B-133924, DEC. 4, 1957

B-133924, DEC. 4, 1957

TO MR. LESTER H. THOMPSON, AUTHORIZED CERTIFYING OFFICER, FEDERAL HOUSING ADMINISTRATION:

ON SEPTEMBER 24, 1957, YOU TRANSMITTED HERE A VOUCHER--- TOGETHER WITH THE RELATED CLAIM FILE--- IN FAVOR OF THE FIRST BAN CREDIT CORPORATION, FIRST NATIONAL BANK BUILDING, ST. PAUL, MINNESOTA, FOR $40.30. THE VOUCHER COVERS A SUPPLEMENTARY CLAIM FOR REIMBURSEMENT FOR LOSS SUSTAINED ON ACCOUNT OF DEFAULT IN THE PAYMENT OF A NOTE SIGNED BY WILLIAM R. STARKS, WHICH THE INSURED INSTITUTION PURCHASED FROM THE MARTIN CONSTRUCTION COMPANY, INDIANAPOLIS, INDIANA, AND REPORTED FOR INSURANCE UNDER ITS CONTRACT WITH THE FEDERAL HOUSING ADMINISTRATION UNDER TITLE I OF THE NATIONAL HOUSING ACT. YOU REQUEST OUR DECISION AS TO WHETHER YOU MAY CERTIFY THE VOUCHER FOR PAYMENT.

THE NOTE ON WHICH THE CLAIM WAS FILED REPRESENTED THE REFINANCING OF TWO EARLIER INSURED NOTES. A DEDUCTION WAS MADE FROM THE INSURED'S CLAIM ON THE REFINANCED NOTE BECAUSE A REBATE OF THE FULL UNEARNED PORTION OF THE CHARGE HAD NOT BEEN MADE IN REFINANCING THE ORIGINAL NOTES. THE INSURED PROTESTED THE DEDUCTION AND FILED A SUPPLEMENTARY CLAIM CONTENDING THAT ITS METHOD OF COMPUTING THE REBATE OF THE UNEARNED CHARGE WAS APPROVED BY THE ASSISTANT COMMISSIONER FOR TITLE I IN LETTER DATED DECEMBER 3, 1956. YOU STATE THAT ADMITTEDLY THE LETTER IS SOMEWHAT AMBIGUOUS AND APPEARS TO APPROVE WITH MINOR MODIFICATIONS THE METHOD FOR COMPUTING THE REBATE OF THE UNEARNED CHARGE WHICH HAD BEEN SET OUT IN INSURED'S LETTER OF OCTOBER 18, 1956. THE METHOD AS SET OUT IN THAT LETTER IS AS FOLLOWS:

1. USE REFINANCE REBATE FACTORS TO DATE OF DEFAULT

2. CREDIT UNEARNED DISCOUNT LEAVING NET INVESTMENT

3. ON NET INVESTMENT COMPUTE EARNINGS AT .008 PER MONTH FROM DATE OF DEFAULT TO DATE OF REFINANCING NOTE.

THE ABOVE METHOD DIFFERS FROM THAT SET OUT IN THE FEDERAL HOUSING ADMINISTRATION'S PAMPHLET ON GENERAL ADMINISTRATIVE POLICY, FM FORM 20A, IN THAT UNDER THE LATTER METHOD THE REFINANCE REBATE FACTORS ARE USED TO THE DATE OF REFINANCING THE NOTE. YOU POINT OUT THAT THE METHOD USED BY THE INSURED IN COMPUTING THE EARNED CHARGE PROVIDES THAT A CREDIT BE MADE FOR THE "UNEARNED CHARGE" AS OF THE DATE OF DEFAULT AND INTEREST FIGURED THEREAFTER AT THE MAXIMUM RATE OF CHARGE PERMITTED BY THE TITLE I REGULATIONS ON THE OUTSTANDING BALANCE, AND THAT THIS HAS THE EFFECT OF CHARGING THE BORROWER FULL INTEREST ON INSTALLMENTS THAT HAVE BECOME DUE BUT HAVE NOT BEEN MET, SOMETHING THAT IS NOT ACCOMPLISHED BY USING THE FORMULA SHOWN IN THE PAMPHLET ON GENERAL ADMINISTRATIVE POLICY. FURTHERMORE, WHILE A PROVISION IS ALLOWED TO BE PLACED IN A NOTE PROVIDING FOR INTEREST ON PAST DUE INSTALLMENTS--- SECTION 201.2 (E) OF TITLE I REGULATIONS--- SUCH INTEREST MUST BE COLLECTED FROM THE BORROWERS AND MAY NOT BE INCLUDED IN ANY CLAIM AGAINST THE FEDERAL HOUSING ADMINISTRATION.

