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FEDERAL HOUSING ADMINISTRATION
WASHINGTON, D. C.

J. M. DAIOEft
ASSISTANT TO THE ADMINISTRATOR




January 2, 1940

Dear Marriner:
Apropos of our telephone conversation of today,
I am sending to you herewith a copy of a memorandum that I
have had distributed to FHA division heads in connection with
the new program under Title I.
With the memorandum I am sending a copy of
Circular No* 3 of the RFC Mortgage Company, to which the memorandum refers, and also a copy of our revised regulations
governing small-house loans under Title I.
Both the revised regulations and the purchasing
arrangement of the RFC Mortgage Company became effective as of
January 1.
Yours sincere!;

J. M. Daiger
Assistant to the Administrator
The Hondrable Marriner S, Eccles, Chairman
Board of Governors of the Federal Reserve System
Washington, D. C.

FHA F o r m No. 13
(Revised Jan. 1, 1938)

FEDERAL HOUSING ADMINISTRATION
MEMORANDUM

DATE

December 29. 1939

Division HEKJS

TO:

ALL

FROM:

J* M* Baiger

SUBJECT:

HFC Mortgage Company Purchase of Class 3, Title I Loons

Attached hereto is a copy of Circular No« 3 of the HJPC Mortgage Company^
which has been sent to the agents of the Company at the addresses listed on
pages 8 and 9 of the circular. Contract forms covering the commitment*
purchase, and servicing agreement will be sent by the Company to its agents
on Tuesday, January 2. Please note particularly the following pointsi
1*

Company will purchase only Interest-bearing notes. Notes made
on a discount basis will not be eligible under the terms of
the Company's Title I contradt with lending institutions.

2|

To be aligiblo under the contract loans must bear 4j| per cont
interest &nd provide for & service charge of i of 1 por cont
pof annum*

3*

Purchases will be made only from original mortgagees,

4|

Notes and mortgages must be on forms prescribed by TFBA*

5* All institutions approved by MFC Mortgage Company or IKM&, as
sellers under fitlo II will be eligible as sailors under Title I*
Except in the case of state and national banks^ federal savings
and loan associations* and federal, state, and municipal
governmental agencies* soiling institutions must have a not worth
of approximately $100,000 or more*
6*

Company will charge a commitment foe of \ of 1 per contt which
will be retained whether or not the mortgage is delivered.

7»

Compa.ny will require an amount equal to 10 per cent of original
principal amount of each loan purchased to be assigned from
seller1s insurance reserve undor Title I to Company1s insurance
reserve*

8*

Sellers will bo required to service loans sold by the&# Componsation for servicing will be 1 por cent per annum--*that is* sellor
may retain the service fee of £ of 1 pqr cent paid by the mortgagor
and in addition will be allowod another | of 1 per cont*




All Division Heads—2

December 29, 1939

9. Purchases and commitments will be limited in general to $12,500
aggregate principal balance of loans to any one mortgagor at any
one time. In practice this will apply to loans covering properties
not yet sold by an operative builder,
10. Company1s Title I contract with lending institutions will cover
only Class 3 loans. Loans on leasehold as well as on fee simple
property will be eligible. Class 1 and Class 2 loans will not be
eligible.

29699 1/2/40






CIRCULAR NO. 3
OF
THE HFC MORTGAGE COMPANY

INFORMATION REGARDING THE PURCHASE BY
THE COMPANY OF LOANS MADE BY LENDING
INSTITUTIONS PURSUANT TO TITLE I OF
THE; NATIONAL HOUSING ACT'
•ft

*

•«•

*

*

#

DECEMBER 27, 1939

1. DEFINITIONS. As used herein —
a. The term "Administrator11 maans the Federal Housing Administrator
or his duly authorized representative.
b. The term "Act" means the National Housing Act, as amended.
c. The term "Class 3, Title I loan" means an interest-bearing loan
made pursuant to Title I of the National Housing Act, as amended, and the Regulations of the Administrator promulgated pursuant thereto f6r the purpose of
financing the construction of a new structure to be used in whole or in part for
residential purposes.
d. The term "note" means a note or bond evidencing a Class 3> Title
I loan.
e. The term "mortgage" means an instrument in form prescribed by the
Administrator for use in connection with Class 3, Title I loans, creating and
evidencing a first lien upon real estate owned in fee simple or under a leasehold interest of a lessee under a lease satisfactory to this Company, which
meets the requirements set forth in Section 1 of Regulation III of the Regulations effective January 1, 1940, of the Administrator governing the insurance of
qualified lending institutions against loss resulting from Class 3 loans made
under the provisions of Title I, Section 2 of the National Housing Act as amended.
f. The term "mortgagor" means the original borrower executing the
Class 3* Title I note and mortgage, his heirs, administrators and successors
in interest.
g. The term "insured lending institution" means an institution,
agency or organization to which a contract of insurance has been issued by the
Administrator pursuant to Title I of the Act and with respect to which such contract of insurance is still in full force and effect.
h. The term "date of purchase" jne&ns the date on which the purchase
price of a Class 3, Title I loan is made available to the insured lending institution which is selling such lo*m to this Company.
1. The term "seller" means an insured lending institution from which
the Company purchases or agrees to purchase a Class 3, Title I loan.
j• The term "insurance reserve" means the amount of insurance which
an insured lending institution has accumulated with the Administrator pursuant
to its contract of insurance for payment of losses resulting from Title I loans
made or purchased by it.
2. SELLERS. This Company will purchase and will execute contracts to
purchase Class 3, Title I loans frpm insured lending institutions which originated such loons and which fall within one of the following classifications:




a. State and national banks, federal savings and loan associations, and federal, state and municipal governmental agencies.
b. Institutions which have been approved by the Company or the
Federal National Mortgage Association as sellers of mortgages
insured under Title II of the National Housing Act.
c. Institutions which establish to the satisfaction of the Company that they have a not worth of approximately One Hundred
Thousand Dollars ($100,000) or more.
3« ELIGIBILITY REQUIREMENTS. The Company will purchase such Class 3,
Title I loans as meet the following eligibility requirements:




a. The note must be on the form prescribed by the Administrator
for use in connection with Class 3, Title I loans ift the
jurisdiction in which the mortgaged property is situated,
must bear interest at the rate of four and one-half percent
(J+2%>) per annum and, except in the instances referred to in
paragraph b below, must provide for the payment of equal
monthly instalments applicable to principal and interest.
b. In the event fifty-one percent (51%) or more of the income
of the mortgagor is derived directly from the sale of agricultural crops, commodities, or livestock produced by hiju,
the note may require the payment of approximately equal semiannual or annual instalments applicable to principal and
interest (in lieu of monthly instalments), provided interest
is payable in advance fur each instalment period.
c. The note must be secured by a mortgage on the form prescribed
by the Administrator for use in connection with Class 3> Title
I loans in the jurisdiction in which the mortgaged property
is situated, which mortgage shall provide, a&ong other things,
for the payment by the mortgagor of the maximum service fee
permitted by the applicable regulations of the Administrator.
d. The mortgage must be duly assigned to the Company in form
and manner satisfactory to it. The note may be indorsed by
the seller without recourse.
e

All payments required by the note and payments and deposits
required by the mortgage which are due and payable must have
been made.

f. The mortgaged property must be located within a radius of
one hundred (100) miles from the principal home office of
the seller or of a branch office of the seller which, in
- 2 -

the opinion of the Company, is adequately equipped to
service the mortgage.
g. Construction of the improvements on the mortgaged property must have commenced on or after January 1, 1940, and
such improvements must be fully completed, must be in all
respects available for occupancy, and must be undamaged by
waste, fire, flood, earthquake, hail or windstorm.
h. An amount equal to ten percent (10$) of the original principal amount of the Class 3, Title I loan must be assigned
from the seller's to the Company's insurance reserve.
i. All applicable requirements of Title I of the Act and the
Regulations promulgated by the Administrator pursuant thereto with respect to Class 3> Title I loans shall have been
met.
The documents and evidence required by the Company to substantiate
the foregoing eligibility requirements are enumerated and described in the Company's Title I Contract, copies of which may be obtained from any Agent of the
Company.
The Company will not purchase or execute commitments to purchase
Class 3y Title I loans if the mortgagor, at the time such loan is offered for
purchase, is or will be obligated either directly or indirectly on Class 3>
Title I loans owned by the Company or which the Company has committed itself
to purchase, having an aggregate principal balance in excess of Twelve Thousand
Five Hundred Dollars ($12,500), unless the character of the improvements on
properties to be covered by future mortgages securing such loans, the location
of such properties, and the extent of the proposed operations of such mortgagor
are first approved as satisfactory by the Directors of the Company. In determining such liability, the mortgagor's liability on mortgages covering properties sold to bonu fide purchasers who will occupy the property and who have
assumed and agreed to pay the mortgage debt will not be included, notwithstanding that the original mortgagor has not been released from liability.
4. MANNER AND TERMS OF PURCHASE. An insured lending institution
which meets the requirements of section 2 hereof and which desires to sell to
the Company a Class 3, Title I loan which, when delivered, will meet the eligibility requirements ©numerated in section 3 hereof, will be required to execute
a Contract in quadruplicate on the Company's prescribed form (heretofore and
hereinafter referred to as the "Title I Contract'1). Such contract shall be
accompanied by a certified copy of a resolution of the board of directors of the
seller, on form approved by the Company, and by a commitment fee equal to onehalf of one percent (^ of 1$) of the unpaid principal amount of the Class 3,
Title I note as of the date of execution of the Contract or, if the note has
not been executed at such date, an amount equal to one-half percent {j$>) of the




- 3 -

original principal amount of the loan which will be evidenced by such note*
In the event the Title I Contract is executed by the Company, the commitment
fee will be retained by the Company as a charge for making the commitment and
defraying the expenses of the Company incident to such commitment and the purchase of the note.
The Title I Contract will incorporate representations of the seller
with respect to the eligibility requirements of the loan, will contain an
agreement by the seller to service the loan for the Company as hereinafter
provided, and will contain an agreement by the Company to purchase the loan
within six (6) months of the date of the execution of the Contract by it, provided the documents required by the Company are delivered and the eligibility
requirements are met, and to pay to the seller, as compensation for servicing
the loan, the amounts hereinafter set forth•
If, subsequent to the date of execution of the Title I Contract and
prior to poor chase of the note, the amount of the note is increased or other
changes have been made with respect to the terms of the note or mortgage, and
the seller desires the Company to accept the note and mortgage when delivered,
in lieu of the note and mortgage described in the Title I Contract, the seller
should advise the Company of such changes and should request the Company to accept
the note and/or mortgage in their changed forms* The Company will thereupon require the sqller to execute a substitute contract in the event the amount of the
loan has boen increased or modifications or changes are deemed material hy the
Company. The seller, however, will not be required to pay an additional commitment fee, provided the new mortgage covers the same property as the mortgage
described in the original Contract and is offered by the sa.ne seller, unless the,
amount of the note has been increased. In the latter case, the seller will be
required to pay td the Company, at the time the substitute contract is executed,
a commitment fee equal to one-half of one percent (| of 1$) of the difference
-between the amount of the note described in the original contract and the amount
of the note described in the substitute contract. Tho commitment of the Company
pursuant to the terms of the substitute contract will expire on the same date as
the commitment would have expired under the original contract.
In the event a seller is unable to deliver a mortgage prior to the
expiration of the commitment period set forth in the Title I Contract relating
to such mortgage, and the delay is occasioned through no fault of such seller,
the Company may extend the original commitment period for a period or periods
not exceeding three (3) months in the aggregate, provided the request for such
extension is received prior to the expiration of the commitment period. No
extensions in excess of throe (3) months will be made by tho Company.
5. PURCHASE PRICE. The purchase price of a Class 3, Title I loan
shall be as follor/s:




a. If the loan is purchased subsequent to the first day of
the month preceding tho date on which tho first instalment

