A-74701, FEBRUARY 4, 1937, 16 COMP. GEN. 723

A-74701: Feb 4, 1937

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1937: I HAVE YOUR LETTER OF DECEMBER 30. WHICH WILL BE SELF-EXPLANATORY. HAS BEEN OUR EXPERIENCE THAT PAYMENT IN FULL FROM THE DEBTORS CAN FREQUENTLY BE OBTAINED IF NO ATTEMPT IS MADE TO REPOSSESS THE EQUIPMENT INVOLVED. IT IS ALSO A WELL RECOGNIZED FACT THAT FREQUENTLY THE PRICE OBTAINED UPON RESALE OF SUCH EQUIPMENT IS NOT EQUAL TO THE UNPAID BALANCE OF THE DEBTOR'S OBLIGATION. THE FEDERAL HOUSING ADMINISTRATION WOULD LIKE TO ADVISE INSURED INSTITUTIONS IN JURISDICTIONS SUCH AS THE STATE OF WASHINGTON THAT WHERE CONDITIONAL SALES CONTRACTS ARE INVOLVED. SO THAT THE FEDERAL HOUSING ADMINISTRATION WILL HAVE FINAL DISCRETION AS TO THE BEST METHOD OF COLLECTING OBLIGATIONS UPON WHICH CLAIMS ARE MADE.

A-74701, FEBRUARY 4, 1937, 16 COMP. GEN. 723

FEDERAL HOUSING ADMINISTRATION - LOANS - DEFAULT - REIMBURSEMENT OF LENDING INSTITUTIONS FOR LOSSES SUSTAINED - ACCELERATION OF UNPAID INSTALLMENTS NOT IN DEFAULT FINANCIAL INSTITUTIONS INSURED UNDER SECTION 2, TITLE 1, OF THE NATIONAL HOUSING ACT, 48 STAT. 1246, AGAINST LOSS WHICH THEY MAY SUSTAIN ON MODERNIZATION LOANS, MAY BE REIMBURSED THE ENTIRE UNPAID BALANCE OF SUCH LOANS WHERE THE DEBTOR HAS DEFAULTED IN PAYMENTS, UPON THE ASSIGNMENT TO THE GOVERNMENT OF THE CONDITIONAL SALES AGREEMENTS INVOLVED, WITHOUT THE PRIOR EXERCISE OF THE RIGHT OF ACCELERATION OF THE DUE DATES OF UNPAID INSTALLMENTS, NOT IN DEFAULT, WHERE TO EXERCISE THAT RIGHT WOULD BE DETRIMENTAL TO THE INTERESTS OF THE UNITED STATES BECAUSE OF THE EFFECT THEREOF UNDER THE STATUTES OF CERTAIN STATES.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE ADMINISTRATOR, FEDERAL HOUSING ADMINISTRATION, FEBRUARY 4, 1937:

I HAVE YOUR LETTER OF DECEMBER 30, 1936, AS FOLLOWS:

I AM ENCLOSING, FOR YOUR INFORMATION, COPIES OF CORRESPONDENCE RECEIVED FROM THE SEATTLE FIRST NATIONAL BANK, SEATTLE, WASHINGTON, WHICH WILL BE SELF-EXPLANATORY.

UNDER PREVIOUS RULINGS OBTAINED FROM YOUR DEPARTMENT, THE FEDERAL HOUSING ADMINISTRATION HAS BEEN REQUIRING THAT INSURED INSTITUTIONS MAKE DEMAND UPON DELINQUENT DEBTORS FOR PAYMENT IN FULL PRIOR TO THE FILING OF CLAIM UNDER CONTRACTS OF INSURANCE WITH THE FEDERAL HOUSING ADMINISTRATION, SO THAT THE EXISTENCE OF LOSS COULD BE ASCERTAINED. FROM THE ENCLOSED CORRESPONDENCE, HOWEVER, IT WOULD APPEAR THAT THE CONTINUANCE OF THIS PRACTICE, AT LEAST IN THE STATE OF WASHINGTON AND OTHER STATES WITH SIMILAR LAWS WITH REFERENCE TO THE ENFORCEMENT OF CONDITIONAL SALES CONTRACTS, MIGHT NOT BE TO THE BEST INTERESTS OF THE UNITED STATES. HAS BEEN OUR EXPERIENCE THAT PAYMENT IN FULL FROM THE DEBTORS CAN FREQUENTLY BE OBTAINED IF NO ATTEMPT IS MADE TO REPOSSESS THE EQUIPMENT INVOLVED. IT IS ALSO A WELL RECOGNIZED FACT THAT FREQUENTLY THE PRICE OBTAINED UPON RESALE OF SUCH EQUIPMENT IS NOT EQUAL TO THE UNPAID BALANCE OF THE DEBTOR'S OBLIGATION.

