B-148894, JUN. 29, 1962

B-148894: Jun 29, 1962

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GILBERT HENOCH: REFERENCE IS MADE TO YOUR LETTER OF MAY 7. THE FACTS CONCERNING THIS CLAIM ARE SET FORTH IN YOUR LETTER AS FOLLOWS: "ON AUGUST 17. ANOTHER NOTE WAS EXECUTED IN THE AMOUNT OF $919.80. BOTH OF THESE NOTES WERE F.H.A. WHILE THESE TWO ABOVE MENTIONED NOTES WERE STILL OUTSTANDING. THE LOAN WAS APPROVED FOR $3500.00 ON THE TELEPHONE BY THE VICE PRESIDENT IN CHARGE OF THE INSTALLMENT LOAN DEPARTMENT. HE DID NOT REALIZE THAT THERE WERE THE TWO SMALLER LOANS ALREADY IN EXISTENCE. THE ACCOUNT WAS EVALUATED IN AN ATTEMPT TO REWRITE AND EXTEND THE LOAN WITH SMALLER MONTHLY PAYMENTS. THE SMALLER PRE- EXISTING LOANS WERE DISCOVERED. THE SMALLER F.H.A.LOANS WERE TAKEN OFF F.H.A. STATUS AND WERE CONSOLIDATED INTO A SINGLE UNSECURED PERSONAL LOAN.

B-148894, JUN. 29, 1962

TO MR. GILBERT HENOCH:

REFERENCE IS MADE TO YOUR LETTER OF MAY 7, 1962, PROTESTING THE REFUSAL BY THE FEDERAL HOUSING ADMINISTRATION TO PAY AN INSURANCE CLAIM ON A DEFAULTED HOME IMPROVEMENT LOAN MADE BY HEMPSTEAD BANK, HEMPSTEAD, NEW YORK, TO CHARLES AND PHYLLIS RIELY.

THE FACTS CONCERNING THIS CLAIM ARE SET FORTH IN YOUR LETTER AS FOLLOWS:

"ON AUGUST 17, 1959, THE DEBTORS EXECUTED A NOTE IN FAVOR OF HEMPSTEAD BANK FOR $689.76. ON OCTOBER 13, 1959, ANOTHER NOTE WAS EXECUTED IN THE AMOUNT OF $919.80. BOTH OF THESE NOTES WERE F.H.A. TITLE 1 - HOME IMPROVEMENT LOANS.

"ON FEBRUARY 19, 1960, WHILE THESE TWO ABOVE MENTIONED NOTES WERE STILL OUTSTANDING, ALTHOUGH REDUCED IN AMOUNTS, THE DEBTORS SOUGHT A $6,000 F.H.A. LOAN FROM HEMPSTEAD BANK AT ONE OF ITS BRANCHES. THE LOAN WAS APPROVED FOR $3500.00 ON THE TELEPHONE BY THE VICE PRESIDENT IN CHARGE OF THE INSTALLMENT LOAN DEPARTMENT.

"AT THAT TIME, HE DID NOT REALIZE THAT THERE WERE THE TWO SMALLER LOANS ALREADY IN EXISTENCE. IN MAY OF 1961, WHEN IT BECAME DIFFICULT FOR THE DEBTORS TO CONTINUE TO MAKE THE PAYMENTS ON THE LARGE LOAN, THE ACCOUNT WAS EVALUATED IN AN ATTEMPT TO REWRITE AND EXTEND THE LOAN WITH SMALLER MONTHLY PAYMENTS. AT THAT TIME AND FOR THE FIRST TIME, THE SMALLER PRE- EXISTING LOANS WERE DISCOVERED.

"TO ELIMINATE ANY DIFFICULTY, THE SMALLER F.H.A.LOANS WERE TAKEN OFF F.H.A. STATUS AND WERE CONSOLIDATED INTO A SINGLE UNSECURED PERSONAL LOAN. THIS WAS DONE ON MARCH 23, 1961. SUBSEQUENTLY, A DEFAULT OCCURRED ON THE LARGE LOAN AND A CLAIM WAS SUBMITTED TO THE F.H.A. FOR PAYMENT OF IT.

