B-164118, NOV. 19, 1969

B-164118, NOV. 19, 1969

HOUSING--LOANS--DEFAULT--INSURANCE COVERAGE CREDIT UNION WHICH AGREED BECAUSE OF BORROWER'S HEALTH TO EXTEND MATURITY DATE OF NOTE BEYOND STATUTORY LIMITATION (5 YEARS AND 32 DAYS) WHERE BORROWER WAS LATER ADJUDICATED BANKRUPT AND NO FURTHER PAYMENTS WERE MADE, MAY NOT BE REIMBURSED BY FEDERAL HOUSING ADMINISTRATION FOR LOSS UPON SUBSEQUENT DEFAULT SINCE, ALTHOUGH LENDER WOULD HAVE BEEN REIMBURSED HAD CLAIM BEEN FILED ON EARLIER DEFAULT AND NOT EXTENDED ONLY BY AGREEMENT, EXTENSION OF TIME FOR PAYMENT OF NOTE WITHOUT REFINANCING, THAT IS BY EXECUTION OF NEW NOTE, DID NOT COMPLY WITH STATUTORY PROVISO OF SECTION 2 (B) OF NATIONAL HOUSING ACT, 12 U.S.C. 1703 (B).

TO MR. LESTER H. THOMPSON:

THIS IS IN RESPONSE TO YOUR REQUEST OF JUNE 19, 1969, FOR OUR OPINION WHETHER, IN THE SITUATION RELATED BELOW, YOU MAY PROPERLY CERTIFY FOR PAYMENT A FORWARDED VOUCHER FOR THE SUM OF $1,737.70 IN FAVOR OF THE CAL- TECH EMPLOYEES FEDERAL CREDIT UNION, 4000 OAK GROVE DRIVE, PASADENA, CALIFORNIA. THE VOUCHER COVERS A CLAIM OF THE CAL TECH FEDERAL CREDIT UNION FOR REIMBURSEMENT OF LOSS SUSTAINED ON A NOTE OF MORRIS L. AND CONNIE P. MILLER WHICH HAD BEEN INSURED PURSUANT TO TITLE I OF THE NATIONAL HOUSING ACT, AS AMENDED (12 U.S.C. 1701 ET. SEQ).

THE NOTE WAS REPORTED FOR INSURANCE BY THE LENDER UNDER ITS CREDIT INSURANCE CONTRACT WITH THIS ADMINISTRATION PURSUANT TO TITLE I OF THE NATIONAL HOUSING ACT, AS AMENDED (12 U.S.C. 1701 ET SEQ.), AND THE INSURANCE PREMIUMS WERE PAID.

THE NOTE WAS DATED MARCH 25, 1965, AND PROVIDED FOR 60 INSTALLMENTS OF $51.96 BEGINNING APRIL 25, 1965, A TERM OF FIVE YEARS, WHICH WOULD HAVE BEEN WITHIN THE MAXIMUM STATUTORY LIMITATION OF FIVE YEARS AND 32 DAYS IN FORCE AT THE TIME THE LOAN WAS MADE (SECTION 2 (B) OF THE NATIONAL HOUSING ACT, AS AMENDED (12 U.S.C. 1703 (B) ); (24 CFR 201.2 (D) (2) (I) ).

BY REASON OF UNEMPLOYMENT ON THE PART OF THE BORROWER DUE TO A SERIOUS HEALTH PROBLEM, THE LENDER ENTERED INTO AN EXTENSION AGREEMENT DATED DECEMBER 6, 1967, EXTENDING THE PAYMENTS FOR A PERIOD OF TWO MONTHS, THEREBY EXTENDING MATURITY OF THE NOTE BEYOND FIVE YEARS AND 32 DAYS. MARCH 27, 1968, A FURTHER EXTENSION AGREEMENT WAS MADE WHICH PROJECTED THE FINAL MATURITY TO JUNE 25, 1970, AND THE TERM OF THE LOAN TO FIVE YEARS AND 92 DAYS.

ON MAY 15, 1968, THE BORROWER WAS ADJUDICATED A BANKRUPT AND NO FURTHER PAYMENTS WERE RECEIVED ON THE NOTE. IN VIEW OF THE EXTENSION AGREEMENT AND THE POSITION OF THIS OFFICE RELATIVE TO CLAIMS EXCEEDING THE MAXIMUM TERM PERMISSIBLE UNDER SECTION 2 (B) OF THE NATIONAL HOUSING ACT, AS AMENDED, AS SET FORTH IN B-164118, DATED AUGUST 14, 1968, THE LENDER'S CLAIM WAS DENIED BY THE FEDERAL HOUSING ADMINISTRATION (FHA). THE LENDER, HOWEVER, HAS APPEALED THE DENIAL AND WAS SUBSEQUENTLY ADVISED THAT IF IT RESUBMITTED THE CLAIM, YOU WOULD SEEK A SPECIFIC RULING FROM THIS OFFICE IN THE MATTER.