-U-

payment of principal and interest is due, the purchase price (except in cases referred to in paragraph
c below) shall be the unpaid principal amount plus
accrued interest to the date of purchase.
b. If the loan is purchased prior to the first day of the
month preceding the date on which the first full instalment payment of principal and interest is due, the purchase price (except in cases referred to in paragraph c
below) shall be the unpaid principal amount loss interest
accruing from tho date of purchase to the first day of
the month preceding the date on which tho first full
instalment payment of principal and interest is due.
e. If, at tho date of purchase of a loan, one or more tinmatured instalments have boon prepaid, or if the note
provides for payment of interest in advance to the due
date of the next instalment, the purchase price will be
the unpaid principal amount loss interest accruing from
tho date of purchase to the date to which interest has
beon paid.
6. REPURCHASE LIABILITY OF THE SELLER. The seller of a Class 3,
Title I loan will be obligated to repurchase same in the event the representations made in the Title I Contract with respect to such loan are not substantiated to the satisfaction of the Company by the documents and other evidence
delivered at date of purchase, and the Company makes demand for such repurchase
within three (3) months from the date of purchase and tenders to the seller,
the note, mortgage and other documents delivered therewith. If the seller
requests the Company to waive this repurchase liability prior to the date of
purchase, the Company will examine tho documents and other evidence prior to
the date of purchase and, if found satisfactory, will waive the repurchase liability of the seller referred to in this paragraph at the time disbursement of
tho purchase price is made. If the Company is not requested to waive this liability prior to purchase, the purchase price of the note will be available
immediately upon delivery of the documents required by the Title I Contract,
and the repurchase liability imposed by this paragraph will terminate automatically if demand for repurchase is not made within throe (3) months from
the date of such disbursement. The Company will thereupon examine as promptly
as possible the documents arid other evidence delivered v/ith the Title I Contract
and notify the seller immediately upon completion of such examination whether or
not tho Company approves the note and mortgage as complying with its requirements. In the event such approval is given, the repurchase liability of the
seller with respect to the matters referred to in this paragraph will terminate
as of the date notice of such approval is given.
The seller will also be required to repurchase the note and mortgage
in the event the lien of the mortgage is or at any time in the future shall be




-5-

subject or inferior to any mechanic!s or materialman! s lien for labor and
materials furnished in the original construction of the improvements on the
mortgaged property or in the event the improvements on which the appraisal of
the Class 3, Title I loan was based by the original mortgagee do not lie wholly
within the boundary and building restriction lines of the real estate covered
by the mortgage. The sellerfs repurchase liability for mechanics1 or materialmen's liens shall terminate upon receipt and approval by the Company of either
(a) a certificate of a title company or on attorney satisfactory to the Company,
certifying that no such mechanic! s or matorialman!s lien appears of record and
that the statutory period for filing such lion has expired, or (b) a title insurance policy specifically insuring the Company against loss or damage by reason of any mechanics1 and matorialmen!s liens which have gained or thereafter
may gain priority over the lien of the mortgage.
'The obligation of the seller to repurchase in the event the improvements do not lie wholly within the boundary and building restriction lines of
the real estate covered by the mortgage shall terminate on the date of delivery to the Company of a plat of survey or other evidence satisfactory to the
Company, showing that such improvements lie wholly within the boundary lines
and building restriction lines cf the land covered by the mortgage.
7. SERVICING OF MORTGAGES. The seller of a C3.ass 3, Title I note
and mortgage will be required to perform for the Company and any subsequent
holder of the mortgajo all services and duties incident to the servicing of
such mortgage. Among tho duties required of the seller will be the duty of
maintaining facilities for the collection of all sums payable by the mortgagor,
tho duty of remitting such collections to the ownar of the mortgage within
twenty-four (24) hours after receipt thereof, the duty of following up delinquencies, obtaining and furnishing the owner of the mortgage with tax bills,
hazard insurance policies, etc., and tho duty of inspecting the mortgaged property at least once a year. Tho seller will not be required to foreclose the
mortgage on behalf of the Company or to bear any part of the expense of any
foreclosure proceeding.
As compensation for servicing a mortgage, tho seller may retain the
late charges, if any, and the service fee paid by the mortgagor pursuant to
the terms of the mortgage and, in addition thereto, will be allowed an amount
equal to one-half percent (-3$) per annum on t.ho unpaid principal balance of
the mortgage, computed in the some manner as interest for the period during
which the seller is servicing such mortgage under tho terms of the Title I Contract. The relationship of the Company v/ith the seller as servicing agent niay
be terminated by the Comprasy en thirty (30) days1 written notice to tho seller,
and thereafter the right of the seller to compensation for servicing the mortgagD
shall cease.
If a seller, either at the time a Class 3, Title I loan is sold to
the Company or thereafter, desires to be relieved of its servicing duties for
reasons deemed satisfactory by tho Company, the Company ordinarily will intorpose no objection, provided another insured landing institution located in




- 6 -

the same territory and satisfactory to the Company agrees to perform such
duties for the Company.
8, RELEASE OF MORTGAGORS. In cases in which property covered by a
•mortgage securing a Class 3, Title I loan owned by the Company is sold and the
purchaser assumes and agrees to pay the indebtedness secured by such mortgage,
the Company ordinarily will have no objection to releasing the original mortgagor, provided the release is effected in such manner as not to impair the
rights of the Company as holder of the mortgage, and provided further:
a. The credit of the purchaser is approved by the Cornpcny;
b. All payments and deposits required by tho terms of the
note and mortgage are currentj and
c. The mortgagor agrees in writing that the deposits held
by the Company for the payment of taxes, assessments,
insurrnce, etc., may be retained by it for the benefit
of the part;" assuming tho indebtedness.
The Company will refuse to release a mortgagor in instances in which
it determines that its rights as holder of the mortgage will be impaired by
such release.
.
9. TITLE REQUIREMENTS. Any mortgage delivered to the Company for
purchase must be accompanied by appropriate title evidence satisfactory to the
Company in tho form set forth in the Title I Contract, evidencing that such
mortgage constitutes a first lion on the property described therein, subject
only to liens for special assessments not in arrears, taxes and ground rents
not duo and payable, and such other exceptions as ere deemed immaterial by the
Company, and further evidencing that the mortgagor holds good and merch intable
title to such property in fee simple or under a lease satisfactory to the Cornpony which meets the requirements set forth in Section 1 of Regulation III of
the Regulations effective January 1, 194-0 of the Administrator, governing the
insurance of qualified lending institutions agcinst loss resulting from Class 3
loans made under the provisions of Title I, Section 2 of the National Housing
Act, as amended.
The Company will not object to tho following exceptions in title,
provided there is delivered to it a letter or certificate from the Administrator that they do not, in the opinion of the Administrator, impair the value of
tho property for residence purposes, or provided the Company finds that they
do not impair the value of the property for residence purposes:




a. Customary easements for public utilities, party walls,
driveways end other purposes, and building or use restrictions which have not beer« materially violated and
for the breach of which there is no right of reversion,
or

» Encroachments by adjoining improvements, or
c. Reservations for outstanding oil, water, mineral leases
or other mineral rights, provided such reservations do
not include the right to sink wells or shafts on the
mortgaged property, withdraw the subjacent support, or
otherwise impair the value of the property for residence
purposes.
The Company will not purchase mortgages covering real estate, the
title to which is subject to a right of reversion, unless such mortgage, at the
date it is delivered for purchase, is accompanied by a title policy satisfactory
to the Company, specifically insuring the Company against loss or damage by
reason of any past or future violation of the covenant or condition upon which
the right of reversion may come into being or be exercised, cr unless, in the
opinion of the Company, such reversion would not affect the lien of the mortgage.
10. AGENTS OF THE COMPANY. All Class 3, Title I loans which are
being sold to the Company must be tendered to the Agent of the Company servicing
the territory in which the mortgaged property is located. All inquiries concerning the purchase of such loans by the Company should be addressed to such
Agent. Title I Contract forms and all other forms prescribed by the Company
may be obtained from such Agent,
A list of the cities in which the Agent$ of the Compcny arc located
and their respective addresses are as follows: l
ATLANTA, GEORGIA:
Federal Reserve Bank Building,
P. 0. Box 1553.

DALLAS, TEXAS:
Gulf States Building.

BIRMINGHAM, ALABAMA:
605-13 Watts Building,
Third Ave. & Twentieth Street.
BOSTON, MASSACHUSETTS:
40 Broad Street.

DENVER, COLORADO:
First National Bank Building.

CHARLOTTE, NORTH CAROLINA:
19th Floor,
First National Bank Building.

HELENA, MONTANA:
Power Block.

CHICAGO, ILLINOIS:
Federal Reserve Bank Building,
I64. West Jackson Boulevard,

HOUSTON, TEXAS:
2505 Gulf Building.

CLEVELAND, OHIO:
4th Floor,
Federal Reserve Bank Building.

JACKSONVILLE, FLORIDA:
Western Union Building.




DETROIT, MICHIGAN:
607 Shelby Street.

KANSAS CITY, MISSOURI:
1014- Federal Reserve Bank Bldg.

PHILADELPHIA, PENNSYLVANIA:
Federal Reserve Bank Building,

LITTLE ROCK, ARKANSAS:
American Exchange Trust Company
Building,
223 Main Street.
LOS ANGELES, CALIFORNIA;
1017 Pacific" National Building,
9th & Hill Streets.

PORTLAND, OREGON:
Room 444, Pittock Block.

LOUISVILLE, KENTUCKY:
Lincoln Bank Building,
W. Market Street.

3T. LOUIS, MISSOURI:
Londreth Building,
320 North Fourth Street

MINNEAPOLIS, MINNESOTA:
438 McKnight Building.

SAN iJJTONIO, TEXAS:
520-523 Alamo National Building.