"HEMPSTEAD BANK WAS INFORMED BY THE F.H.A. HOWEVER THAT NO PAYMENT COULD BE MADE IN VIEW OF THE FACT THAT SINCE THE SMALL LOANS WERE IN EXISTENCE IN 1960, IT WAS NOT PROPER TO WRITE AN F.H.A. LOAN AT THAT TIME FOR $3500.00.

"IN VIEW OF THE ERROR THAT THE LOAN WAS APPROVED FOR $3500.00 WITHOUT ANY INTENT TO VIOLATE THE STATUTE AND WITHOUT ACTUAL KNOWLEDGE THAT THE SMALLER LOANS WERE ALREADY ON THE BOOKS, WE CANNOT AGREE THAT THE STATUTORY POLICY WAS VIOLATED. AS SOON AS THE SMALLER LOANS WERE DISCOVERED, THEY WERE TAKEN OFF F.H.A. STATUS. THUS, THERE WAS NEVER ANY INTENTION TO SEEK TO HOLD THE F.H.A. LIABLE FOR MORE THAN $3500.00.

"IN THE CIRCUMSTANCES, WE FEEL THAT F.H.A. INSURANCE SHOULD COVER THE ENTIRE AMOUNT OF THE DEFAULT UNDER THE $3500.00 LOAN, OR, AT LEAST, COVER $3500.00 MINUS THE THEN UNPAID BALANCES OF THE TWO SMALLER LOANS.'

THE CLAIM BY HEMPSTEAD BANK FOR INSURANCE PROCEEDS UNDER TITLE I OF THE NATIONAL HOUSING ACT, 48 STAT. 1246, AS AMENDED, WAS DISALLOWED BY THE FEDERAL HOUSING ADMINISTRATION ON THE BASIS THAT THE LOAN OF $3,500 WAS NOT ELIGIBLE FOR INSURANCE IN VIEW OF SECTION 2 (B) OF THAT ACT, 12 U.S.C. 1703, WHICH PROVIDES IN PERTINENT PART AS FOLLOWS:

"NO INSURANCE SHALL BE GRANTED UNDER THIS SECTION * * * IF THE AMOUNT OF SUCH LOAN, ADVANCE OF CREDIT, OR PURCHASE EXCEEDS $3,500.'

IT APPARENTLY IS YOUR VIEW THAT BY REMOVING THE TWO SMALLER LOANS FROM INSURANCE COVERAGE THE $3,500 LOAN, WHICH WAS INELIGIBLE FOR INSURANCE AT THE TIME IT WAS MADE, THEN BECAME AN INSURED LOAN. WE DO NOT QUESTION THAT THE BANK ACTED IN GOOD FAITH IN THIS MATTER, HOWEVER, WE ARE NOT AWARE OF ANY LEGAL BASIS FOR THE VIEW THAT SUCH ACTION CREATED ANY LIABILITY ON THE UNITED STATES INSOFAR AS INSURANCE OF THIS INELIGIBLE LOAN IS CONCERNED NOR IS ANY GIVEN IN YOUR LETTER. ALSO, EVEN THOUGH THE ADDITIONAL LOAN OF $3,500 MIGHT NOT HAVE AFFECTED THE INSURANCE COVERAGE OF THE TWO SMALLER LOANS HAD NO REMOVAL ACTION BEEN TAKEN, THE FACT REMAINS THAT THE BANK DID REMOVE SUCH LOANS FROM INSURANCE COVERAGE AND REGARDLESS OF ITS GOOD FAITH IN THE MATTER, IT IS EVIDENT THAT NONE OF THE LOANS WAS INCURRED AT THE TIME OF DEFAULT.

ACCORDINGLY, WE BELIEVE THAT THE ACTION OF THE FEDERAL HOUSING ADMINISTRATION IN DISALLOWING THE CLAIM WAS PROPER.