A-17406, FEBRUARY 23, 1927, 6 COMP. GEN. 546

A-17406, FEBRUARY 23, 1927, 6 COMP. GEN. 546

WORLD WAR ADJUSTED COMPENSATION - LOANS TO VETERANS THERE IS NO PROVISION IN THE WORLD WAR ADJUSTED COMPENSATION ACT AUTHORIZING A BANK TO COMPOUND INTEREST ANNUALLY, SEMIANNUALLY, QUARTERLY, OR OTHERWISE ON LOANS MADE TO VETERANS ON THE SECURITY OF THEIR ADJUSTED SERVICE CERTIFICATES. THE AMOUNT OF A SECOND LOAN TO A VETERAN BASED ON THE SECURITY OF AN ADJUSTED SERVICE CERTIFICATE TO INCLUDE THE AMOUNT OF THE FIRST LOAN, TOGETHER WITH ACCRUED INTEREST THEREON, SHOULD NOT EXCEED THE LOAN VALUE OF THE CERTIFICATE FOR THE CERTIFICATE YEAR IN WHICH THE NEW LOAN IS MADE. IF THE SECOND LOAN IS SEPARATE AND DISTINCT, THE PRINCIPAL THEREOF, SHOULD NOT EXCEED THE DIFFERENCE BETWEEN THE PRINCIPAL OF THE FIRST LOAN, PLUS ACCRUED EARNED INTEREST THEREON, AND THE LOAN VALUE OF THE CERTIFICATE FOR THE CERTIFICATE YEAR IN WHICH THE SECOND LOAN IS MADE. THE DISCOUNT OF VETERANS' NOTES IN ADVANCE IS PROHIBITED WHEN SUCH ACTION RESULTS IN BRINGING THE ACTUAL INTEREST RATE IN EXCESS OF THE MAXIMUM AUTHORIZED BY THE WORLD WAR ADJUSTED COMPENSATION ACT. WHERE DUPLICATE ADJUSTED SERVICE CERTIFICATES HAVE ERRONEOUSLY ISSUED TO A VETERAN AND LOANS HAVE BEEN NEGOTIATED ON BOTH, THE BANK OR BANKS SHOULD BE PAID THE AMOUNT OF BOTH LOANS PLUS THE EARNED INTEREST ON EACH, THE AGGREGATE AMOUNT OF WHICH WILL BE CONSIDERED AS A CHARGE AGAINST THE FIRST CERTIFICATE ISSUED, IF IN REGULAR FORM, WHICH WILL NOT BE AVAILABLE AS SECURITY FOR ADDITIONAL LOANS UNTIL THE FULL AMOUNT OF THE INDEBTEDNESS RESULTING FROM THE LOANS ON THE DUPLICATE CERTIFICATES HAS BEEN LIQUIDATED.

COMPTROLLER GENERAL MCCARL TO THE DIRECTOR, UNITED STATES VETERANS' BUREAU, FEBRUARY 23, 1927:

CONSIDERATION HAS BEEN GIVEN TO YOUR LETTER OF FEBRUARY 11, 1927, AS FOLLOWS:

THE WORLD WAR ADJUSTED COMPENSATION ACT OF MAY 19, 1924, IN ITS SECTION 502, MAKING THE ADJUSTED SERVICE CERTIFICATES ELIGIBLE AS COLLATERAL SECURITY FOR LOANS OBTAINED BY VETERANS FROM ANY NATIONAL BANK OR TRUST COMPANY INCORPORATED UNDER THE LAWS OF ANY STATE, TERRITORY, POSSESSION, OR THE DISTRICT OF COLUMBIA, DECLARES THAT---

"THE RATE OF INTEREST CHARGED UPON THE LOAN BY THE BANK SHALL NOT EXCEED, BY MORE THAN 2 PERCENTUM PER ANNUM, THE RATE CHARGED AT THE DATE OF THE LOAN FOR THE DISCOUNT OF 90-DAY COMMERCIAL PAPER UNDER SECTION 13 OF THE FEDERAL RESERVE ACT BY THE FEDERAL RESERVE BANK FOR THE FEDERAL RESERVE DISTRICT IN WHICH THE BANK IS LOCATED.'