NASHVILLE, TENNESSEE:
Nashville Trust Company Building.

SAN PRtillCISCO, CALIFORNIA;
514 Federal Reserve bank Building.

NEW ORLEANS, LOUISIANA:
Fifth Floor, Union Building,
837 Gravier Street.

SAN JUAN, PUERTO EIOO:
P. 0. Box 549.

NEW YORK, NEW YORK:
Federal Reserve Bank Building,
33 Liberty Street.

SEATTLE, WASHINGTON:
1414 Exchange Building.

RICHMOND, VIRGINIA:
Richmond Trust Building,
Seventh & Main Streets.

OKLAHOMA CITY, OKLAHOMA:
SPOKANE, WASHINGTON:
Columbia Building.
Federal Reserve Branch Bank Building.
OMAHA, NEBRASKA:
507 Medical Arts Bids.

This Company will not purchase modernization and improvement Title I
loans or Class 3, Title I loans evidenced by notes written on a discount basis
as distinguished from interest-bearing notes. The policy of this Company with
respect to the purchase of Class 3, Title I loans is subject to change without
notice.




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FEDERAL HOUSING ADMINISTRATION
WASHINGTON, D. C.
December 15, 1939
( JK No, 91 )
TO:

ALL QUALIFIED LENDING INSTITUTIONS

SUBJECT;

NEW TITLE I REGULATIONS EFFECTIVE JANUARY 1, 1940

Attached is a copy of the new Title I Regulations governing the
insurance of qualified lending institutions against loss resulting from
Title I loans made on and after January 1, 1940.
The new Title I Regulations are in two parts. Part I governs the
making of Class 1 (repair and modernization) Loans and Class 2 (new nonresidential structure) Loans. Part II governs the making of Class 3 (new
residential structures) Loans.
PART I OF THE REGULATIONS: Regulations governing Class 1 or Class
2 loans have not been changed from the regulations heretofore in effect,
except that all reference to Class 3 Loans has been eliminated and the
maximum maturity of Class 2 (b) (non-residential agricultural structure)
Loans has been increased to 15 years and one calendar month if a first
mortgage is taken to secure the loan. (See Reg. III.)
The forms to be used in making and reporting Class 1 or Class 2
Loans remain the same.
PART II OF THE REGULATIONS: Because of the widespread interest in
the Title I small home ownership plan since its inauguration July 1, 1939,
it is felt expedient to establish separate regulations to govern such
loans. Therefore, PART II deals exclusively with Class 3 Loans and has
no bearing whatsoever on Class 1 or Class 2 Loans.
In certain general aspects the plan of financing small homes under
Title I remains the same as heretofore; namely, maximum loan $2500, maximum
maturity 15 years and five calendar months, first mortgage or similar security instrument required, and an eligible borrower whose credit is acceptable to the lending institution. However, in a number of other respects
the Class 3 Regulations have been modified or changed so that it is important that they be read carefully. It should be noted particularly that;
1. An eligible borrower must be the fee simple owner of unincumbered
land, or a long-term lessee of unincumbered land, having an equity of at
least 5 percent of the appraised value of the completed property. No
second mortgage or junior lien financing is permitted. The borrower must
certify on the Credit Statement-Application that the property will be free
and clear of all liens other than a Title I mortgage. (See Regulation III.)
2. The structure must conform with the minimum construction requirements and property standards of the Administration, copies of which will be




- 2 available in our local Insuring Offices shortly. The proceeds of the Title
I loan must be expended in financing the construction of the structure and
the appurtenances thereto. The word "appurtenances" refers to landscaping,
fencing, garage, sidewalks and drives, septic tanks, cesspools, well, lighting system, heating system, plumbing system, and other similar improvements
normally included to make the structure complete. It does not include fixtures or furnishings, such as furniture, stoves, refrigerators, washing machines and other similar appliances. (Regulation IV.)
3. Loans may be evidenced by either an interest bearing note, or a
non-interest (discount) note. If the note is interest bearing, Regulation
VII is applicable. If the note is non-interest bearing, Regulation VIII
will govern.
4. The insured institution must submit to the local Insuring Office in
whose area the property is located, an "Application for Property Approval"
(FHE 41) prior jg the start of construction. No transaction will be eligible if construction starts before the institution receives FHA approval.
This application must be accompanied by plans or drawings and specifications
of the proposed structure and the institution's check, made payable to the
order of the Administration, for flO.OO. (Regulation IX.)
5. After receiving the Administrator's approval (on form FHE 42)
the institution may proceed in disbursing the proceeds of the loan. Note
particularly, that in the absence of written notice from the Administrator
during construction, the lending institution may make progress payments,
but no proceeds in excess of the 80 per cent of the loan may be disbursed
until the institution has received from the local Insuring Office a final
inspection report approving the completed property. (Regulation IX.)
6. In the event of default the insured institution may make claim
for reimbursement for loss by conveying the property to the Administrator
with a good, merchantable title. In lieu of conveying the property to the
Administrator, the institution may elect the option of selling the property
and make claim on the Administrator for the deficiency, if any. If the
sales price is less than 75 per cent of the unpaid balance, the prior approval of the Administrator must be obtained. (Regulation XI.)
7. The insurance charge on Class 3 Loans is one-half of one per cent
of the principal amount advanced, payable annually in advance during the life
of the loan. For example, if the loan is J2,000 (exclusive of financing
charges) the annual insurance charge will be $10.00, payable on each anniversary date. (Regulation XII.) (Annual payment of the insurance charge may also
be made on Class 3 Loans made on or after July 1, 1939. Regulation XIV.)
However, if the loan is paid in full or is foreclosed prior to its
maturity, no further annual insurance charge need be paid. (Regulation XII.)
(Also applicable on Class 3 Loans made on or after July 1, 1939. Regulation
XIV.)
8. Class 3 Loans made prior to January 1, 1940, under the Regulations effective February 3, 1938, and July 1, 1939, as amended, may be




- 3 extended or renewed for a period up to 15 years from the date of the original loan. (Regulation XIV.) Likewise, it is permissible to substitute
an eligible borrower for the original maker of such loans. (Regulation
XIV.) (Also permissible on loans made after January 1, 1940 - Regulation
IX.)
9. If default occurs on any Class 3 Loan made on or after July 1,
1939, the insured institution may, at its option, sell the property and
make claim for any deficiency as provided in Regulation XI of these Regulations. (Regulation XIV.)
The new forms to be used in making and reporting Class 3 Loans are:
FHE 3-NDCS - "Credit Statement-Application" to be executed by the applicant
when applying for a Class 3 Loan. (Do not use on Class 1
or Class 2 Loans.)
FHE 41 - - - "Application for Property Approval11 to be used by the lending
institution in applying to our local Insuring Office for
approval of the proposed transaction.
FHE 5-D - - "Report of Each Loan Made" to be used by the lending institution in reporting to the Federal Housing Administrator
Class 3 Loans made direct to the borrower. (Do not use on
Class 1 or Class 2 Loans.)
FHE 5-E - - -"Report of Each Note Purchased", for use by lending institutions in reporting the purchase of eligible Class 3 notes.
(Do not use on Class 1 or Class 2 Loans.)
In addition to the above new forms, special mortgage instruments
are being prepared as required by Regulation VII, in connection with interest-bearing loans.
No mortgage instrument forms will be furnished on discount loans, as
described in Regulation VIII.
The above new forms are now being printed and as quickly as possible
distribution will be made to our local Insuring Offices from whom you may
obtain your supply.
These new Regulations are being furnished you at this time in order
that you may acquaint yourselves fully with various provisions prior to the
effective date, January 1, 1940. Supplementary information will be released
from time to time by this office further amplifying the more important provisions of these Regulations. In the meantime, if you have any specific
questions, please feel free to call upon us.

Very truly yours,

Jay Keegan
Assistant Administrator
29527 12/15/39



P R O P E R T Y
I M P R O V E M E N T
LOANS

under

T I T L E

I

of the
N A T I O N A L

H O U S I N G

ACT

As Amended E f f e c t i v e J u l y 1 , 1939

PART I - Class I and Class 2 loans
PART II - Class 3 loans

REGULATIONS
Effective January 1, 1940

Issued by
Federal Housing Administration
Washington, D. C.

FHE 1
(Revised 12-15-39)






P R E F A C E

THESE REGULATIONS GOVERN PROPERTY IMPROVEMENT
LOANS UNDER TITLE I OF THE NATIONAL HOUSING ACT AS
AMENDED JUNE 3, 1939. PART I OF THESE REGULATIONS
GOVERNS CLASS 1 AND CLASS 2 LOANS ONLY, i.e., LOANS
FOR THE PURPOSE OF FINANCING THE REPAIR, ALTERATION
OR IMPROVEMENT OF AN EXISTING STRUCTURE AND LOANS
FOR THE PURPOSE OF FINANCING THE CONSTRUCTION OF A
NEW STRUCTURE WHICH IS NOT TO BE USED IN WHOLE OR
IN PART FOR RESIDENTIAL PURPOSES OR WHICH IS TO BE
USED FOR AGRICULTURAL PURPOSES. PART II OF THESE
REGULATIONS GOVERNS CLASS 3 LOANS ONLY, i.e., LOANS
FOR THE PURPOSE OF FINANCING THE CONSTRUCTION OF
NEW STRUCTURES TO BE USED IN WHOLE OR IN PART FOR
RESIDENTIAL PURPOSES.

PART I - CLASS 1 AND CLASS 2 LOANS

REGULATIONS
OF THE FEDERAL HOUSING ADMINISTRATOR
GOVERNING CLASS 1 AND CLASS 2 LOANS
UNDER TITLE I OF THE NATIONAL HOUSING ACT

REGULATION I
These Regulations may be cited and referred to as "Regulations effective
January 1, 1940, of the Federal Housing Administrator governing the insurance
of qualified lending institutions against loss resulting from Class 1 and Class
2 loans made under the provisions of Title I, Section 2, of the National Housing Act, as amended.

REGULATION II
DEFINITIONS
As used in these Regulations —
1. The term "owner" includes, in addition to owners in fee, life tenants
and persons holding an equity under a mortgage, trust or contract.
2. The term "note" includes a note, bond, mortgage, or other evidence
of indebtedness.
3. The term "paymentft includes a deposit to an account or fund.
4. The term "installment payment" includes that deposit to an account or
fund which represents the partial repayment of an advance of credit.
5. The term "loan" includes any loan, advance of credit, or purchase of
an obligation representing a loan or advance of credit for the purpose of financing eligible repairs, alterations or improvements as
authorized by the National Housing Act, as amended, effective July 1,
1939, and by these Regulations.
6. The term "Administrator" means "the Federal Housing Administrator.
7. The term "borrower" means one who is an eligible owner or lessee of
real property to be improved pursuant to the provisions of the Act
and who applies for and receives an advance of credit in reliance
upon the provisions of the Act.
8. The term "Act" means the National Housing Act, as amended, effective
July 1, 1939.
9. The term "Contract of Insurance" includes all of the provisions of
these Regulations and of the applicable provisions of the Act.
10. The terra "insured institution" means any bank, trust company, personal finance company, mortgage company, building and loan association, installment lending company or other such financial institution which the Administrator has found to be qualified by experience
or facilities and has approved as eligible for credit insurance and
to which he has issued a Contract of Insurance effective July 1, 1939.




