REFINANCING

The Federal Housing Administration encourages lending institutions to utilize the refinancing privilege permitted by the Regulations in meritorious cases and where the facts and circumstances of the particular transaction justify retention of the account. Such action should be taken when it will assist the borrower in paying his obligation in full.

In refinancing notes previously reported for insurance, with or without an additional advance, the unearned charge must be refunded to the borrower. If no additional advance is made, the financial institution may assess the borrower a $2 handling charge.

For simplicity in handling, it is suggested in the refinancing of an account that it be effected on the due date of an installment.

The formula for computing the amount of the unearned charge is:

Charge for full term proration factor 1-earned charge.
Charge for full term-earned charge unearned charge.

Example

Date of note, June 15, 1950; face amount, $344.94; net proceeds, $300; finance charge, $44.94; 36 payments of $9.58, beginning July 15, 1950; refinanced, August 15, 1951.

$44.94×0.62012 2=$27.87 (earned charge)
$44.94-$27.87-$17.07 (unearned charge)

The table of factors on the preceding insert may be used in lieu of the formula to calculate the full unearned financing charge which must be credited to the borrower's account.

Each refinancing transaction should be reported within 31 days from the date of refinancing on the Title I Refinancing Report, Form FH-5.

CREDITS

In applying for and accepting a Contract of Insurance the lending institution assumes certain responsibilities. One of these is the responsibility of applying sound principles in the evaluation of credit. CREDIT INVESTIGATION AND ANALYSIS

The lending institution in considering the credit of the applicant must bear in mind that available insurance coverage does not relieve it of the responsibility of exercising the care that a reasonable and prudent lender would take if the loan were not being offered for insurance.

The proration factors for the various periods are published in a separate booklet, available upon request. 'Proration factor for the fourteenth period of a 36-payment loan.

The applicant must furnish the lending institution with an executed Credit Application on a form approved or provided by the Commissioner. The lending institution should obtain sufficient supplementary information to satisfy itself that the applicant represents a reasonable credit risk. If in the judgment of the lending institution it is deemed necessary, an individual credit report from a reputable credit reporting agency should be obtained plus such other information as is considered desirable. On the basis of all information before the lending institution it must then pass upon the reasonableness of the credit risk.

Consideration should be given to the applicant's ability to pay, as determined by the assurance of a steady and sufficient income that will allow, after the payment of ordinary living and operating expenses plus other obligations, sufficient overage to make payments on his Title I loan. Income from rents and other sources should be given consideration creditwise only when such income is verified and when it is determined that the income is of a sufficiently permanent nature to continue for the life of the loan.

The applicant borrower must have a reputation for meeting his obligations promptly. The lending institution should satisfy itself that approval will not result in an overextension of credit. The institution's profit depends upon the type of credits approved and to make a loan to a borrower knowing that the additional indebtedness cannot be repaid, benefits no one.

SECURITY

In some cases it may be advisable to obtain security in the form of endorsers, comakers or collateral. The lending institution, however, should never accept security as a substitute for an otherwise unacceptable credit risk. If a security instrument is taken it should be recorded in accordance with the law of the applicable jurisdiction, and the cost may be collected from the borrower in addition to the maximum permissible financing charge.

RATIO OF LOAN TO VALUE

It is important that the lending institution, when considering an application for a loan, determine that the value of the proposed improvements bears a proper relationship to the value of the property being improved and that the amount of credit applied for is in proper proportion to the value of the work to be done.

Lending institutions are encouraged to take steps to detect any notes based on inflated charges. It is obvious, of course, that notes which finance excessive charges represent unsound loans on which collection will be difficult if not impossible. More important than that, of course, is the fact that lending money under such conditions is a practice which is a grave disservice to the people of the 'community.

PRIOR APPROVAL OF THE COMMISSIONER

In the event the proposed loan would result in a total principal amount outstanding in excess of $5,000, exclusive of financing charges, to any borrower, the prior approval of the Federal Housing Commissioner must be obtained before the transaction will be eligible for insurance. The principal amount outstanding to any borrower applies to anyone who, as an eligible borrower on a proposed loan, is primarily or secondarily liable on any prior Title I obligation. Such approval may be obtained from the local insuring office of the Federal Housing Administration having jurisdiction over the site of the property to be improved.

In submitting the transaction for approval, all papers bearing on the case, including the recommendation of the institution, the Credit Application, balance sheet, profit and loss statement, credit reports, and other supporting papers, should be forwarded to the local FHA office in order to insure prompt consideration.

ADDITIONAL LOANS

If an additional loan is made to the same borrower, it is required that the lending institution obtain a new Credit Application in order to determine whether there has been any change in the borrower's condition of solvency and ability to pay since the previous loan, and also in order to determine the eligibility of the use of the proceeds of the new loan.

A borrower may obtain any number of loans to improve one or more properties owned by him. However, it is not intended that a borrower be permitted to circumvent the specific limitations which the National Housing Act places upon the various classes of loans by obtaining more than one loan for a single job. In accordance with the Statute and Regulations a borrower may secure an amount not in excess of the stated maximum amount for one complete job which he contemplates at any given time. If, at a later date, as a separate job, he undertakes additional work he may secure another loan. Such loan, of course, would be subject to prior credit approval of the Commissioner if the additional credit, when added to the principal amount outstanding on other class 1 and class 2 loans to the same borrower, exceeds the aggregate amount of $5,000.

DELINQUENCY ON PRIOR LOANS

If, prior to the disbursement of the loan proceeds, the insured has knowledge that the borrower is past due more than 15 days in the payment of either principal or interest on an obligation owing to or insured by a department or agency of the Federal Government, the transaction will not be eligible for insurance. Following are examples of some "governmental agencies":