THE LEGAL RATE OF INTEREST VARIES IN THE DIFFERENT STATES AND THE STATUTE LAW RELATING TO THE PAYMENT OF COMPOUND INTEREST, OR INTEREST ON INTEREST, IS NOT UNIFORM. THE NATIONAL BANK ACT LIMITS THE NATIONAL BANKS TO THE RATE ALLOWED BY THE LAWS OF THE STATE,"AND NO MORE," EXCEPT THAT WHEN NO RATE IS FIXED BY THE STATE LAW THEY MAY CHARGE 7 PERCENT. U.S. COMP.STAT.SEC. 9758. IT IS DOUBTFUL, HOWEVER, WHETHER THIS STATUTE IS APPLICABLE TO THE FEDERAL RESERVE BANKS, AS THERE IS NO LIMIT IN THE FEDERAL RESERVE ACT TO THE AMOUNT OF INTEREST OR DISCOUNT A FEDERAL RESERVE BANK MAY CHARGE.

IN ADMINISTERING THE REDEMPTION PROVISIONS OF THE WORLD WAR ADJUSTED COMPENSATION ACT, AS AMENDED, SECTION 502 (C), (D), (E), (F), (G), AND (H), INQUIRIES WILL NATURALLY ARISE CONCERNING THE INTEREST FEATURE OF THESE LOANS, AND PROBABLY WILL INVOLVE THE FOLLOWING POINTS:

1. WHAT EFFECT HAS THE STATE LAW ESTABLISHING INTEREST RATES ON THE RATE THAT MAY BE CHARGED FOR LOANS SECURED BY ADJUSTED SERVICE CERTIFICATE? THUS, WHERE THE FEDERAL RESERVE RATE FOR THE DISCOUNT OF 90-DAY COMMERCIAL PAPER REACHES 4 1/2 PERCENT, MAY A LOAN BE MADE AT 6 1/2 PERCENT IN A STATE WHERE THE MAXIMUM LEGAL RATE IS 6 PERCENT?

2. IN CASE THE TERM OF THE LOAN COVERS A PERIOD OF MORE THAN ONE YEAR AT THE MAXIMUM RATE ALLOWED BY THE ACT, MAY INTEREST BE COMPOUNDED ANNUALLY? IS COMPOUNDING OF INTEREST FOR A PERIOD LESS THAN ONE YEAR AS FOR INSTANCE QUARTERLY OR SEMIANNUALLY, ALLOWABLE UNDER ANY CIRCUMSTANCES?

3. IN CASE A SHORT-TERM LOAN HAS BEEN MADE FOR THE MAXIMUM AMOUNT STATED IN THE CERTIFICATE AND IS NOT PAID AT MATURITY, MAY A NEW LOAN BE NEGOTIATED ON THE SECURITY OF THE CERTIFICATE WHERE THE AMOUNT OF THE NEW LOAN EXCEEDS THE LOAN VALUE, THE EXCESS BEING REPRESENTED BY EARNED INTEREST? IF NOT ALLOWABLE, WHAT IS THE PENALTY?

4. WHERE THE RATE OF INTEREST CHARGED EXCEEDS THE RATE SPECIFIED IN THE ACT, IS THE NOTE THEREBY VOIDED? IF NOT, WHAT IS THE PENALTY?

5. MAY THE NOTES BE DISCOUNTED IN ADVANCE WHERE SUCH ACTION RESULTS IN BRINGING THE ACTUAL INTEREST RATE IN EXCESS OF THE MAXIMUM? THUS, WHERE A NOTE FOR $100, TERM 1 YEAR, AT 6 PERCENT, IS DISCOUNTED, THE VETERAN RECEIVES ONLY $94, THE BANK RECEIVING IN EXCESS OF 6 PERCENT, ON ITS ACTUAL LOAN OF $94. IF SUCH DISCOUNTING IS ILLEGAL, WHAT IS THE PENALTY?

6. WHAT IS THE MAXIMUM RATE OF INTEREST THAT MAY BE CHARGED BY A BANK LOCATED OUTSIDE THE CONTINENTAL UNITED STATES AND, THEREFORE, NOT WITHIN ANY FEDERAL RESERVE DISTRICT?