- 2 11.

12.

13.

14.
15.

The term "Class 1 loan" means any loan which is for the purpose of financing the repair, alteration or improvement of an existing structure
or of the real property in connection therewith, exclusive of the
"building of new structures.
The term "Class 2(a) loan" means any loan which is for the purpose of
financing the construction of a new structure which is not to " e used
b
in whole or in part either for residential or agricultural purposes.
The term "Class 2(b) loan" means any loan which is for the purpose of
financing the construction of a new structure for use in whole or in
part for agricultural purposes.
The term "Class 2 loan" includes both "Class 2(a)" and "Class 2(1))"
loans as defined in Sections 12 and 13 of this Regulation.
The term "Administration" means Federal Housing Administration.

REGULATION III
ELIGIBLE NOTES
Promissory notes in order to " e eligible for insurance:
b
1. Shall "bear the genuine signature, as maker, of an owner of the real
property to be improved or of a lessee thereof under a lease expiring
not less than six calendar months after the maturity of the loan or
advance of credit.
2. Shall " e in a form which is valid and enforceable in the jurisdiction
b
in which they are issued.
3. Shall be payable in equal monthly, semi-monthly or weekly installments.
The final installment may be slightly more or less than the other installments, subject to such exceptions as may be made by the Administrator. Notes may not provide for a first payment less than six days
nor more than two calendar months from the date of the note. However,
if fifty-one percent or more of the income of the maker is derived directly from the sale of agricultural crops, commodities, or livestock
produced by him, a note may be made payable in installments corresponding to income periods shown on the credit statement. In such cases, the
first payment must be made within twelve months of the date of the note
and at least one payment must be made during each calendar year thereafter and the proportion of total principal to be paid in later years
must not exceed the proportion of total principal payable in earlier
years.
4. Shall contain a provision for acceleration of maturity, either automatic or at the option of the holder, in the event of default in the
payment of any installment upon the due date thereof.
5. Shall not have a final maturity in excess of three years and thirty-two
days from the date thereof in the case of Class 1 and Class 2(a) loans,
nor in excess of ten years and thirty-two days in the case of Class 2(b)
loans, provided that Class 2(b) loans secured by a first mortgage, first
deed of trust, or other security instrument constituting a first lien
upon the improved property may have a final maturity not in excess of




- 3 fifteen years and one calendar month.
May provide for a late charge, to " e paid by the maker, not to exceed
b
five cents (5{0 for each $1.00 of each installment more than fifteen
days in arrears. In lieu of late charges, notes may provide for interest on past due installments at a rate not in excess of the contract rate in the jurisdiction in which the note is drawn. No late
charge or interest on a past due installment may " e accrued in excess
b
of $5.00. The borrower must be billed for the penalties collected
as such, and evidence of such billing must be in the file if claim
is made under the Contract of Insurance.
May be in a series provided each is of an equal amount as provided in
this Regulation and that each note indicates on its face that it is
one of a series signed by the same maker.

REGULATION IV
MAXIMUM LOAN
A loan shall not involve a principal amount, exclusive of financing
charges to the borrower in excess of $2,500.
No loan shall increase the principal amount outstanding at any one
time, on all loans made under Title I of the Act effective July 1,
1939 with respect to any one piece of property to an amount in excess of $2,500 exclusive of financing charges to the borrower.
One borrower may obtain any number of loans to improve any number
of separate pieces of property, subject to the credit requirements
contained in Regulation VI.

REGULATION V
MAXIMUM PERMISSIBLE FINANCING CHARGES
1.

The maximum permissible financing charge which may be paid by the borrower for interest, discount and fees of all kinds in connection with
the transaction may not be in excess of an amount equivalent to $5.00
discount per $100 original face amount of a one-year note, to be paid
in equal monthly installments, calculated from the date of the note.
Such charges correctly based on tables of calculations issued by the
Federal Housing Administrator are deemed to comply with this Regulation.
2. If the insured institution in purchasing a note takes the maximum charge
permitted by this Regulation, but employs a "holdback" and does not advance the entire proceeds of the note to the seller, it shall calculate
its financing charge on the amount advanced and credit to the account
of the seller the difference between the financing charge calculated
on the face amount of the note and the financing charge calculated on
the amount advanced.
3. The acceptance of a voluntary payment of one or more installments prior







- 4to due date shall not " e construed as increasing the maximum permisb
sible financing charge as provided in Section 1 of this Regulation.
However, if the entire "balance outstanding on the loan is paid in advance the insured institution must make a rebate as follows:
If the maximum permissible financing charge in connection with the
transaction is in an amount equivalent to $5.00 discount as provided in Section 1 of this Regulation, the insured institution shall
make a rebate at a rate not less than 5% per annum of the amounts
so paid in advance of their due dates. If a lesser charge has been
taken, the rebate shall be at not less than a proportional rate.
An increase in the ratio of the charge to the average amount outstanding
on the debt over the maximum provided in this Regulation, which increase
results from the first payment falling due less than thirty days after
the date of the note as provided in Section 3 of Regulation III, shall
not be deemed to be in conflict with this Regulation*

REGULATION VI
CREDITS
The insured institution shall obtain a signed and dated Credit StatementApplication from the borrower, on a form approved by the Administrator.
The Credit Statement-Application must, in the judgment of the insured institution, clearly show the borrower to be solvent with reasonable ability to pay the obligation and in other respects a reasonable credit risk.
A separate Credit Statement-Application is required in connection with
each loan made or note purchased.
An insured institution acting in good faith may rely upon the statements
of the borrower who signs the Credit Statement-Application. The Administrator does not place upon the insured institution the burden of verifying the truth of any such statements. Even if such statements are investigated after the loan is made and found to be false, this will not
affect in any way the eligibility of the note for insurance. However,
any borrower making false statement or misusing the funds, or any dealer,
contractor, or lender who knowingly assists in such a violation, may be
committing a Federal offense and will be subject to the penal provisions
of the National Housing Act. In all cases where the insured institution
discovers a material misstatement in the Credit Statement-Application,
or misuse of the funds, it must promptly report such a discovery to the
Administrator.
A loan shall not be made to a borrower who is delinquent at the time
the loan is made, as to either principal or interest, with respect to
an obligation owing to or insured by any department or agency of the
Federal Government,
The prior credit approval of the Administrator shall be obtained on
all loans which increase the net amount outstanding, exclusive of financing charges, to any individual borrower to an amount in excess of
$2,500 with respect to any obligation incurred pursuant to the provisions of Title I of the National Housing Act since July 1, 1939.

- 5 REGULATION VII
ELIGIBLE IMPROVEMENTS
1.

2.

3.
4.

5.

6.
7.

8.

9.




A loan must be for the purpose of financing eligible improvements within the United States, its Territories and Possessions, commenced on or
after July 1, 1939 and prior to July 1, 1941, in reliance upon the
credit facilities afforded by Title I of the National Housing Act as
approved June 3, 1939.
The proceeds of a loan shall be used only to finance alterations, repairs and improvements upon urban, suburban or rural real property
(including the restoration, rehabilitation, rebuilding and replacement
of such improvements which have been damaged or destroyed by earthquake,
conflagration, tornado, cyclone, flood or other catastrophe).
The proceeds of a loan shall not be used to finance the cost of completing an unfinished structure.
The proceeds of a Class 1 loan shall be used only to finance the cost
of alterations, repairs and improvements upon or in connection with
existing structures. The term "existing structure" means a completed
building that has or had a distinctive functional use.
The proceeds of a Class 2 loan shall not be used to supplement another
loan or advance of credit not reported for insurance, the payment of
which is secured by a prior lien created in connection with the building of such new structure.
The proceeds of a loan shall not be used for the purchase of land.
The proceeds of a loan may be used to pay for architectural and engineering services performed in connection with eligible alterations,
repairs or improvements financed in accordance with these Regulations.
The proceeds of a loan shall not be used for the purpose of refinancing existing obligations not previously reported for insurance pursuant to these Regulations.
Where any doubt exists as to the eligibility of a transaction which
is to be financed with an insured loan, the facts of the case should
be submitted to the Administrator for a decision and ruling.

- 6 REGULATION VIII
COMPLETION CERTIFICATE - STATEMENTS
1.

An insured institution may not disburse the proceeds of a loan to one
other than the borrower or to the borrower and another jointly until it
has first:
(a) Obtained a Completion or Installation Certificate signed by the
borrower in the following, or a substantially similar, form:
BORROWER'S COMPLETION CERTIFICATE*

NOTICE TO BORROWER -- Do not sign this Certificate
ihe work is sati.sfactoril^ comjDieted^

Dated at

13
I (we) the undersigned hereby certify that all articles and materials have
been furnished and installed and the work satisfactorily completed on premises
at
m in accordance with my application for a loan dated
pursuant to the provisions?
of Title I of the National Housing Act, as amended.
(Signature)

*(Insured Institution please note) The wording "Notice to borrower - Do not
sign this Certificate until the work is satisfactorily completed", must be in
type size at least three times the size of the next largest type appearing on
the form of Borrower's Completion Certificate.
(b) Obtained a statement signed by the dealer, contractor or applicator in the following, or a substantially similar, form:
DEALER/CONTRACTOR/APPLICATOR STATEMENT

To the

(lending institution) of

In consideration of your accepting the note of
(Name of
borrower(s)) for $
, dated
, we (I) hereby certify
that all articles and materials contracted for have been furnished and installed and the work fully completed, that the signature(s) on the note and Completion Certificate are genuine, that the Completion or Installation Certificate was
signed after the articles and materials contracted for had been furnished and
installed and the work fully completed.




(Signature)

,
(Name)
(Title)

- 7(c) A written authorization signed by the borrower authorizing payment of the proceeds to the person to whom paid, in the following, or a substantially similar, form:
BORROWER'S AUTHORIZATION FORM
19
I (we) hereby authorize and direct the
to pay $
for $

(financial institution)

of the proceeds of my (our) note dated ,
to

,

.
(Signature)

2.