YOU STATE THAT HAD THE LENDER NOT SOUGHT TO AVOID FILING CLAIM UNDER ITS INSURANCE BY ENTERING INTO AN EXTENSION AGREEMENT WITH THE BORROWER AND INSTEAD FILED IMMEDIATELY FOR INSURANCE BENEFITS WHEN THE LOAN WENT INTO DEFAULT UNDER ITS CONTRACT OF INSURANCE, THE CLAIM WOULD HAVE BEEN ELIGIBLE AND WOULD HAVE BEEN PAID.

IN VIEW OF THE FACTS AND CIRCUMSTANCES, YOU REQUEST OUR VIEWS AS TO WHETHER IT IS PROPER TO CERTIFY THE ENCLOSED VOUCHER FOR PAYMENT.

SECTION 2 (B) OF THE NATIONAL HOUSING ACT PROVIDES IN PERTINENT PART AS FOLLOWS:

"NO INSURANCE SHALL BE GRANTED UNDER THIS SECTION * * * IF SUCH OBLIGATION HAS A MATURITY IN EXCESS OF THREE YEARS AND THIRTY-TWO DAYS, EXCEPT THAT THE COMMISSIONER MAY INCREASE SUCH MAXIMUM LIMITATION TO FIVE YEARS AND THIRTY-TWO DAYS. * * * PROVIDED FURTHER, THAT ANY OBLIGATION WITH RESPECT TO WHICH INSURANCE IS GRANTED UNDER THIS SECTION ON OR AFTER JULY 1, 1939, MAY BE REFINANCED AND EXTENDED IN ACCORDANCE WITH SUCH TERMS AND CONDITIONS AS THE COMMISSIONER MAY PRESCRIBE, BUT IN NO EVENT FOR AN ADDITIONAL AMOUNT OR TERM IN EXCESS OF THE MAXIMUM PROVIDED FOR IN THIS SUBSECTION.'

AS INDICATED IN YOUR LETTER, WE HAVE HELD THAT IN VIEW OF THE ABOVE QUOTED PROVISION OF LAW A FINANCING INSTITUTION MAY EXTEND THE TIME FOR PAYING A NOTE BEYOND THE MAXIMUM TIME LIMITATION ONLY IF IT REFINANCES THE LOAN, THAT IS, IF A NEW NOTE IS EXECUTED. SEE B-131963, JULY 17, 1957; B- 148816, MAY 21, 1962; B-149800, SEPTEMBER 28, 1962; CF. B 164118, AUGUST 14, 1968. IT IS CLEAR FROM THE RECORD BEFORE US IN THE INSTANT CASE THAT THE LENDER EXTENDED THE MATURITY DATE OF THE INITIAL OBLIGATION 60 DAYS BEYOND THE MAXIMUM AUTHORIZED UNDER THE STATUTE BUT DID NOT REFINANCE THE LOAN AS REQUIRED BY THE STATUTORY PROVISION QUOTED ABOVE. IN FACT THE LENDER ADVISED FHA BY LETTER THAT: "HAD WE REFINANCED THE LOAN IN DECEMBER 1967 AND EXTENDED THE MATURITY DATE FOR THE MAXIMUM TIME (SEVEN YEARS FROM THE DATE OF ORIGINAL NOTE), THE BALANCE OF $2,059.46 WOULD THEN HAVE BEEN PAYABLE WITHIN FIFTY-ONE MONTHS AT THE RATE OF $49.32 PER MONTH, REPRESENTING A REDUCTION OF $2.64 ON MR. MILLER'S CURRENT MONTHLY PAYMENT SCHEDULE. HAD WE ATTEMPTED TO FOLLOW THIS COURSE OF ACTION IN MARCH 1968, THIS SAME BALANCE WOULD HAVE BEEN PAYABLE AT THE RATE OF $52.14 PER MONTH, REPRESENTING AN INCREASE OF $0.18 OVER HIS PRESENT MONTHLY PAYMENT SCHEDULE. AT NEITHER TIME WOULD THE REFINANCING OF THIS LOAN HAVE HELPED OUR MEMBER OR REMEDIED THE SITUATION. WE THEREFORE SUBSTITUTED THIS PROCEDURE BY GRANTING AN EXTENSION AGREEMENT ON EACH OCCASION, THEREBY PROVIDING OUR MEMBER WITH GENUINE ASSISTANCE, AT THE SAME TIME FALLING FAR SHORT OF EXTENDING THE LOAN TO A MAXIMUM MATURITY PERIOD OF SEVEN YEARS, AS PROVIDED, FOR REFINANCED LOANS.'ALTHOUGH OUR DOCUMENTATION DOES NOT INDICATE THE EXISTENCE OF A REFINANCED LOAN, WE ARE HOPEFUL THAT THE ABOVE EXPLANATION WILL SERVE TO SUBSTANTIATE THE FACT THAT WE ACTED IN GOOD FAITH, FOR THE BENEFIT OF ALL CONCERNED, AND THAT THE ACTION TAKEN WAS BASICALLY THE SAME AS IF WE HAD REFINANCED THE LOAN.'