7. IN CASE OF DUPLICATE CERTIFICATES WITH LOANS NEGOTIATED ON BOTH BY THE VETERAN NAMED THEREIN, MAY THE BUREAU REDEEM BOTH NOTES?

I WILL VERY MUCH APPRECIATE YOUR EARLY CONSIDERATION OF THE QUESTION SUBMITTED FOR DECISION.

EVIDENTLY THE QUESTIONS ARE SUBMITTED ON THE THEORY THAT THEY MAY ARISE UNDER THE SEVERAL SUBDIVISIONS OF SECTION 502 OF THE WORLD WAR ADJUSTED COMPENSATION ACT OF MAY 19, 1924, 43 STAT. 126, IN DETERMINING THE AMOUNT TO BE PAID BY THE GOVERNMENT IN PAYMENT OF A VETERAN'S NOTE TO A LOANING BANK PRESENTING TO THE VETERANS' BUREAU THE NOTE AND AN ADJUSTED SERVICE CERTIFICATE ACCEPTED BY THE BANK AS SECURITY FOR PAYMENT OF THE NOTE, EITHER UPON THE FAILURE OF A VETERAN TO PAY THE LOAN WITH INTEREST AT MATURITY, OR UPON THE DEATH OF THE VETERAN PRIOR TO MATURITY OF THE LOAN, THE AMOUNT THUS DETERMINED BEING ALSO THE AMOUNT TO BE INITIALLY CHARGED AGAINST OR DEDUCTED FROM THE FACE VALUE OF THE ADJUSTED SERVICE CERTIFICATE, AND UPON WHICH INTEREST AT THE RATE OF 6 PERCENT COMPOUNDED ANNUALLY IS TO BE CHARGED THE VETERAN BY THE GOVERNMENT UNTIL HE HAS REDEEMED HIS CERTIFICATE. IT IS UNDERSTOOD THAT THERE ARE NO MATTERS NOW BEFORE THE BUREAU FOR DETERMINATION INVOLVING ANY OF THE QUESTIONS HERE PRESENTED.

THE QUESTIONS WILL BE CONSIDERED IN THE ORDER PRESENTED AS FOLLOWS:

1. IN THE COMMITTEE REPORT ON H.R. 16886, PROPOSING TO AUTHORIZE THE VETERANS' BUREAU TO MAKE LOANS DIRECT TO THE VETERANS, IT IS STATED THAT "THE PRESENT RATE FOR DISCOUNT BY THE FEDERAL RESERVE BANKS IS 4 PERCENT FOR ALL DISTRICTS.' IF SO, THE INTEREST RATE ON ALL LOANS BY BANKS TO VETERANS WOULD BE NOT IN EXCESS OF 6 PERCENT PER ANNUM. I AM NOT ADVISED OF ANY STATE HAVING A LEGAL RATE OF INTEREST LESS THAN 6 PERCENT. HENCE, THIS QUESTION PROBABLY WILL NOT ARISE. IF AND WHEN THE QUESTION IS PRESENTED IN AN ACTUAL CASE, THIS OFFICE WILL BE PLEASED TO GIVE CONSIDERATION THERETO.

2. THERE IS NO PROVISION IN THE STATUTE AUTHORIZING A BANK TO COMPOUND INTEREST ON THESE LOANS ANNUALLY, SEMIANNUALLY, QUARTERLY, OR OTHERWISE. IT WILL BE NOTED THAT THE STATUTE SPECIFICALLY AUTHORIZES THE GOVERNMENT TO COMPOUND INTEREST ANNUALLY ON THE AMOUNT OF THE INDEBTEDNESS CHARGED AGAINST A VETERAN'S CERTIFICATE IN CASE OF DEFAULT IN PAYMENT OF THE LOAN. IT MUST BE PRESUMED THAT HAD THE CONGRESS INTENDED TO AUTHORIZE THE SAME ACTION BY THE LOANING BANK IT WOULD HAVE SO PROVIDED IN EXPRESS TERMS. IN THE ABSENCE OF SUCH EXPRESS AUTHORITY, THIS QUESTION MUST BE AND IS ANSWERED IN THE NEGATIVE.

