NOTES TO FINANCIAL STATEMENTS

[Referred to in exhibit tables pp. 1446 and 1448]

1. Certain real estate and defaulted mortgage notes which had been tendered to the Commissioner had not been officially accepted by FHA at June 30, 1953. FHA estimates that almost $6 million in debentures will be issued upon final acceptance, segregated as follows: Title I-Housing Insurance Fund $216,000, Mutual Mortgage Insurance Fund $376.200; Title II-Housing Insurance Fund $590,600, and War Housing Insurance Fund $4,776,800. The accrued debenture interest at June 30, 1953, is estimated at $53,700. When the assets are acquired, FHA will set up provisions for estimated future losses from current income at rates of 15 percent of the acquisition cost under titles I and II and 17% percent under title VI.

2. Statutory reserve applies to mutual insurance groups and is composed of net income available for

Contingent losses, expenses, and group account participations- $117, 301, 384
Transfer to insurance reserve--

Total____

30, 966, 814 148, 268, 198

Prior to the enactment of the "Housing Amendments of 1953," the statutes required that an amount equal to 10 percent of the total premiums credited to the groups be transferred to the insurance reserve at termination of the group accounts. The new legislation directed that the 10 percent of premiums credited to group accounts be transferred to the insurance reserve as of July 1, 1953, without regard to termination dates. Accordingly, a transfer of $30,593,463 was made at the beginning of fiscal year 1954. The difference between the amount transferred and the amount available for transfer shown above consisted of collected premiums which had not as yet been credited to group accounts on June 30, 1953.

3. Under authority contained in the National Housing Act, as amended, funds were transferred between certain insurance Fund accounts as follows:

4. Net income does not include a provision for future losses that may result from insurance in force at June 30, 1953. Future losses inherent in insurance operations are not recognized until properties are acquired in settlement of claims. However, FHA does retain its cumulative income as an insurance reserve.

5. FHA is not required to pay the Government's share of the cost of retirement and disability benefits which inure to FHA employees. Based on the rate of contributions applicable to agencies that are subject to such payments, FHA's contribution would be about $1,554 500 for fiscal year 1953. If FHA were required to make such contributions, most of the cost would be charged to the mutual mortgage groups and would result in a savings to the Government.

6. Uncollected interest earned on defaulted property improvement loans and mortgage notes is not recorded as an asset on the balance sheet.

Interest income for Title I-Insurance Fund represents cash collections of interest for the year on defaulted property improvement loans. FHA does not consider it practical to accrue interest on these defaulted loans because of the uncertainty of collection and the clerical expense involved. Interest collected on notes and mortgages held by FHA under titles other than Title I-Insurance Fund is not shown as interest income but is credited to the acquired properties account.

Interest income shown for titles II and VI is imputed interest, on debentures redeemed before maturity, which has been added to the acquired properties account.

7. In the Mutual Mortgage Insurance Fund debenture interest may be charged to the Mutual Mortgage groups after the related property has been sold and final settlement made. This interest expense appears on the FHA statement as interest on debentures.

Senator MAYBANK. Why wasn't the FHA checked before 1949? Mr. KANE. Before the GAO audited on a centralized type of audit basis. That type of audit does not go into the operations of the

agency.

Senator MAYBANK. I know that, but I want it for the record. When was it changed?

Mr. KANE. It was changed in 1949, and when the agency was put under the audit of the Government Corporations Control Act. The Comptroller General endorsed that because it meant we would go into the agency and make a commercial-type audit, where we could do the operation and examine the books and records there.

Senator MAYBANK. What law gives you the right to do that?

Mr. KANE. The Government Corporations Control Act of 1945 was the basic law, but FHA wasn't put under it in the 1949 act. Senator MAYBANK. Why did you wait until 1949?

Mr. KANE. At the time the Government Corporations Control Act was considered the General Accounting Office felt that the FHA should have been put under it, but as a matter of congressional policy it was not included.

Senator MAYBANK. What congressional policy made you do it?

Mr. KANE. I think that the Congress itself felt that there should be an overall audit, a commercial-type audit, made.

Senator MAYBANK. The Congress thought so, unless I am mistaken, in the Housing Act of 1949.

Mr. KANE. That's right. That's right. Of course, we heartily endorse that.

The CHAIRMAN. Mr. Kane, I don't suppose you have this, but does every loan made under title I, does every bank have to use the same sort of form as furnished by you?

Mr. FRENTZ. Yes, I do.

The CHAIRMAN. May I see it?

Mr. FRENTZ. Yes.

The CHAIRMAN. You may proceed, Mr. Newman, while he is getting that form.

Mr. NEWMAN. I believe I was quoting some figures with regard to claims paid. I think to sum it up, briefly, we had outstanding-we had paid claims in the year 1949, of approximately $17 million. In 1950, it went to $19 million. In 1952 it dropped to $11 million, and in 1953, it is at $12.8 million.

The number of claims paid in 1953 is 35,000, as compared to 46,000 for 1949. I think that is important to show that progress has been made and that there has been a tightening up.

Back to Senator Lehman's remark about the status of the insurance fund, we have on the books at June 30, 1953, $50 million of claims paid. We have a reserve against the $50 million of $35 million, plus a surplus reserve of $23 million. I just wanted to emphasize that for Senator Lehman.

The CHAIRMAN. I would like to ask some questions, but, Mr. Frentz, you have just handed me FHA title I credit application. That is form FH-1, revised January 1954.