INSOFAR AS THE EXTENSION OF THE LOAN BEING MORE BENEFICIAL TO THE BORROWER THAN REFINANCING, WE NOTE THAT IN FHA'S LETTER OF SEPTEMBER 4, 1968, TO THE LENDER, IT IS STATED THAT:

"WE APPRECIATE YOUR EFFORTS IN TRYING TO HELP THE BORROWERS BUT A REFINANCING WOULD HAVE BEEN MORE ADVANTAGEOUS IN THIS INSTANCE. UNDER THE AMENDMENTS TO THE REGULATIONS EFFECTIVE JUNE 15, 1964, A CLASS 1 (A) LOAN OR A CLASS 2 (A) LOAN MAY BE REFINANCED FOR AN ADDITIONAL PERIOD NOT IN EXCESS OF 5 YEARS AND 32 DAYS FROM THE DATE OF THE REFINANCING PROVIDED THAT THE TERM OF THE NEW NOTE DOES NOT EXTEND BEYOND 10 YEARS FROM THE DATE OF THE ORIGINAL NOTE. BY REFINANCING ON DECEMBER 6, 1967, THE PAYMENTS COULD HAVE BEEN REDUCED BY APPROXIMATELY $9.'

ALSO, WHILE IT MAY BE THAT THE CLAIM WOULD HAVE BEEN ELIGIBLE AND PAID HAD THE LENDER NOT ENTERED INTO AN EXTENSION AGREEMENT WITH THE BORROWER BUT FILED IMMEDIATELY FOR INSURANCE BENEFITS WHEN THE LOAN WENT INTO DEFAULT, THE LENDER APPARENTLY COULD HAVE AVOIDED FILING CLAIM UNDER ITS INSURANCE BY REFINANCING THE LOAN AND UPON SUBSEQUENT DEFAULT WOULD HAVE BEEN ENTITLED TO RECOVER UNDER ITS CONTRACT OF INSURANCE.

FURTHER, ALTHOUGH SECTION 2 (E) OF TITLE I OF THE NATIONAL HOUSING ACT, AS AMENDED, 12 U.S.C. 1703 (E) AUTHORIZES THE SECRETARY OF HOUSING AND URBAN DEVELOPMENT TO WAIVE COMPLIANCE WITH REGULATIONS PRESCRIBED BY HIM, NEITHER THAT SECTION NOR ANY OTHER PART OF THE ACT VESTS ANY AUTHORITY IN THE SECRETARY TO WAIVE COMPLIANCE WITH THE ABOVE-QUOTED STATUTORY REFINANCING PROVISO. THEREFORE, SINCE THE EXTENSION OF TIME FOR PAYMENT OF THE NOTE WITHOUT REFINANCING THE LOAN WAS NOT IN COMPLIANCE WITH THE STATUTORY PROVISO, THE SECRETARY'S WAIVER AUTHORITY WOULD NOT APPLY.

ACCORDINGLY, AND REGARDLESS OF THE REASON FOR THE LENDER NOT REFINANCING THE LOAN INVOLVED HERE, SINCE THE EXTENSION OF THE MATURITY DATE OF THE ORIGINAL NOTE WAS GRANTED WITHOUT SUCH REFINANCING, OUR DECISION OF JULY 17, 1957, REFERRED TO ABOVE, IS APPLICABLE. THEREFORE, THE VOUCHER IN QUESTION MAY NOT BE CERTIFIED FOR PAYMENT AND IS RETURNED HEREWITH TOGETHER WITH YOUR CLAIMS FILE.