For the purpose of this Regulation, if there are two or more eligible
borrowers involved in the transaction only one signature is required
on the Completion Certificate or Authorization Form.
REGULATION IX
REFINANCING
New obligations to liquidate loans previously reported for insurance
pursuant to Title I of the Act effective July 1, 1939 which may or may
not include an additional amount advanced will be covered by insurance,
provided:
(a) They meet the requirements of all applicable regulations;
(b) Are reported to the Administrator on the proper form within 31
days from date of execution;
(c) Have a maturity not in excess of the maximum permitted under these
Regulations from the date of the original obligation;
(d) If an additional advance is made, the full unearned charge on the
original note shall be refunded to the borrower;
(e) If no additional advance is made, the full unearned charge on
the original note shall be refunded to the borrower, except that
a handling charge not in excess of $2.00 may be assessed to the
borrower;
(f) They are evidenced by notes which meet with the requirements of
Regulation III and other applicable Regulations.
An agreement to defer payments on a note previously reported for insurance under these Regulations without rewriting the note will not affect
the insurance coverage on the loan provided:
(a) That such agreement is evidenced in writing;
(b) That payments shall not be deferred for more than five months from
the due date of the last fully-paid installment;
(c) That such agreement shall not extend the final maturity of the

- 8 obligation beyond the maturity date of the obligation as provided
by its original terms;
(d) That if the lending institution assesses the borrower for the cost
of such deferment, such charge may not be in excess of an equivalent amount of lat§ ch&rges &§ provided in Section 6 ? Regulation III,
REGULATION X
REPORT OF LOANS
Loans shall be reported on the proper form to the Federal Housing Administration at Washington, D.C., within 31 days from the date of the note or date
upon which it was purchased. Any loan refinanced as provided in Regulation IX
shall likewise be reported on the proper form within 31 days from date of refinancing.




REGULATION XI
CLAIMS
Claim for reimbursement for loss on a qualified loan shall be made as
provided in this Section.
(a) Claim for reimbursement for loss on a qualified loan may be made
to the Administrator after default on any installment, provided
demand has been made upon the debtor for the full unpaid balance.
(b) For the purpose of this Section, any payment received on an account, including payments on a judgment predicated thereon, shall
be applied to the earliest unpaid installment, and whenever any
installment is six months in arrears claim shall be made within
31 days,
(c) In the case of yearly installment notes, whenever an installment is twelve months in arrears claim must be made within 31
days thereafter,
(d) Upon presentation to him of the facts of a particular case
within the allowable claim period prescribed in this Section,
the Administrator may, in his discretion, extend the time within which claim must be made.
Subject to Regulation XII, claim may be made only for loss sustained
by the insured institution itself, and may include:
(a) Net unpaid amount of advance actually made or the actual purchase price of the note, whichever is the lesser;
(b) Uncollected earned interest (after default interest is not to
be claimed at a rate to exceed 4% per annum and will be calculated to the date the claim is approved for payment);
(c) Uncollected court costs, including fees paid for issuing, serving and filing summons;
(d) Attorney's fees not exceeding 15% of the amount collected by
the attorney on the defaulted note;

- 9 (e) Handling fee of $5 for each loan, if judgment is secured, plus
5% of amounts collected subsequent to return of unsatisfied
property execution.
(f) An insured institution may not waive its claim against the
borrower for attorney fees and subsequently call upon the
Administrator for payment of such an item.
Claim shall "be made on a form provided "by the Administrator, filled
out completely and executed in duplicate by a duly qualified officer
of the insured institution. If the Regulations have been complied
with, payment of the loss will be made on audit of the claim and
upon proper assignment to the United States of America, of the note
upon which the loss occurred, together with any security taken to
secure payment thereof. Any security or judgment taken must be
assigned, and if any claim has been filed in bankruptcy, insolvency
or probate proceedings, such claim shall likewise be assigned to the
United States of America.
Where a real estate mortgage, deed of trust, or a conditional sales
contract, chattel mortgage or any other security device has been
used to secure the payment of loans for eligible purposes, the
insured institution may not both proceed against such security and
also make claim under its Contract of Insurance, but shall elect
which method it desires to pursue. If claim is made, such security
device shall be assigned, in its entirety, to the United States of
America. If the security taken is non-assignable, all rights in
such security shall be exhausted by the insured institution or the
claim against the Administrator reduced by the full face amount of
the security taken before claim will be paid by the Administrator.
The following form of assignment properly dated shall be used in
assigning a note, judgment, real estate mortgage, deed of trust,
conditional sales contract, chattel mortgage or any other security
device in event of claim:
"All right, title and interest of the undersigned is hereby
assigned (without warranty, except that the note qualifies
for insurance) to the United States of America.
Financial Institution

Jdate)

Title,
REGULATION XII
INSURANCE RESERVE

1. Subject to the limitation that his total liability which may be outstanding at any one time plus the amount of claims paid in respect of







- 10 all insurance heretofore and hereafter granted shall not exceed
$100,000,000, the Administrator, in accordance with Regulation XI, will
reimburse any insured institution for losses sustained by it up to a
total aggregate amount equal to 10% of the total amount advanced by
it with respect to Class 1, Class 2, and Class 3 loans during the
time its Contract of Insurance is in force, on all eligible obligations previously reported for insurance, taken or purchased by it on
and after July 1, 1939, and held by it, or on which it remains liable.
If the obligations previously reported for insurance under Contracts
of Insurance issued pursuant to the National Housing Act, as amended,
effective July 1, 1939, are sold to another insured institution endorsed with or without recourse, the buying and selling institutions
may agree, with the prior approval of the Administrator, to transfer
all or any part of the insurance reserve standing to the credit of
the selling institution, to the purchasing institution. Where the
parties agree to transfer an insurance reserve in excess of 10% of
the actual purchase price of the obligations involved, or in excess
of 10% of the net unpaid original advance on the obligations involved,
whichever is the lesser, the entire insurance reserve transferred may
be used to pay only those claims arising out of defaults occurring
in the transferred obligations. When the obligations so transferred
have all been fully paid to the purchasing institution, it shall so
notify the Administrator, and any insurance reserve remaining unused
shall thereupon revert to the institution from which it was originally transferred.
Where the parties agree to transfer an insurance reserve not in excess
of 10% of the actual purchase price of the obligations involved, or not
in excess of 10% of the net unpaid original advance on the obligations
involved, whichever is the lesser, the insurance reserve so transferred
will be credited to the general reserve of the purchasing institution
in the absence of any agreement to the contrary between the purchasing
and selling institutions.
The transfer of insurance reserve in cases of merger or consolidation
of two or more insured institutions, or of an insured with an uninsured
institution, will be provided for by the Administrator in accordance
with the facts of the particular case.
In all cases involving the transfer of insured obligations, the reports
required by Regulation X must be filed and shall indicate the intent of
the parties with regard to the transfer of the insurance reserve, and
must show that no note to be transferred is delinquent more than one
calendar month at the time of such transfer.
Where the notes are transferred without recourse, guarantee, or repurchase agreement and the reports do not indicate the intent of the parties, the insurance reserve will be transferred to the general reserve
of the purchasing institution on the basis of 10% of the actual purchase price of the obligations involved, or 10% of the net unpaid original advance on the obligations involved, whichever is the lesser.
Where the transfer of the obligations is with recourse or under a
guarantee or purchase agreement and the required reports do not show
the intent of the parties, no insurance reserve will be transferred.

- 11 8.

9.

10.




The selling price on the transfer of an insured note "between insured
institutions will not affect the insurance on the note. The calculation of insured loss will " e based on the original transaction of the
b
institution first reporting the loan for insurance.
Where notes reported for insurance by one insured institution are
pledged to another insured institution as security for a loan, an assignment of the pledging institution's insurance reserve may " e made
b
with the prior consent of the Administrator provided requests for
such consent are accompanied by a signed agreement between the two
institutions.
Amounts which may be salvaged by the Administrator with respect to a
loan in connection with which an institution has been reimbursed
under its Contract of Insurance shall not be added to the insurance
reserve remaining to the credit of such institution.

REGULATION XIII
INSURANCE CHARGE
Insured institutions shall pay to the Administration an insurance charge
equal to three-fourths of 1 percentum per annum of the net proceeds
of any loan reported for insurance for the entire terra of such loan.
The insurance charge so calculated shall be paid by check or draft
to the order of the Federal Housing Administration, within 25 days
after the date the Administrator acknowledges receipt to the insured
institution of the report of loan.
When the proceeds of any loan are used to liquidate a loan previously
reported for insurance under these Regulations, there shall be deducted
from the amount of the insurance charge the prorata share of the insurance charge paid on the original obligation.
There shall not be refunded any portion of the insurance charge paid
by the insured institution with respect to any loan, unless it is subsequently found to have been in whole or in part ineligible for insurance, in which event the insurance charge paid with respect to the
ineligible portion of the advance shall be refunded by the Administration to the insured institution.
The purchaser of an insured obligation shall not be required to pay the
insurance charge provided in this Regulation with respect to the insurance of any obligation transferred under the provisions of Regulation
XII with respect to which an insurance charge has previously been paid
by the seller, and no refund shall be made to the seller as to any part
of the insurance charge previously paid with respect to any obligation
so transferred. Any adjustments of the insurance charge paid with respect to the insurance of any obligation transferred shall be made
between the purchaser and the seller.
The insurance charge paid by the insured institution shall not be
charged to the borrower if such charge would cause the total payments
made by the borrower to exceed the maximum permissible amount which
may be charged to the borrower for interest, discount and all other
charges in connection with the transaction.

- 12 Subject to the other provisions of these Regulations, the insurance
granted under Title I of the National Housing Act, as amended, shall
" e effective with respect to any loan from the date of the report
b
thereof to the Administrator provided that the insurance charge with
respect to such loan has "been paid as required " y this Regulation.
b

REGULATION XIV
ADMINISTRATIVE REPORTS AND EXAMINATION
The Administrator, in his discretion, may at any time or from time to
time call for a report from any institution on the delinquency status of the
obligations held by such institution and reported for insurance, or call for
such reports as he may deem to be necessary in connection with these Regulations, or he or his authorized representative may inspect the books or accounts of the lending institution as they pertain to the loans reported for
insurance.

REGULATION XV
AMENDMENTS
These Regulations may be amended by the Administrator at any time and
from time to time, in whole or in part, but such amendment shall not affect
the insurance with respect to any loan made or obligation purchased prior
to the issuance of such amendment.

REGULATION XVI
EFFECTIVE DATE
These Regulations are effective as to all Class 1 and Class 2 loans, advances of credit or purchases made after January 1, 1940 pursuant to the
provisions of Title I of the National Housing Act, as amended, and shall have
the same force and effect as if included in and made a part of each Contract
of Insurance.




Issued at Washington, D. C, December 14, 1939

Stewart McDonald
FEDERAL HOUSING ADMINISTRATOR

PABT II

REGULATIONS
OF THE FEDERAL HOUSING ADMINISTRATOR
GOVERNING CLASS 3 LOANS UNDER TITLE I
OF THE NATIONAL HOUSING ACT

REGULATION I
These Regulations may " e cited and referred to as "Regulations effective
b
January 1, 1940 of the Federal Housing Administrator governing the insurance
of qualified lending institutions against loss resulting from Class 3 loans
made under the provisions of Title I, Section 2, of the National Housing Act,
as amended.