YOUR LETTER CONTINUES IN PART AS FOLLOWS:

"IF THE METHOD USED BY OUR INSURED IN COMPUTING THE "EARNED CHARGE" AND THUS REDUCING THE AMOUNT OF "UNEARNED CHARGE" IS JUSTIFIED, ITS SUPPLEMENTAL CLAIM SHOULD BE CERTIFIED FOR PAYMENT. HOWEVER, IN VIEW OF THE FACT THAT THE ADMINISTRATION HAS INTERPRETED THE REGULATIONS TO MEAN THAT THE REBATE FORMULA IN THE GENERAL ADMINISTRATIVE POLICY MUST BE USED BY LENDERS IN CALCULATING THE UNEARNED CHARGE, I AM IN DOUBT ON THIS QUESTION IN SPITE OF THE LETTER FROM OUR ASSISTANT COMMISSIONER OF DECEMBER 3, 1956. HAS OUR INTERPRETATION OF THE APPLICABLE REGULATIONS BEEN INCORRECT OR DOES THE ASSISTANT COMMISSIONER'S LETTER AUTHORIZE US TO PAY THIS CLAIM ALTHOUGH THE REGULATIONS WERE NOT AMENDED?

TITLE I OF THE NATIONAL HOUSING ACT AUTHORIZES THE REFINANCING OF LOANS "IN ACCORDANCE WITH SUCH TERMS AND CONDITIONS AS THE COMMISSIONER MAY PRESCRIBE.' 12 U.S.C. 1703 (B). REGULATIONS GOVERNING THE REFINANCING OF LOANS, 24 CFR 201.9, PROVIDE IN SUBSECTION (C) AS FOLLOWS:

"/C) REBATE. THE FULL UNEARNED CHARGE ON THE ORIGINAL NOTE SHALL BE REFUNDED TO THE BORROWER. IF NO ADDITIONAL ADVANCE IS MADE A HANDLING CHARGE NOT IN EXCESS OF $2.00 MAY BE ASSESSED THE BORROWER.'

THE PRIMARY QUESTION FOR DETERMINATION APPEARS TO BE WHETHER THE ABOVE- QUOTED PROVISION SPEAKS AS OF THE TIME OF REFINANCING OR AS OF THE DATE A BORROWER BECOMES DELINQUENT IN PAYMENTS ON THE ORIGINAL NOTE. SINCE SECTION 201.9 RELATES TO REFINANCING AND NOT BE DELINQUENT OR DEFAULTED NOTES, SUBSECTION (C) MUST NECESSARILY BE VIEWED AS REQUIRING A FULL REBATE OF THE UNEARNED CHARGE ON THE ORIGINAL NOTE AS OF THE TIME OF REFINANCING. HENCE, REFUND OF THE UNEARNED PORTION OF THE FINANCING CHARGE AS PROVIDED IN THE PAMPHLET ON GENERAL ADMINISTRATIVE POLICY APPEARS TO BE A PROPER APPLICATION OF SECTION 201.9 (C) HEREINBEFORE QUOTED. ANY METHOD OF COMPUTATION USED WHICH WOULD RESULT IN THE REBATE OF LESS THAN THE FULL UNEARNED CHARGE WOULD BE UNAUTHORIZED.

ACCORDINGLY, THE LETTER OF DECEMBER 3, 1956, IN WHICH THE ASSISTANT COMMISSIONER FOR TITLE I APPEARS TO APPROVE A METHOD THAT CANNOT BE SUPPORTED BY AUTHORITY IN THE REGULATIONS, MUST BE VIEWED AS WITHOUT LEGAL EFFECT. SEE SHERIDAN-WYOMING COAL CO. V. KRUG, 172 F.2D 282, WHEREIN THE COURT HELD THAT A REGULATION ISSUED BY THE SECRETARY OF THE INTERIOR WAS BINDING UPON HIM AND PRECLUDED HIM FROM GRANTING ANY EXCEPTION THERETO UNTIL IT WAS REPEALED OR MODIFIED.

SINCE THE SCHEDULED PAYMENT APPEARS TO BE BASED UPON AN UNAUTHORIZED METHOD OF COMPUTATION, THE SUBMITTED VOUCHER, WHICH IS RETURNED TOGETHER WITH THE CLAIM FILE, MAY NOT BE CERTIFIED FOR PAYMENT.