Claim by Bank for Reimbursement of Loss Sustained on Property Improvement Loans

An authorized certifying officer of the Department of Housing and Urban Development (HUD) asked whether he could certify for payment a voucher payable to a bank. The voucher covered a claim for reimbursement of a loss sustained on several property improvement loans which the bank made and submitted to HUD for insurance under the National Housing Act. The claim was initially denied by HUD because, at the time the loans were made, the borrowers were not eligible for insurance. They were neither the owners of the property nor lessees with a lease expiring at least 6 months after the maturity of the loans as required by the Act. The bank felt its claim should be honored, because it had been incorrectly advised by the HUD area office that the loan in question was eligible for HUD insurance due to the option to purchase contained in the lease. In response, HUD cited the long recognized principle that the United States cannot be bound or estopped by the unauthorized acts of its agents. The bank claimed that a second loan was not disbursed, and the check was not honored until the date the borrowers gained legal title to the property. Thus it was entitled to at least this portion of the claim. At the time the note was signed, the borrowers were lessees and not owners. The fact that the borrowers chose to exercise their option to purchase on the following day did not change the legal relationship that existed between the borrowers and their landlord on that date. The final argument of the bank was that the claim could be paid on the basis of the last note which refinanced the then-outstanding loans as it covered legitimate qualified improvements and was executed after the borrower had obtained ownership of the property. Based on the statutory refinancing provision, GAO believed that this refinancing loan was also ineligible for insurance. Accordingly, the voucher in question could not be certified for payment, in whole or in part.