NO. MCP-54230, SUBMITTED ON SCHEDULE NO. MCP-4561 ON NOVEMBER 15. THE VOUCHER WAS RETURNED WITHOUT CERTIFICATION, THE PREAUDIT DIFFERENCE STATEMENT EXPLAINING THAT IT IS THE DUTY OF AN INSURED INSTITUTION TO DISCOVER THE AUTHORITY OF AN AGENT TO SIGN A NOTE OR THE LEGAL CAPACITY OF THE SIGNER OF A NOTE TO BORROW. FULL EXPLANATION REGARDING THE TRANSACTION WHICH INVOLVES A FORGED SIGNATURE, CONTINUES THE DIFFERENCE STATEMENT, SHOULD BE FURNISHED.

THE FOOTNOTE APPENDED TO THE VOUCHER STATED THAT THE BORROWER'S SIGNATURE HAD BEEN FORGED AND THAT THE CLAIM, WHICH HAD BEEN SUBMITTED WITHIN THE SIXTY-DAY PERIOD FROM DEFAULT, HAD BEEN APPROVED BECAUSE OF THE FORGERY. THIS STATEMENT WAS IN ERROR AND THE FOLLOWING IS A CORRECT EXPLANATION OF THE TRANSACTION: THE ERROR WAS DUE TO A MISUNDERSTANDING ON THE PART OF A CLERK WHOSE DUTIES INVOLVE PREPARATION OF THE VOUCHER.

ON FEBRUARY 17, 1937, A NOTE WAS SIGNED IN BLANK BY THE BORROWER, A PROPERTY OWNER'S CREDIT STATEMENT HAVING BEEN PREVIOUSLY SIGNED, THE BORROWER, ACCORDING TO A SUBSEQUENT DEPOSITION, HAVING FAILED OF UNDERSTANDING AS TO THE SIGNIFICANCE OF THE CREDIT STATEMENT. THE DEALER, ONE J. W. SHIELDS, THEN PROCURED THE ADVANCE OF FUNDS AND ALMOST IMMEDIATELY THEREAFTER THE BORROWER, WITHOUT BEING AWARE THAT THE FUNDS HAD BEEN ADVANCED, CHANGED HIS MIND IN REGARD TO THE CONTEMPLATED IMPROVEMENT AND NOTIFIED THE DEALER THAT HE MIGHT NOT CONTINUE WITH THE PROJECT. BECOMING INVOLVED IN DOMESTIC DIFFICULTIES, THE DEALER LEFT THE JURISDICTION BEFORE THE LENDING INSTITUTION BECAME AWARE OF HIS DEFALCATION. WHEN THE ALLEGED BORROWER WAS BILLED FOR PAYMENT OF THE FIRST INSTALLMENT, THE FACTS OF THE SITUATION CAME TO LIGHT. FROM THE FILE IT APPEARS THAT SHIELDS LATER RETURNED TO THE JURISDICTION AND, IN AN ATTEMPT TO STRAIGHTEN OUT HIS AFFAIRS, MADE PAYMENTS TO THE ACCOUNT TOTALING $157.15. WHEN HIS INABILITY TO CONTINUE PAYMENTS BECAME APPARENT, THE INSTITUTION SUBMITTED THE CLAIM TO THIS OFFICE.

THERE IS ONLY ONE ACTUAL FORGERY INVOLVED AND THAT IS THE SIGNATURE OF THE BORROWER TO AN AUTHORIZATION WHICH SHIELDS PRESENTED TO THE BANK. THEREIN THE BANK WAS AUTHORIZED TO PAY THE PROCEEDS OF THE LOAN TO HIM. THE FILE SHOWS DEFINITELY THAT THE LENDING INSTITUTION CHECKED VERY CLOSELY AS TO THE DEBT-PAYING ABILITY OF THE PARTY WHO HAD SIGNED THE NOTE AND THERE IS A VERY GOOD INFERENCE THAT THAT PARTY WOULD HAVE LIQUIDATED THE OBLIGATION IN A SATISFACTORY MANNER HAD IT BEEN BONA FIDE. WE DO NOT BELIEVE THAT SHIELDS CAN BE SAID TO HAVE ACTED AS AN AGENT OF THE LENDING INSTITUTION AND IT APPEARS THAT THE INSTITUTION ACTED IN ENTIRE GOOD FAITH IN PURCHASING A NOTE WHICH WAS SUPPORTED BY A PROPERTY OWNER'S CREDIT STATEMENT AND AN ALLEGED AUTHORIZATION TO DISBURSE THE PROCEEDS.

IN VIEW OF THE FOREGOING, THE VOUCHER IS HEREWITH RESUBMITTED, AND IT IS RESPECTFULLY REQUESTED THAT IT BE CERTIFIED AS APPROVED.

UNDER DATE OF FEBRUARY 17, 1937, JOHN W. AND GERALDINE B. LOWE, 104 MARKET STREET, HERTFORD, N.C., EXECUTED A NOTE IN BLANK IN CONTEMPLATION OF A LOAN TO BE MADE TO THEM BY THE MORRIS PLAN BANK OF VIRGINIA (NORFOLK BRANCH), RICHMOND, VA., FOR THE PURPOSE OF FINANCING IMPROVEMENTS TO PROPERTY OF THE MAKERS OF THE NOTE. THEREAFTER ONE J. W. SHIELDS PRESENTED TO THE BANK AN AUTHORIZATION FOR PAYMENT OF THE PROCEEDS OF THE CONTEMPLATED LOAN WHICH AUTHORIZATION IS REPORTED TO HAVE BORNE THE FORGED SIGNATURES OF THE PROSPECTIVE BORROWERS. NOTWITHSTANDING THE BANK WAS IN POSSESSION OF THE NOTE BEARING THE SIGNATURES OF JOHN W. AND GERALDINE B. LOWE AND APPARENTLY A ,PROPERTY OWNER'S CREDIT STATEMENTS" SIGNED BY THEM IT ACCEPTED THE PURPORTED AUTHORIZATION AS AUTHENTIC WITHOUT COMPARISON OF SIGNATURES--- SUCH CONCLUSION BEING INESCAPABLE SINCE A COMPARISON OF SIGNATURES UNDOUBTEDLY WOULD HAVE DISCLOSED THAT THE AUTHORIZATION WAS NOT BONA FIDE.

IN THE MEANTIME THE PROSPECTIVE BORROWERS DECIDED AGAINST IMPROVING THEIR PROPERTY AND AGAINST CONSUMMATING THE TRANSACTION ENTERED INTO WITH THE BANK BY APPLYING FOR AND ACCEPTING THE AMOUNT COVERED BY THEIR NOTE. ACCORDINGLY, WHEN PAYMENT OF THE FIRST INSTALLMENT, WHICH WOULD HAVE BEEN DUE ON THE NOTE IF THE LOAN HAD BEEN MADE TO THE MAKERS, WAS CLAIMED, THE FRAUD PERPETRATED BY SHIELDS WAS DISCOVERED. IT IS NOT CONTENDED THAT SHIELDS WAS DULY AUTHORIZED BY THE MAKERS OF THE NOTE TO APPLY FOR AND RECEIVE THE AMOUNT OF THE LOAN IN THEIR BEHALF OR THAT HE HAD BEEN APPOINTED BY THEM TO REPRESENT THEM IN ANY MATTERS IN CONNECTION WITH THE CONTEMPLATED LOAN. AFTER THE FRAUD WAS DISCOVERED THE BANK APPARENTLY DEALT WITH SHIELDS WITH RESPECT TO THE FUNDS ADVANCED TO HIM TO THE EXTENT OF ACCEPTING SIX INSTALLMENT PAYMENTS AGGREGATING $157.15. WHEN IT BECAME APPARENT THAT SHIELDS WAS UNABLE TO CONTINUE THE PAYMENTS, THE BANK SUBMITTED A CLAIM TO YOUR ADMINISTRATION FOR PAYMENT OF LOSS ON A LOAN PURPORTED TO HAVE BEEN MADE TO JOHN W. AND GERALDINE B. LOWE COVERED BY INSURANCE CONTRACT NO. 20087, UNDER THE PROVISIONS OF TITLE 1, SECTION 2 (A) OF THE NATIONAL HOUSING ACT, AS AMENDED BY THE ACT OF APRIL 3, 1936, 49 STAT. 1187, IN PERTINENT PART AS FOLLOWS:

THE ADMINISTRATOR IS AUTHORIZED AND EMPOWERED, UPON SUCH TERMS AND CONDITIONS AS HE MAY PRESCRIBE, TO INSURE BANKS, TRUST COMPANIES, PERSONAL FINANCE COMPANIES, MORTGAGE COMPANIES, BUILDING AND LOAN ASSOCIATIONS, INSTALLMENT LENDING COMPANIES, AND OTHER SUCH FINANCIAL INSTITUTIONS, WHICH THE ADMINISTRATOR FINDS TO BE QUALIFIED BY EXPERIENCE OR FACILITIES AND APPROVES AS ELIGIBLE FOR CREDIT INSURANCE, AGAINST LOSSES WHICH THEY MAY SUSTAIN AS A RESULT OF LOANS AND ADVANCES OF CREDIT, AND PURCHASES OF OBLIGATIONS REPRESENTING LOANS AND ADVANCES OF CREDIT, MADE BY THEM ON AND AFTER APRIL 1, 1936, AND PRIOR TO APRIL 1, 1937, OR SUCH EARLIER DATE AS THE PRESIDENT MAY FIX BY PROCLAMATION UPON HIS DETERMINATION THAT THERE NO LONGER EXISTS ANY NECESSITY FOR SUCH INSURANCE IN ORDER TO MAKE AMPLE CREDIT AVAILABLE, FOR THE PURPOSE OF FINANCING ALTERATIONS, REPAIRS, AND ADDITIONS UPON IMPROVED REAL PROPERTY, AND THE PURCHASE AND INSTALLATION OF EQUIPMENT AND MACHINERY UPON SUCH REAL PROPERTY, BY THE OWNERS THEREOF OR BY LESSEES OF SUCH REAL PROPERTY UNDER A LEASE EXPIRING NOT LESS THAN SIX MONTHS AFTER THE MATURITY OF THE LOAN OR ADVANCE OF CREDIT. * * *

THE LOSS INCURRED BY THE MORRIS PLAN BANK OF VIRGINIA WAS NOT AS A RESULT OF A LOAN MADE TO A BONA FIDE BORROWER FOR THE PURPOSE OF FINANCING ALTERATIONS, REPAIRS, AND IMPROVEMENTS OF REAL PROPERTY OF SUCH BORROWER BUT RATHER THE LOSS RESULTED THROUGH FRAUD PRACTICED BY J. W. SHIELDS IN PRESENTING TO THE BANK A FORGED AUTHORIZATION FOR PAYMENT OF THE AMOUNT OF A LOAN TO BE MADE TO A PROSPECTIVE BONA FIDE BORROWER. IT CANNOT BE SERIOUSLY CONTENDED UNDER SUCH CIRCUMSTANCES THAT A LOAN WAS MADE TO JOHN W. AND GERALDINE B. LOWE OR THEIR DULY APPOINTED AGENT AND THEREFORE NO LOAN HAVING BEEN MADE TO THEM OR IN THEIR BEHALF THE POLICY ISSUED PROPOSING TO INSURE AGAINST ANY LOSS SUSTAINED BY THE BANK BY VIRTUE OF A LOAN TO THEM HAS NO APPLICATION WITH RESPECT TO FUNDS ADVANCED TO J. W. SHIELDS. WITH RESPECT TO THE NOTE EXECUTED BY JOHN W. AND GERALDINE B. LOWE, THE RECORD DISCLOSES THAT SAME NEVER BECAME AN ENFORCEABLE OBLIGATION BY REASON OF THE FAILURE OF THE BANK TO PERFORM ITS PART OF THE CONTRACT IN ADVANCING TO THE MAKERS OR THEIR AGENT THE AMOUNT FOR WHICH THE NOTE WAS EXECUTED. WHILE YOU STATE THAT "THE LENDING INSTITUTION CHECKED VERY CLOSELY AS TO THE DEBT-PAYING ABILITY OF THE PARTY WHO HAD SIGNED THE NOTE AND THERE IS A VERY GOOD INFERENCE THAT THAT PARTY WOULD HAVE LIQUIDATED THE OBLIGATION IN A SATISFACTORY MANNER HAD IT BEEN BONA FIDE," THE FACT REMAINS THAT NO BONA FIDE LOAN WAS MADE TO THE PARTIES COVERED BY INSURANCE CONTRACT NO. 20087, AND THEREFORE NO LOSS COULD POSSIBLY BE SUSTAINED REQUIRING PAYMENT THEREUNDER.

IN THE CIRCUMSTANCES, IT MUST BE HELD THAT THE LOSS ALLEGED TO HAVE BEEN SUSTAINED BY THE MORRIS PLAN BANK OF VIRGINIA DUE TO THE ADVANCE OF FUNDS TO J. W. SHIELDS DOES NOT CONSTITUTE A LOSS ON AN INSURED LOAN MADE TO JOHN W. AND GERALDINE B. LOWE COVERED BY A POLICY ISSUED UNDER THE NATIONAL HOUSING ACT, SUPRA.SEE ALSO LAND T. AND T. CO. V. N.W. NATIONAL BANK, 50 L.R.A. 75.

ACCORDINGLY, PAYMENT ON VOUCHER NO. MCP-54230 NOT BEING AUTHORIZED, SAID VOUCHER WILL BE RETAINED AS PART OF THE FILES OF THIS OFFICE.