IN VIEW OF THE ABOVE, THE FEDERAL HOUSING ADMINISTRATION WOULD LIKE TO ADVISE INSURED INSTITUTIONS IN JURISDICTIONS SUCH AS THE STATE OF WASHINGTON THAT WHERE CONDITIONAL SALES CONTRACTS ARE INVOLVED, DEMAND FOR PAYMENT IN FULL NEED NOT BE MADE UPON THE DEBTOR, SO THAT THE FEDERAL HOUSING ADMINISTRATION WILL HAVE FINAL DISCRETION AS TO THE BEST METHOD OF COLLECTING OBLIGATIONS UPON WHICH CLAIMS ARE MADE.

SINCE THE INSURED INSTITUTION RAISING THE QUESTION HAS BEEN ADVISED TO WITHHOLD ANY FURTHER ACTION IN THE NATURE OF MAKING DEMAND IN FULL PENDING THE RECEIPT OF A RULING FROM YOUR DEPARTMENT, IT WOULD BE APPRECIATED IF THIS MATTER COULD BE GIVEN PREFERRED ATTENTION.

THE SITUATION APPEARS TO BE THAT BY REASON OF THE TERMS OF CONDITIONAL SALES AGREEMENTS COVERING PURCHASES OF EQUIPMENT, ON THE BASIS OF WHICH AGREEMENTS CREDIT HAS BEEN EXTENDED BY FINANCIAL INSTITUTIONS, WITH SUCH LOANS INSURED UNDER THE PROVISIONS OF TITLE I OF THE NATIONAL HOUSING ACT OF JUNE 27, 1934, 48 STAT. 1246, AS AMENDED, SUCH INSTITUTIONS CANNOT EXERCISE THE RESERVED RIGHT TO ACCELERATE THE DUE DATE OF ALL UNPAID INSTALLMENTS UPON DEFAULT IN PAYMENT OF ANY INSTALLMENT, WITHOUT THEREBY, IN EFFECT, CONFIRMING THE SALE AND PASSING TITLE TO THE EQUIPMENT TO THE VENDEE, THUS LOSING THE ALTERNATIVE RIGHT TO REPOSSESS THE EQUIPMENT BY REASON OF THE DEFAULT.

A SPECIMEN COPY OF SUCH CONDITIONAL SALES AGREEMENTS SHOWS THESE ALTERNATIVE RIGHTS RESERVED TO THE SELLER, OR ITS ASSIGNEES, AS FOLLOWS:

5.IF THE BUYER SHALL FAIL TO PAY ANY UNPAID INSTALLMENT OR LATE CHARGE TO BECOME DUE UNDER THE PROVISIONS HEREOF, WHEN AND AS THE SAME SHALL BECOME DUE AND PAYABLE, OR IF THE BUYER SHALL BECOME INSOLVENT OR FAIL TO KEEP SAID PROPERTY IN A GOOD STATE OF REPAIR, OR FAIL TO PERFORM, OR VIOLATE ANY OTHER TERM OR PROVISION OF THIS CONTRACT, OR IF THE SELLER SHALL HAVE REASONABLE CAUSE TO BELIEVE THAT SAID PROPERTY IS IN DANGER OF MISUSE, ABUSE, DESTRUCTION, REMOVAL, SECRETION, CONCEALMENT OR CONFISCATION, THEN, IN ANY SUCH CASE, THE SELLER MAY AT THE SELLER'S OPTION, AND WITHOUT NOTICE, EITHER:

(A) DECLARE THE ENTIRE BALANCE REMAINING UNPAID UNDER THE TERMS HEREOF IMMEDIATELY DUE AND PAYABLE AND PROCEED TO ENFORCE COLLECTION OF THE SAME, BY SUIT IF THE SELLER SO DESIRES, OR

(B) DECLARE THIS CONTRACT, AND ALL THE BUYER'S RIGHTS HEREUNDER, FORFEITED AND ENTER ANY PREMISES WHERE SAID PROPERTY MAY BE FOUND AND RETAKE POSSESSION THEREOF WITHOUT BEING ACCOUNTABLE TO THE BUYER THEREFOR, AND RETAIN AS LIQUIDATED DAMAGES, AND AS FAIR COMPENSATION FOR THE USE OF SAID PROPERTY, ALL PAYMENTS THERETOFORE MADE BY THE BUYER.