3. PARAGRAPH (G) OF SECTION 502 OF THE STATUTE FIXES THE LOAN VALUE OF AN ADJUSTED SERVICE CERTIFICATE AS "90 PERCENT OF THE RESERVE VALUE OF THE CERTIFICATE ON THE LAST DAY OF THE CURRENT CERTIFICATE YEAR.' IF A LOAN WAS MADE DURING THE CURRENT FISCAL YEAR FOR THE MAXIMUM LOAN VALUE STATED IN THE CERTIFICATE FOR THAT YEAR, AND A NEW LOAN WAS REQUESTED DURING THE NEXT SUCCEEDING CERTIFICATE YEAR TO INCLUDE THE AMOUNT OF THE FIRST LOAN TOGETHER WITH THE ACCRUED INTEREST THEREON, THE AMOUNT OF THE PRINCIPAL OF THE SECOND LOAN SHOULD NOT EXCEED THE LOAN VALUE OF THE CERTIFICATE FOR THE CERTIFICATE YEAR IN WHICH THE NEW LOAN IS MADE. IF THE FIRST AND SECOND LOANS ARE TO BE KEPT SEPARATE AND DISTINCT, THE PRINCIPAL OF THE SECOND LOAN SHOULD NOT EXCEED THE DIFFERENCE BETWEEN THE PRINCIPAL OF THE FIRST LOAN, PLUS ACCRUED EARNED INTEREST THEREON, AND THE LOAN VALUE OF THE CERTIFICATE FOR THE CERTIFICATE YEAR IN WHICH THE SECOND LOAN IS MADE, AND SO ON FOR SUCCEEDING YEARS. ACCORDINGLY, THIS QUESTION IS ANSWERED IN THE NEGATIVE.

4. IT MAY BE ASSUMED THAT NO BANK WILL CHARGE A RATE OF INTEREST IN EXCESS OF THE MAXIMUM RATE AUTHORIZED BY THE STATUTE. IF AND WHEN THE QUESTION IS PRESENTED AS ARISING IN AN ACTUAL CASE, CONSIDERATION WILL BE GIVEN THERETO. AS TO THE PENALTY, REFERENCE IS MADE TO SUBDIVISION (H) OF SECTION 502 OF THE STATUTE, WHICH WILL BE FOR CONSIDERATION WHEN THE QUESTION PROPERLY ARISES.

5. THIS QUESTION IS ANSWERED IN THE NEGATIVE. SUCH DISCOUNT IN ADVANCE WOULD AMOUNT TO AN INDIRECT METHOD OF INCREASING THE LEGAL RATE OF INTEREST NOT AUTHORIZED OR SANCTIONED BY THE STATUTE. AS TO THE PENALTY, SEE ANSWER TO QUESTION 4.

6. IT IS NOT LIKELY THAT THIS QUESTION WILL ARISE IN CONNECTION WITH ANY MATTER REQUIRING DETERMINATION OR ACTION BY THE BUREAU. IN ANY EVENT, IT WILL BE BETTER TO CONSIDER THE QUESTION WHEN PROPERLY PRESENTED IN AN ACTUAL CASE AND IN CONNECTION WITH THE FACTS RELATING THERETO.

7. THE BANK OR BANKS SHOULD BE PAID THE AMOUNT OF BOTH LOANS PLUS THE EARNED INTEREST ON EACH, THE AGGREGATE AMOUNT OF WHICH WILL BE CONSIDERED AS A CHARGE AGAINST THE FIRST CERTIFICATE ISSUED, IF IN REGULAR FORM. ASSUMING THE CERTIFICATE FIRST ISSUED TO HAVE BEEN REGULAR IN EVERY WAY, THE CERTIFICATE SUBSEQUENTLY ISSUED SHOULD BE CANCELED WHEN SUBMITTED TO THE BUREAU BY THE BANK, AND THE FIRST CERTIFICATE SHOULD BE HELD IN THE VETERANS' BUREAU UNTIL THE VETERAN LIQUIDATES THE FULL INDEBTEDNESS AND REDEEMS THE CERTIFICATE. THAT IS TO SAY, THE FIRST CERTIFICATE WOULD NOT AGAIN BE AVAILABLE AS SECURITY FOR ADDITIONAL LOANS UNTIL THE FULL AMOUNT OF THE INDEBTEDNESS RESULTING FROM THE LOANS ON THE DUPLICATE CERTIFICATES HAS BEEN LIQUIDATED.