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Authority To Purchase Surety Bonds

B-114860 Dec 19, 1979
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Highlights

The Administrator of the Farmers Home Administration (FmHA) sought a decision as to whether FmHA could purchase surety bonds in order to release deeds of trust for Colorado borrowers whose promissory notes were lost while in FmHA custody. Under Colorado law, the public official designated as the public trustee is the only person authorized to release a deed of trust when the obligation underlying it has been satisfied. The original promissory note must be presented in order for a deed of trust to be released. If the note is lost, a corporate surety bond must be issued against delivery of the note in a sum equal to the original principal amount in the deed of trust. As an alternative, the Federal agency which originated the loan must agree to indemnify the public trustee for damages resulting from release of the trust deed. The normal FmHA procedures were not consistent with these alternatives. There were three former FmHA borrowers in Colorado who had paid their loans in full but had not had their deeds of trust released because FmHA could not find their original promissory notes. GAO held that FmHA was responsible for release of the deeds of trust. It held that agreements to indemnify which subject the Federal Government to liability in an indeterminate amount were not authorized. However, FmHA could indemnify in an amount not to exceed the original principal amount of the trust deed. FmHa should reserve from available funds sufficient amounts to pay for those indemnities. As for the alternative of purchasing surety bonds, it was held that the funds which issued the loans could purchase the bonds.

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