IT IS URGED THAT IF THE INSURED FINANCIAL INSTITUTIONS ARE REQUIRED UPON DEFAULT IN PAYMENTS BY THE BUYER UNDER SUCH AGREEMENTS TO DECLARE THE ENTIRE BALANCE REMAINING UNPAID IMMEDIATELY DUE AND PAYABLE UNDER ALTERNATIVE (A) AS A CONDITION PRECEDENT TO MAKING CLAIM ON THE GOVERNMENT UNDER TITLE I OF THE NATIONAL HOUSING ACT FOR THE AMOUNT OF SUCH ENTIRE UNPAID BALANCE, THE GOVERNMENT, AS ASSIGNEE OF THE NOTE AND AGREEMENT, WILL HAVE LOST THE RIGHT TO PROCEED AGAINST THE EQUIPMENT AND THUS WILL BE IN A LESS ADVANTAGEOUS POSITION TO COLLECT PAYMENTS FROM THE BUYER THAN IF SUCH OPTION WERE NOT EXERCISED PRIOR TO ASSIGNMENT TO THE GOVERNMENT.

IT WAS HELD IN DECISION OF OCTOBER 6, 1936, A-74701 (16 COMP. GEN. 336), THAT WHILE SECTION 2 OF TITLE I OF THE NATIONAL HOUSING ACT, 48 STAT. 1246, AUTHORIZED THE INSURANCE OF FINANCIAL INSTITUTIONS ONLY AGAINST "LOSSES" WHICH THEY MAY SUSTAIN ON MODERNIZATION LOANS, AND, THEREFORE, THAT ORDINARILY THERE WOULD BE NO AUTHORITY FOR REIMBURSING SUCH INSTITUTIONS ON UNMATURED NOTES BECAUSE SUCH NOTES, NOT YET BEING DUE AND PAYABLE, COULD NOT BE REGARDED AS REPRESENTING LOSSES OF THE INSURED INSTITUTIONS, THERE WOULD BE NO OBJECTION TO REIMBURSING SUCH INSTITUTIONS UNMATURED BALANCES WHERE NECESSARY TO CONSERVE THE INTERESTS OF THE UNITED STATES IN ATTEMPTING COLLECTION ON DEFAULTED LOANS IN CASES WHERE THE FACTS CLEARLY INDICATE THAT THE ENTIRE UNPAID BALANCE WILL BE A CLAIM OF THE INSTITUTION AGAINST THE GOVERNMENT.

IN THE PRESENT MATTER IT APPEARS CLEARLY IN THE INTEREST OF THE UNITED STATES TO HAVE THE AGREEMENTS ASSIGNED WITHOUT THE PRIOR EXERCISE OF THE OPTION ACCELERATING THE DUE DATE OF UNPAID INSTALLMENTS NOT IN DEFAULT, AND AS THE INSURED INSTITUTIONS COULD, IN ANY EVENT, PERFECT THEIR CLAIMS AGAINST THE GOVERNMENT FOR THE ENTIRE UNPAID BALANCE BY THE SIMPLE EXPEDIENT OF SO EXERCISING SUCH OPTION, SUCH CASES MAY BE VIEWED AS COMING WITHIN THE PRINCIPLES OF THE DECISION OF OCTOBER 6, 1936, SUPRA.

ACCORDINGLY, YOU ARE ADVISED THAT THIS OFFICE WILL NOT BE REQUIRED TO OBJECT TO REIMBURSEMENT, OTHERWISE PROPER, OF THE INSURED INSTITUTIONS FOR THE ENTIRE UNPAID BALANCE IN SUCH CASES WHERE THE BUYER HAS DEFAULTED IN PAYMENTS UPON THE ASSIGNMENT TO THE GOVERNMENT OF THE CONDITIONAL SALES AGREEMENTS WITHOUT THE PRIOR EXERCISE OF THE ALTERNATIVE RIGHT OF ACCELERATION RESERVED IN THE AGREEMENTS.

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