REGULATION II
DEFINITIONS
As used in these Regulations —
1. The term "Act" means the National Housing Act, as amended, effective
July 1, 1939.
2. The term "Administration" means Federal Housing Administration.
3. The term "Administrator" means the Federal Housing Administrator.
4. The term "Contract of Insurance" includes all of the provisions of
these Regulations and of the applicable provisions of the Act.
5. The term "insured institution" means any bank, trust company,
personal finance company, mortgage company, building and loan
association, installment lending company or other such financial
institution which the Administrator has found to be qualified by
experience or facilities and has approved as eligible for credit
insurance and to which he has issued a Contract of Insurance.
6. The terms "loan" and "Class 3 loan" mean any loan which is
for the purpose of financing the construction of a new structure to be used in whole or in part for residential purposes.
7. The term "borrower" means one who is an eligible owner or lessee
of real property upon which a new structure is to be or has been
constructed pursuant to the provisions of the Act and these Regulations and who applies for and receives an advance of credit in
reliance upon the provisions of the Act and these Regulations.
8. The term "payment" includes a deposit to an account or fund.
9. The term "installment payment" includes that deposit to an




- 2 •
account or fund which represents the partial repayment of an advance of credit.
10. The term "note" includes a note, "bond, mortgage, deed of trust,
or other evidence of indebtedness or security instrument.
11. The term "discount loan" means a loan made on a discount,
gross charge or non-interest bearing basis,
12. The term "interest bearing loan" means a loan represented by
a note payable in monthly installments bearing simple interest
on the principal outstanding from time to time.
13. The term "Class 3 structure" means a structure, the construction of
which is financed with the proceeds of an eligible Class 3 loan.

REGULATION III
ELIGIBLE BORROWERS
A borrower in order to be eligible for a Class 3 loan:
1. Shall be (1) the fee simple owner of unencumbered land upon which the
new structure is to be built or (2) the lessee of such unencumbered
land under a lease from the United States Government for a terra of at
least six months beyond the maturity of the loan or (3) the lessee of
such unencumbered land under a lease having a term of at least thirty
years to run from the date of the note and providing for annual rental not in excess of 6% of the valuation placed upon the unimproved
land by the insured institution and containing a provision which will
entitle the lessee to obtain the fee simple title to such land upon
payment at any time after one months written notice of a sura not in
excess of the amount of such annual rental multiplied by 16-2/3, or
(4) the lessee of such unencumbered land under a lease for not less
than 99 years which is renewable.
2. Shall establish to the satisfaction of the insured institution by
certification on the Credit Statement-Application provided for in Regulation VI that after the mortgage, deed of trust or similar instrument
has been recorded, the property will be free and clear of all liens
other than such mortgage, deed of trust or similar instrument, except
taxes and ground rents not due and payable and special assessments not
in arrears, and that in addition to the loan he has an investment in
the property in cash, in land, or an interest in the land in an amount
equal to 5% of the appraised value of the completed property as determined under Section 1 of Regulation IX.
3. Shall meet with the credit requirements set forth in Regulation VI.
REGULATION IV
ELIGIBLE IMPROVEMENTS
1. A loan must be for the purpose of financing the construction of a







- 3Class 3 structure and appurtenances thereto which conforms with the
minimum construction requirements and property standards prescribed
by the Administrator and which is approved by the Administrator as
to architectural design, physical characteristics and location, and
which is within the United States, its Territories and Possessions
and which is commenced on or after July 1, 1939 and prior to July 1,
1941, in reliance upon the credit facilities afforded by Title I of
the National Housing Act as approved June 3, 1939.
The proceeds of a loan shall not be used to finance the cost of completing an unfinished structure, unless the unfinished structure was begun
under a Class 3 loan, in which case the total of all loans shall not exceed $2500.
The proceeds of a loan shall not be used to supplement another loan or
advance of credit not reported for insurance.
The proceeds of a loan may be used to pay for architectural and engineering services and builder's profit in connection with the building
of new structures financed in accordance with these Regulations.
The proceeds of a loan shall not be used for the purpose of refinancing existing obligations not previously made or reported for insurance pursuant to these Regulations.
Where any doubt exists as to the eligibility of a transaction which
is to be financed with an insured loan, the facts of the case should
be submitted to the Administrator for a decision and ruling.

REGULATION V
MAXIMUM LOAN
The amount of advance actually made to the borrower on any loan shall
not be in excess of $2500.
No such loan shall increase the principal amount outstanding at any
one time on all loans made under Title I of the National Housing Act
effective July 1, 1939, with respect to any one structure or piece
of property to an amount in excess of $2500.
One borrower may obtain any number of loans to improve any number
of separate pieces of property, subject to the credit requirements
contained in Regulation VI.

REGULATION VI
CREDITS
The insured institution shall obtain a signed and dated Credit Statement-Application from the borrower on a form approved by the Administrator. The Credit Statement-Application must, in the judgment of
the insured institution, clearly show the borrower to be solvent
with reasonable ability to pay the obligation and in other respects
a reasonable credit risk.




- 4 A separate Credit Statement-Application is required in connection with
each loan made or note purchased.
An insured institution acting in good faith may rely upon the statements of the "borrower who signs the Credit Statement-Application.
The Administrator does not place upon the insured institution the
"burden of verifying the truth of any such statements. Even if such
statements are investigated after the loan is made and found to be
false, this will not affect in any way the eligibility of the note
for insurance. However, any "borrower making such false statement or
misusing the funds, or any dealer, contractor, or lender who knowingly
assists in such a violation, may be committing a Federal offense and
will be subject to the penal provisions of the National Housing Act.
In all cases where the insured institution discovers a material
misstatement in the Credit Statement-Application or misuse of the
funds, it must promptly report such a discovery to the Administrator.
A loan shall not be made if the records of the lender or the Credit
Statement-Application indicates that the borrower is delinquent as to
either principal or interest, with respect to an obligation owing to
or insured by any Department or agency of the Federal Government.

REGULATION VII
ELIGIBLE INTEREST BEARING LOANS
In order to be eligible for insurance an interest bearing loan shall
be secured by collateral security in the form of a duly recorded first
mortgage, first deed of trust or similar instrument which constitutes
a first lien upon a fee simple or leasehold interest in the land and
buildings, appurtenances and improvements thereon and which:
(a) Is in a form approved by the Administrator for use in the jurisdiction in which the property covered by the mortgage, deed of
trust, or similar instrument is situated and involves a principal
amount not in excess of $2500.
(b) Shall provide for interest at such rate as may be agreed upon between the borrower and the insured institution but in no case
shall such interest be in excess of 4£% per annum on the outstanding principal. Interest and principal shall be payable in
monthly installments (or other periodic installments as provided
in subsection (k) of this Section. In the event interest is payable in installments corresponding to the income periods shown on
the Credit Statement-Application such interest payments may be required in advance for each such installment period.) The mortgage
may provide that the borrower shall pay in addition to interest an
annual service charge at such rate as may be agreed upon between
the borrower and the insured institution but in no case shall such
service charge exceed one half of one per cent per annum on the
outstanding balances. Any such service charge shall be payable on
the installment payment dates.
(c) May provide for payments by the borrower to the insured institution




- 5 -

(d)

(e)

(f)

(g)

(h)
(i)
(j)

(k)

on each installment payment date of an amount equal to the annual
insurance charge payable by the insured institution to the Administrator, divided " y the number of installment payment dates
b
to elapse prior to the date such charge is due and payable to the
Administrator.
Shall provide for such equal payments by the borrower to the insured institution on each installment payment date as will
amortize the ground rents, if any, and the estimated amount of
all taxes, special assessments, if any, and fire and other hazard
insurance premiums, within a period ending one month prior to the
date on which same become delinquent. The note shall further provide that such payments shall be held by the lending institution
in a manner satisfactory to the Administrator for the purpose of
paying such ground rents, taxes, assessments, and insurance premiums before the same become delinquent for the benefit and account of the borrower. The note shall also make provision for adjustments in case the estimated amount of such taxes, assessments,
and insurance premiums should prove to be more or less than the
actual amount thereof so paid by the insured institution.
The note shall contain a privilege of prepayment in full or in
amounts equal to one or more installment payments, on the principal that are next due on the note at any interest payment date
upon thirty days prior notice and without premium or penalty.
Shall provide that all installment payments to be made by the
borrower to the insured institution shall be added together and
the aggregate amount thereof shall be applied to the following
items in the order set forth.
(1) Insurance charges due the Federal Housing Administrator.
(2) Service charge, if any.
(3) Ground rents, taxes, special assessments, and fire and
other hazard insurance premiums.
(4) Interest on the loan.
(5) Amortization of the principal of the loan.
May provide for a late charge to be paid by the borrower, not to
exceed two cents {2<jt>) for each dollar for each installment payment more than fifteen days in arrears. No late charge may be
accrued in excess of $5.00. The borrower must be billed for the
penalties collected as such, and evidence of such billing must
be in the file if claim is made under the Contract of Insurance.
Shall contain a provision for acceleration of maturity at the
option of the holder in the event of default,
Shall not have a final maturity in excess of fifteen years and
five calendar months.
Shall provide for not more than one hundred and eighty monthly
payments which shall fall due on the first day of a month and the
first such payment shall fall due not less than six days nor more
than six calendar months from the date of the note, except as
provided in subsection (k) of this Section,
In instances in which the Credit Statement-Application of the
borrower indicates that not less than 51% of the income of the

- 6 "borrower is derived directly from the sale of agricultural crops,
commodities or livestock produced "by him, the note may provide,
in lieu of monthly installments, for substantially equal
installment payments corresponding to the income periods shown on
the Credit Statement-Application, provided, however, that the
first payment must "be within twelve months of the date of the note
and that at least one payment must "be made during each calendar
year thereafter.
The "borrower must pay to the insured institution, upon the execution
of the note, a sum that will "be sufficient to pay premiums on fire
and other insurance required "by the insured institution pursuant to
the terms of the note, and ground rents, if any, and estimated taxes,
special assessments, drainage and irrigation charges applicable to the
period beginning on the date to which such ground rents, taxes, assessments, and charges were last paid and ending on the date of the first
periodic payment under the note. The borrower, at such time, may also
be required to pay a sum equal to the first annual insurance charge
plus an amount equal to one-twelfth (1/12) of the annual insurance
charge multiplied by the number of months to elapse from the date of
the closing of the loan to the date of the first periodic payment,
and if the note provides for payment of interest in advance, interest
to the due date of the first periodic payment thereunder. The insured
institution may charge the borrower the $10.00 paid to the Administration for examining the loan and an initial service charge in an amount
sufficient to reimburse the insured institution for the cost of closing
the transaction, including appraisal fees but in no case shall the
amount of such service charge be in excess of 1% of the original principal amount of the loan.
In addition to the charges hereinbefore mentioned the insured institution may collect from the borrower only recording fees and such costs
of title search as are customary in the community.
REGULATION VIII
ELIGIBLE "DISCOUNT" LOANS
1. A "discount" loan shall be secured by collateral security in the form
of a duly recorded first mortgage, first deed of trust or other similar
instrument which constitutes a first lien upon a fee simple or leasehold interest in the land and buildings, appurtenances and improvements
thereon and:
(a) Shall not be in excess of $2500 exclusive of financing charges to
the borrower.
(b) Shall not have a maturity in excess of fifteen years and five calendar months.
(c) May provide for a maximum financing charge to be paid by the
borrower for interest, discount and fees of all kinds other than
those referred to in subsection (d) of this Section and Sections
2 and 3 of this Regulation in connection with the transaction







- 7-

(d)

(e)

(f)

(g)

not in excess of an amount equivalent to $3.50 discount per $100
original face amount of a one year note to "be paid in equal
monthly installments calculated from the date of the note. Such
charges correctly based on tables of calculations issued by the
Federal Housing Administrator are deemed to comply with this Regulation. The acceptance of a voluntary payment of one or more
installments prior to due date shall not be construed as increasing the maximum permissible financing charge as provided in this
subsection. However, if the entire loan is paid in advance, the
insured institution shall make a rebate of the entire unearned
financing charge.
May provide for such equal monthly payments by the borrower to
the insured institution as will amortize the ground rents, if any,
and the estimated amount of all taxes, special assessments, if
any, and fire and other hazard insurance premiums within a period
ending one month prior to the date on which same becomes delinquent. In such event the note shall further provide that such
payments shall be held by the insured institution in a manner
satisfactory to the Administrator for the purpose of paying such
ground rents, taxes, assessments, and insurance premiums before
the same become delinquent for the benefit and account of the
borrower and shall also make provision for adjustments in case
the estimated amount of such taxes, assessments, and insurance
premiums shall prove to be more or less than the actual amount
thereof so paid by the borrower. If the income of the borrower
is derived from the sale of agricultural crops, commodities, or
livestock, payments may be seasonal as provided in Subsection
(g) of this Section.
May provide for a late charge, to be paid by the maker, not to
exceed two cents (2$O for each dollar of each installment more
than fifteen days in arrears. In lieu of late charges, notes
may provide for interest on past due installments at a rate not
in excess of the contract rate in the jurisdiction in which the
note is drawn. No late charge or interest on a past due installment may be accrued in excess of $5.00. The borrower must be
billed for the penalties collected as such, and evidence of such
billing must be in the file if claim is made under the Contract
of Insurance.
May not provide for a first payment less than six days nor more
than six calendar months from the date of the note except as provided in Subsection (g) of this Section and in no case shall
provide for more than one hundred and eighty payments.
May be made payable in installments corresponding to the income
periods shown on the Credit Statement-Application if fifty-one percent or more of the income of the borrower is derived directly
from the sale of agricultural crops, commodities, or livestock
produced by him. In such cases, the first payment must be made
within twelve months of the date of the note and at least one
payment must be made during each calendar year thereafter and the
proportion of total principal to be paid in later years must not
exceed the proportion of total principal payable in earlier years.




- 8 (h) Shall contain a provision for acceleration of maturity, either
automatic or at the option of the holder, in the event of default
in the payment of any installment.
In addition to the maximum permissible financing charge which may be
paid by the borrower in connection with a Class 3 loan as provided in
Section 3 of this Regulation, the following allowable costs or expenses
if incurred by the insured institution in connection with the transaction may be collected from the borrower, provided such costs or expenses
are not paid from the net proceeds advanced to the borrower.
(a) Recording fees.
(b) Title Examination fees.
(c) Fire and other hazard Insurance Premiums.
(d) The $10.00 paid to the Administration for examining the loan,
(e) An initial service charge in an amount sufficient to reimburse
the insured institution for the cost of closing the transaction
provided that no such service charge shall exceed one per centum of the original net proceeds of the loan.
The borrower may be required to pay to the insured institution upon the
closing of the loan a sum that will be sufficient to pay the ground
rents, if any, and the estimated taxes, special assessments, and fire
and other hazard insurance premiums for the period beginning on the
date to which such ground rents, taxes, assessments and insurance premiums were last paid and ending on the date of the first monthly payment
under the loan to be held by the insured institution for the purpose of
paying such ground rents, taxes, assessments, and insurance premiums
before the same become delinquent for the benefit and account of the
borrower,
REGULATION IX
LOAN PROCEDURE
Prior to the start of construction and to the disbursement of any portion of the proceeds of the loan, the insured institution shall make
an estimate of the value of the property assuming completion of the
proposed improvements and shall certify to the local insuring office
the amount of such appraisal and that the requirements of Section 2
of Regulation III will be complied with. However, if the insured institution is an approved mortgagee under the provisions of Title II
of the Act and requests the Administrator to determine the eligibility
of the property for insurance of a mortgage loan under the provisions
of Section 203 of Title II of the Act, it may accept the value estimate of the Administrator as its own in the event it subsequently decides to make a loan under the provisions of these Regulations.
Prior to the start of construction and to the disbursement of any portion of the proceeds of the loan, the insured institution shall submit to
the Administrator an Application for Property Approval on a form prescribed by the Administrator. Such application shall be accompanied by
the certificate provided for in Section 1 of this Regulation, the
plans or drawings and specifications, and the insured institution's check
made payable to the Federal Housing Administration in the sum of $10.00.

- 9 After obtaining the approval of the application by the Administrator and
prior to disbursing the proceeds of the loan or any portion thereof, the
institution shall satisfy itself that the value of the work done and
materials on the site at the time of any progress payment is equal to
at least 110% of such payment, plus all such progress payments theretofore made. The insured institution shall not make a disbursement
or a progress payment which would increase the total amount disbursed
to a sum in excess of 80 per centum of the proceeds of the loan until
it has been notified that the final inspection of the structure by the
Administration has been made and the work approved. No disbursement
of any portion of the proceeds shall be made subsequent to receipt
of written notice from the Administrator by the insured institution
to the effect that the structure has not been constructed in accordance with the plans and specifications and conditions as approved by
the Administrator.
The approval of the Administrator provided for in this Regulation shall
not relieve the insured institution from compliance with any Regulation.
In the event that property covered by a loan is sold to an eligible
borrower who assumes and agrees to pay the debt and whose credit is
satisfactory to the insured institution, the seller may be released
by the insured institution from his obligation upon notice thereof
to the Administrator.
Loans shall be reported on the proper form to the Federal Housing Administration at Washington, D. C , within thirty-one days of the first
disbursement of any of the proceeds of the loan or the date upon which
it was purchased. Any loan refinanced in accordance with Regulation
X shall be reported on the proper form within thirty-one days from
the date of refinancing.

REGULATION X
REFINANCING
New obligations to liquidate loans previously reported for insurance pursuant to Title I of the Act effective July 1, 1939 which may or may not include
an additional amount advanced will be covered by insurance, provided that:
(a) They meet the requirements of all applicable regulations;
(b) Are reported to the Administrator on the proper form within
31 days from date of execution;
(c) Have a maturity not in excess of the maximum permitted under
these Regulations from the date of the original obligation;
(d) If an additional advance is made, the full unearned charge on
the original note shall be refunded to the borrower;
(e) If no additional advance is made, the full unearned charge on
the original note shall be refunded to the borrower, except
that a handling charge not in excess of $2.00 may be assessed
to the borrower.




- 10 -

REGULATION XI
CLAIMS
Claim for reimbursement for loss on a qualified loan shall be made as provided in this Regulation.
1. If the borrower fails to make any payment, or to perform any other covenant or obligation under the mortgage, and such failure continues for
a period of thirty (30) days, the note shall be considered in default
and at any time within one year from the date of default the insured
institution, at its election, shall either —
(a) Acquire by means other than foreclosure of the mortgage, possession of, and title to, the mortgaged property; or
(b) Commence foreclosure of the mortgage; provided, that if the laws
of the State in which the mortgaged property is situated do not
permit the commencement of such foreclosure within such period of
time, the insured institution shall commence such foreclosure
within sixty (60) days after the expiration of the time during
which such foreclosure is prohibited by such laws.
(c) Nothing herein contained shall be construed so as to prevent the
lending institution, with the written consent of the Administrator,
from taking action at a later date than herein specified.
2. For the purposes of this section, the date of default shall be considered as thirty (30) days after (a) the first uncorrected failure to perform a covenant or obligation, or (b) the first failure to make a
monthly payment which subsequent payments by the mortgagor are insufficient to cover when applied to the overdue monthly payments in the
order in which they became due.
3. If after default and prior to the completion of foreclosure proceedings,
the borrower shall pay to the insured institution all monthly payments
in default and such expenses as the insured institution shall have incurred in connection with the foreclosure proceedings, no claim for reimbursement under the Contract of Insurance can be made and the insurance shall continue as if such default had not occurred.
4. If the default is not cured as aforesaid, and if the insured institution has otherwise complied with the provisions of this Regulation,
it may at any time within thirty (30) days (or such further time as
may be necessary to complete the title examination and perfect such
title) after the expiration of the period given the insured institution to sell under Section 7 of this Regulation, tender to the Administrator possession of, and a deed containing a covenant which
warrants against the acts of the insured institution and all claiming by, through, or under it, conveying good merchantable title to
such property undamaged by fire, earthquake, flood, or tornado.
The Administrator shall promptly accept conveyance of such property
and, subject to Regulation XIV, make payment of loss sustained by
the insured institution as follows:
(a) The net unpaid balance of advance actually made;
(b) Uncollected earned interest (after default interest is not to be







- 11 claimed at a rate to exceed 4% per annum for the first six months
nor thereafter to exceed 3% per annum and will be calculated to the
date the claim is approved for payment);
(c) Actual expenses incurred "by the insured institution and approved "by
the Administrator in connection with the foreclosure proceedings or
the acquisition of the mortgaged property otherwise, and the conveyance thereof to the Administrator up to "but not to exceed $75.00;
(d) The amount of all payments which have "been made "by the insured
institution for taxes, ground rents, special assessments, and
water rates which are liens prior to the mortgage, and fire and
hazard insurance premiums.
Any amount received by the insured institution from any source relating
to the property on account of rent or other income, after deducting
reasonable expenses incurred in handling the property shall "be deducted
from the sum of the foregoing,
Evidence of title of the following types will "be satisfactory to the
Administrator:
(a) A fee or owner's policy of title insurance, a guaranty or guarantee of title, or a certificate of title, issued by a title company, duly authorized by law and qualified by experience to
issue such; or
(b) An abstract of title prepared by an abstract company or individual
engaged in the business of preparing abstracts of title and accompanied by a legal opinion as to the quality of such title
signed by an attorney at law experienced in examination of titles; or
(c) A Torrens or similar title certificate; or
(d) Evidence of title conforming to the standards of a supervising
branch of the Government of the United States or of any State or
Territory thereof.
Such evidence of title shall be furnished without cost to the Administrator and shall be executed as of a date to include the recordation of the
deed to the Administrator, and shall show that, according to the public
records, there are not, at such date, any outstanding prior liens, except
for ground rents and taxes not due and payable and special assessments
not in arrears. If the title and title evidence are such as to be acceptable to prudent lending institutions and leading attorneys generally in
the community in which the property is situated, such title and title
evidence will be satisfactory to the Administrator and will be considered
by him as good and merchantable.
The Administrator will not object to the title by reason of the following matters, provided they are not such as to impair the value of the
property for residence purposes:
(a) Customary easements for public utilities, party walls, driveways,
and other purposes; customary building or use restrictions for
breach of which there is no reversion and which have not been
violated to a material extent;
(b) Such restrictions when coupled with a reversionary clause, provided
there has been no violation prior to the date of the deed to the Administrator;
(c) Slight encroachments by adjoining improvements;




- 12 (d) Outstanding oil, water, or mineral rights, which do not impair the
value of the property for Residence purposes, or which are customarily waived by prudent lending institutions and leading attorneys
generally in the community.
In lieu of the procedure provided for in Sections 4 and 5 of this Regulation the insured institution, after acquiring title to the property as
provided in this Regulation, may at its option, sell the same in the
open market to a "bona fide third party at any time within six months from
the date of such acquisition of the property, or within such further
time as may be approved by the Administrator; provided, that such property may not, without the prior approval of the Administrator, be sold
for a price less than 75 percent of the net unpaid balance of the advance actually made. The net amount received at such sale, whether in
cash or deferred payments, shall be credited on the obligation and
claim may be filed with the Administrator for the balance. Payment
of loss sustained by the insured institution shall be made as follows:
(a) The net unpaid balance of the advance actually made. In calculating the net unpaid amount, the net sale price must be included
as a credit.
(b) Uncollected earned interest (after default and prior to acquisition of the property by the insured institution interest is not
to be claimed at a rate to exceed 4% per annum for the first six
months nor thereafter to exceed 3% per annum. Subsequent to the
acquisition of the property by the insured institution interest
shall not be claimed at a rate to exceed 3% per annum.)
(c) Actual expenses incurred by the lending institution and approved
by the Administrator in connection with foreclosure proceedings
or acquisition of the property otherwise up to but not exceeding
$75.00.
(d) The amount of all payments which have been made by the insured institution for taxes, ground rents, special assessments, water
rates which are liens prior to the mortgage, fire and hazard insurance premiums and cost of maintenance and repair of the property (claim for cost of maintenance and repair shall not exceed
10% of the net unpaid balance of the advance actually made unless
prior approval of the Administrator has been obtained.)
Any amount received by the insured institution from any source relating
to the property on account of rent or other income shall be deducted
from the sum of the items referred to in this Section,
REGULATION XII
INSURANCE CHARGE
Insured institutions shall pay to the Administration an insurance charge
equal to one-half of one per centum per annum of the net proceeds of
any discount loans reported for insurance and an annual insurance charge
equal to one-half of one per centum of the original principal amount of
any interest-bearing loans reported for insurance.




- 13 The first annual insurance charge so calculated shall " e paid by
b
check or draft to the order of the Federal Housing Administration
within 25 days after the date the Administration acknowledges receipt to the insured institution of the report of any such loan
and the next and each succeeding annual insurance charge shall
" e paid in advance upon the anniversary of the first day of the
b
month following the date of the note until the loan is paid in full
or claim is filed with the Administrator under the Contract of
Insurance.
In the event the loan is paid in full prior to maturity or is foreclosed or the possession of and title to the property is otherwise
acquired " y the insured institution, the insured institution shall
b
within 30 days thereafter notify the Administration of the date of
prepayment, foreclosure or acquisition, after which its obligation
to pay future annual insurance charges in connection therewith shall
cease but it shall not be entitled to a refund of any portion of an
annual insurance charge previously paid or a reduction in the amount
of any insurance charge which fell due prior to such prepayment,
foreclosure or acquisition of the property.
When the proceeds of any loan are used to liquidate a loan previously
reported for insurance under these Regulations, there shall be deducted from the amount of the insurance charge payable the first
year the prorata share of the annual insurance charge paid on the
original obligation.
The purchaser of an obligation previously reported for insurance shall
pay each succeeding annual insurance charge as provided in Section 2
of this Regulation, Any adjustment of the insurance charge paid in
advance by the seller shall be made between the purchaser and the
seller.
The insurance charge paid by the insured institution shall not be
charged to the borrower if such charge would cause the total payments made by the borrower to exceed the maximum permissible amount
which may be charged to the borrower for interest, discount and all
other charges in connection with the transaction, except as provided
in Regulations VII and VIII.
Subject to the other provisions of these Regulations, the insurance
granted under Title I of the National Housing Act, as amended,
shall be effective with respect to any loan from the date of the
report thereof to the Administrator provided that the insurance
charge with respect to such loan is paid as required by this Regulation,

REGULATION XIII
INSURANCE RESERVE
Subject to the limitation that his total liability which may be outstanding at any one time plus the amount of claims paid in respect
of all insurance heretofore and hereafter granted shall not exceed

- 14 -

2.

3.

4.

5.

6.

7.

8.

9.

$100,000,000, the Administrator, in accordance with Regulation XI, will
reimburse any insured institution for losses sustained " y it up to a
b
total aggregate amount equal to 10% of the total amount advanced with
respect to Class 1, Class 2 and Class 3 loans during the time its
Contract of Insurance is in force, on all eligible obligations previously reported for insurance, taken or purchased by it on and after
July 1, 1939, and held by it, or on which it remains liable,
If obligations previously reported for insurance under Contracts of
Insurance issued pursuant to the National Housing Act, as amended,
effective July 1, 1939, are sold to another insured institution endorsed with or without recourse, the buying and selling institution
may agree to transfer all or any part of the insurance reserve standing to the credit of the selling institution to the purchasing institution with the prior approval of the Administrator under such terms
and conditions as he may prescribe.
The transfer of insurance reserve in cases of merger or consolidation
of two or more insured institutions, or of an insured with an uninsured
institution, will be provided for by the Administrator in accordance
with the facts of the particular case.
In all cases involving the transfer of insured obligations, the reports
required by Section 6, Regulation IX must be filed and shall indicate
the intent of the parties with regard to the transfer of the insurance reserve, and must show that no note to be transferred is delinquent more than one calendar month at the time of such transfer.
Where the notes are transferred without recourse, guarantee, or repurchase agreement and the reports do not indicate the intent of
the parties, the insurance reserve will be transferred to the
general reserve of the purchasing institution on the basis of
10% of the actual purchase price of the obligations involved, or
10% of the net unpaid original advance on the obligations involved,
whichever is the lesser.
Where the transfer of the obligation is with recourse or under a
guarantee or purchase agreement and the required reports do not
show the intent of the parties, no insurance reserve will be
transferred.
The selling price on the transfer of an insured note between insured
institutions will not affect the insurance on the note. The calculation of insured loss will be based on the original transaction of
the institution first reporting the loan for insurance.
Where notes reported for insurance by one insured institution are
pledged to another insured institution as security for a loan, an
assignment of the pledging institution's insurance reserve may be
made with the prior consent of the Administrator provided requests
for such consent are accompanied by a signed agreement between the
two institutions.
Amounts which may be salvaged by the Administrator with respect to
a loan in connection with which an institution has been reimbursed
under its Contract of Insurance shall not be added to the insurance
reserve remaining to the credit of such institution.




- 15 REGULATION XIV
PRIVILEGES EXTENDED TO LOANS REPORTED FOR INSURANCE UNDER PREVIOUS REGULATIONS
1.

2.

3.

4.

5.

At its option an insured institution may extend or renew, for a period
up to fifteen years from its original date, any Class 3 loan made prior
to the effective date of these Regulations and heretofore or hereafter
reported for insurance under the Acts of February 3, 1938 or June 3,
1939 amending the National Housing Act, and the unpaid balance of any
such loan shall " e so amortized as to " e fully paid at the end of said
b
b
fifteen year term; provided that all such loans are secured " y collatb
eral security in the form of a duly recorded first mortgage, first
deed of trust or similar instrument which constitutes a first lien
upon a fee simple or leasehold interest in the land and "buildings,
appurtenances and improvements thereon.
In the event the property covered " y a loan made prior to the effecb
tive date of these Regulations and heretofore or hereafter reported
for insurance under the Acts of February 3, 1938, or June 3, 1939 is
sold to an eligible borrower who assumes and agrees to pay the debt
and whose credit is satisfactory to the insured institution, the
seller may be released by the insured institution from his obligation upon notice thereof to the Administrator; provided that all
such loans are secured by collateral security in the form of a
duly recorded first mortgage, first deed of trust or similar instrument which constitutes a first lien upon a fee simple or leasehold interest in the land and building, appurtenances and improvements thereon.
In the case of any loan made on or after July 1, 1939, the insured
institution at its option may acquire title to the property and
dispose of such property as provided in Regulation XI, whereupon
such loan shall be subject to all the applicable provisions of
these Regulations.
In the event any loan made on or after July 1, 1939, is paid in
full or the property is acquired by the lending institution as set
forth in Regulation XI or in the event the insurance with respect
to the loan is terminated, no additional insurance charge with respect to such loans shall be payable.
In the case of any loan made on or after July 1, 1939, the insurance
charge may be paid by check or draft to the order of the Federal
Housing Administration annually in advance as provided in Section 2
of Regulation XII.

REGULATION XV
ADMINISTRATIVE REPORTS AND EXAMINATION
The Administrator, in his discretion, may at any time or from time to time
call for a report from any institution on the delinquency status of the obligations held by such institution and reported for insurance, or call for such




- 16 reports as he may deem to be necessary in connection with these Regulations,
or he or his authorized representative may inspect the "books or accounts of
the lending institution as they pertain to the loans reported for insurance.

REGULATION XVI
AMENDMENTS
The foregoing Regulations may be amended by the Administrator at any time
and from time to time, in whole or in part, but such amendment shall not effect
the insurance with respect to any loan made or obligation purchased prior to
the issuance of such amendment.

REGULATION XVII
EFFECTIVE DATE
The foregoing Regulations are effective as to all Class 3 loans, advances
of credit or purchases made on or after January 1, 1940 pursuant to the provisions of Title I of the National Housing Act, as amended, and shall have the
same force and effect as if included in and made a part of each Contract of
Insurance.

Issued at Washington, D. C. December 14, 1939.

Stewart McDonald
Federal Housing Administrator

26733 Rev. 12/15/39