The CHAIRMAN. This is the application that they make for the loan. Mr. FRENTZ. That's right.

The CHAIRMAN. Do you furnish every lending agency with these forms?

Mr. FRENTZ. Yes, we do. We print them and furnish them. Some lenders print their own. We encourage lenders to print their own, rather than use Government-expense ink.

The CHAIRMAN. If they use this they use exactly the same wording. Mr. FRENTZ. Exactly, but it is folded differently.

The CHAIRMAN. This is an application for the loan?

Mr. FRENTZ. Yes.

The CHAIRMAN. What sort of document do they sign when they receive the money?

Mr. FRENTZ. The note. The note document.

The CHAO You let each lender use his judgment as to time and type

Mr. FRENTZ. Yes, sir.

The CHAIRMAN. Does it remain in the lender's safe or office, or does that remain with you?

Mr. FRENTZ. It goes to the lender.

The CHAIRMAN. Do you keep a copy of it?

Mr. FRENTZ. No.

The CHAIRMAN. When do you get it?

Mr. FRENTZ. We see it on two occasions, once when we make a check with our financial representatives.

The CHAIRMAN. You don't check on 11 million of these, do you? Mr. FRENTZ. No, but that is when we see a few of them, and another time when we see them is when a claim comes in for audit.

The CHAIRMAN. When a bank asks you to reimburse them, then they bring this to you?

Mr. FRENTZ. That's right.

The CHAIRMAN. And that is the only way. The man who borrows the money signs this. This looks like a Government document; does it not? It is a Government document. Anyone signing that would naturally, unless he was cautioned-the average person signing that would think they were doing business with the Federal Government; do you not think so?

Mr. FRENTZ. You will notice we put the warning clause in there, so that at the time they sign it they also read the warning.

The CHAIRMAN. Yes, but generally speaking anyone signing that would think they were doing business with the Federal Government; would they not?

Mr. FRENTZ. The name of the institution is in the front, on the first line. They are applying for credit to that institution.

The CHAIRMAN. But, it says—

Property improvement loans, Budget Bureau, FHA improvement loanMr. FRENTZ. That heading was required by the Bureau of the Budget.

The CHAIRMAN. I understand that.

Here is a chart over here showing by dollars the amount of the interest. It says down here, "U. S. Government Printing Office." Anyone signing this, wouldn't they be under the impression they were doing business with the Federal Government?

Mr. FRENTZ. I doubt it, sir. That would be misrepresentation of the first water.

The CHAIRMAN. Well, I can't quite see it. It is Federal Government all the way through. Where does the lender's name enter into it? In the first line it says, "This application is submitted to obtain credit under the terms of title I of the National Housing Act." Mr. FRENTZ. Right above that.

The CHAIRMAN. Yes, I see it. And right under where you print in the name of the bank, it says in quite large type:

This application is submitted to obtain credit under the terms of title I of the National Housing Act.

What I am getting at is that it is awfully easy for these salesmen, and others who care to, to fool the public into believing that they are doing business with their Government. Every man has a right to believe that his Government is going to treat him fairly and hon

estly and not take advantage of him. I don't know how you are going to correct it, but I think that is it.

Senator BENNETT. What does it say on the bottom?

The CHAIRMAN [reading]:

Anyone who makes a false statement or a misrepresentation in the application shall be subject to a fine of not more than $5,000 or by imprisonment for not more than 2 years, or both, under provisions of the United States Criminal Code.

Senator BENNETT. That sounds more than ever like Government. That has the effect of warning the man who signs the note that you don't require any such signature from the dealer. There is no warning. Mr. FRENTZ. May I answer that?

Senator BENNETT. Yes.

Mr. FRENTZ. We now require a dealer's application form.

Senator BENNETT. This is the application the dealer makes to be put on the list to the institution, to receive the lender's credit. Mr. FRENTZ (reading):

Any person who knowingly makes a false statement or misrepresentation in this application.

But, the application simply identifies where he has done business. It is a credit plan more than anything else, that's right.

The CHAIRMAN. Well, the reason we are spending a little time on this is, as we said a moment ago, our problem is to find some way to properly warn the borrower, or the homeowner against the unscupulous man. Let me say this, they are in, by far, in the great minority, but that seems to be our problem.

Mr. FRENTZ. This is the completion certificate which both the homeowner and the borrower must sign. That also contains a warning clause. It also carries the warranty of the dealer and the assurances of the homeowner.

The CHAIRMAN. But, this still is a Government document. One signing it would still think the Government was his protector and that he was doing business with the Government.

In other words, I see in all these forms that they sign that they think it is the Government and not the bank which is going to lend them the money or the dealer who is going to sell them the goods. They are incidental to all these forms. Their names are either typed or written in longhand into them. I think that is going to be one of our problems.

Mr. FRENTZ. There is another form now that the banker sends out saying, "We have approved your credit and we will make this loan to you," and that is that 6-day notice I referred to yesterday. The CHAIRMAN. Do you have a copy of one of those?

Mr. FRENTZ. Yes.

The CHAIRMAN. Does that still indicate that the Federal Government is his benefactor and protector?

What is the wording of the message?

Mr. FRENTZ. Do you care for me to read it?

The CHAIRMAN. Put it over here and I will read it.

That goes on the letterhead "Advance notice to applicant for FHA title I loans." That is on the letterhead of the institution. The borrower's name, the date, the address: