(c) "Commissioner" means the Federal Housing Commissioner or his duly authorized representative.

(d) "Contract of Insurance" includes all of the provisions of this part and of the applicable provisions of the act.

(e) "Insured" means a financial institution holding a Contract of Insurance under Title I of the Act.

(f) "Loan" means an advance of funds or credit or the purchase of an obligation evidenced by a note.

(g) "Note" includes a note, bond, mortgage, or other evidence of indebtedness.

(h) "Payment" includes a deposit to an account or fund which represents the full or partial repayment of a loan.

(i) "Borrower" means one who applies for and receives a loan in reliance upon the provisions of the act and whose interest in the property to be improved is (1) a fee title, or (2) a life estate, or (3) an equitable interest under an instrument of trust or contract, or (4) a lease having a fixed term, expiring not less than six calendar months after the maturity of the loan.

(j) "Class 1 (a) loan" means a loan, other than a loan defined in paragraph (k) of this section as a "Class 1 (b) 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 "existing structure" means a completed building that has or had a distinctive functional use.

(k) "Class 1 (b) loan" means a loan which is (1) made for the purpose of financing the alteration, repair, improvement, or conversion of an existing structure located in an area or locality in which the President shall find that an acute shortage of housing exists or impends, which would impede national war activities and (2) is made for the purpose of providing additional living accommodations to which the borrower shall establish in a manner and upon forms prescribed by the Commissioner that occupancy priority will be given to war workers.

(1) "Class 2 (a) loan" means a loan which is for the purpose of financing the construction of a new structure which is to be used exclusively for other than residential or agricultural purposes.

(m) "Class 2 (b) loan" means a loan which is for the purpose of financing the construction of a new structure for use in whole or in part for agricultural purposes, exclusive of residential purposes.

(n) "Class 1 loan" includes both "Class 1 (a)" and "Class 1 (b)" loans as defined in paragraphs (j) and (k) of this section.

(o) "Class 2 loan" includes both "Class 2 (a)" and "Class 2 (b)" loans as defined in paragraphs (1) and (m) of this section.

§ 501.3 Eligible notes-(a) Validity. The note shall bear the genuine signature of the borrower as maker, shall be valid and enforceable in the jurisdiction in which it is issued, and shall be complete and regular on its face. If more than one borrower signs the note all such signatures must be genuine. If the note is executed for and on behalf of a corporation or in a representative capacity the note must create a binding obligation of the principal.

(b) Acceleration clause. The note 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 instalment upon the due date thereof.

(c) Payments. The note shall be payable in equal monthly, semi-monthly, or weekly instalments. The final instalment may be more or less than the other instalments provided that it is not less than one-half or more than one and onehalf times the preceding instalment. A note may not provide for a first payment less than six days nor more than sixtytwo days from the date of the note. However, 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, a note may be made payable in instalments corresponding to income periods shown on the credit application. In such cases, the first payment must be made within twelve months of the date of the note and at least one payment shall be made in each twelve months thereafter, provided that no two payments shall be more than twelve months apart, and the proportion of total principal to be paid in later years shall not exceed the proportion of total principal payable in earlier years. lieu of an instalment note payable in equal periodic instalments a loan may

In

be evidenced by a series of notes provided each is of an equal amount as provided in this section and that each note indicates on its face that it is one of a series signed by the same borrower.

(d) Maturity—(1) Minimum. The note shall not have a final maturity of less than six calendar months from the date of the note.

(2) Maximum. The maximum permissible maturity of a note evidencing:

(i) A Class 1 (a) or a Class 2 (a) loan is three years and thirty-two days from the date of the note.

(ii) A Class 1 (b) loan is seven years and thirty-two days from the date of the note.

(iii) A Class 2 (b) loan is seven years and thirty-two days from the date of the note, except that if a Class 2 (b) loan is secured by a first mortgage, first deed of trust, or other security instrument constituting a first lien upon the improved property, the loan may have a final maturity not in excess of fifteen years and thirty-two days from the date of the note.

(iv) A combination of any of the above classes of loans shall be no greater than the maximum maturity governing that component part of the loan having the shortest maturity if made alone.

(e) Late charges. The note may provide for a late charge, not to exceed 5 cents for each $1.00 of each instalment more than fifteen days in arrears. No late charge on a past due instalment may be accrued in excess of $5.00. In lieu of late charges, notes may provide for interest on past due instalments at a rate not in excess of the contract rate in the jurisdiction in which the note is drawn. 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.

(f) Deferred first payment. Loans made on and after July 1, 1944 the proceeds of which are used exclusively for (1) the conversion of heating equipment to the use of any other fuel, the repair of heating equipment, or the replacement of heating equipment if it is worn out, damaged beyond repair, or destroyed, (2). the instalation of loose-fill, blanket, or batt-type insulation, or insulating board, within existing structures, (3) the instalation of storm doors, storm windows, or weather stripping, may provide for a first payment not later

625507-45-SUPP. VII-BK. 2-13

than November 1, 1944, unless a later first payment is permitted by paragraph (c) of this section.

§ 501.4 Maximum amount of loans— (a) Class 1 (a) loan. A Class 1 (a) loan shall not involve a principal amount, exclusive of financing charges to the borrower, in excess of $2,500.

(b) Class 1 (b) loan. A Class 1 (b) loan shall not involve a principal amount, exclusive of financing charges to the borrower, in excess of $5,000.

(c) Class 2 loan. A Class 2 loan shall not involve a principal amount exclusive of financing charges to the borrower, in excess of $3,000.

(d) Maximum amount per property. A Class 1 or a Class 2 loan shall not increase the principal amount outstanding at any time on all Class 1 or Class 2 loans made under Title I of the act after July 1, 1944 with respect to any one piece of property to an amount in excess of $5,000, exclusive of financing charges to the borrower.

§ 501.5 Financing charges-(a) Maximum charge. The maximum permissible financing charges, exclusive of fees and charges as provided by paragraph (b) of this section, which may be paid by the borrower for interest, discount and fees of all kinds in connection with the transaction, shall be computed as follows:

(1) Class 1 loans having a principal amount not in excess of $2,500 shall not have a financing charge 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 instalments calculated from the date of the note.

(2) Class 1 loans having a principal amount in excess of $2,500 shall not have a financing charge in excess of an amount equivalent to $4.00 discount per $100 original face amount of a one-year note, to be paid in equal monthly instalments calculated from the date of the note.

(3) Class 2 loans shall not have a financing charge 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 instalments calculated from the date of the note, except that Class 2 (b) loans having a maturity in excess of seven years and thirty-two days shall not have a financing charge in excess of an amount equivalent to $3.50 discount per $100 original

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face amount of a one-year note, to be paid in equal monthly instalments calculated from the date of the note.

Such charges correctly based on tables of calculations issued by the Federal Housing Commissioner are deemed to comply with this section. An increase in the ratio of the charge to the average amount outstanding on the debt over the maximum provided in this section, which increase results from the first payment falling due less than thirty days after the date of the note as provided in § 501.3 (c) shall not be deemed to be in conflict with this section.

(b) Permissible additional charges. If the insured takes security in the nature of a real estate mortgage, deed of trust, conditional sales contract, chattel mortgage, mechanic's lien, or other security device for the purpose of securing the payment of eligible loans, the insured may collect from the borrower, in addition to the maximum permissible financing charge as provided in paragraph (a) of this section, the following expenses actually incurred by the insured in connection with the transaction:

Recording or filing fees, documentary stamp taxes, title examination charges and hazard insurance premiums, provided that such costs or expenses are not paid from the proceeds of the loan or included in the face amount of the note. Such costs or expenses shall not be included by the insured as a portion of a claim under the Contract of Insurance and if such costs or expenses are assessed against the borrower, proper evidence thereof should be in the file.

(c) Partial disbursement of proceeds. If the insured in purchasing a note takes the maximum charge permitted by this section, 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.

(d) Application of lump sum payments. The acceptance of a voluntary payment of one or more instalments prior to due date shall not be construed as increasing the maximum permissible financing charge as provided in paragraph (a) of this section. However, the excess of any amount paid or applied at one time to

an insured obligation above the amount then due thereon, when such excess exceeds the amount of three instalments, shall be applied to the final instalments in reverse order, unless the insured is required by law or is directed by the person making the payment to make some other application, in which case evidence of such direction must be in the file if claim is made upon the Commissioner.

(e) Prepayment rebate. If a note is paid in full prior to maturity, the insured shall make a rebate at a rate not less than 6% per annum of the amount so paid in advance of their due dates, if the maximum permissible financing charge in connection with the transaction is in an amount equivalent to $5.00 discount as provided in paragraph (a) of this section. If a lesser charge has been taken, the rebate shall be at not less than a proportional rate.

§ 501.6 Credits-(a) Credit application. Prior to making a loan the insured shall obtain a dated credit application executed by the borrower on a form approved by the Commissioner. A separate credit application is required for each loan made or note purchased.

(b) Credit investigation. The credit application, supplemented by such other information as the insured deems necessary, must, in the judgment of the insured, clearly show the borrower to be solvent, with reasonable ability to pay the obligation and in other respects a reasonable credit risk. If, after the loan is made, an insured who acted in good faith discovers any material misstatements or misuse of the proceeds of the loan by the borrower, dealer, or others, the eligibility of the note for insurance will not be affected. However, the insured shall promptly report such discovery to the Commissioner.

(c) Outstanding FHA and direct Federal obligations. The proceeds of a loan shall not be disbursed if the insured has knowledge that the borrower is past due as to either principal or interest with respect to an obligation owing to, or insured by, any department or agency of the Federal Government.

(d) Past due Title I notes at time of purchase. A note shall not be purchased when any installment thereon is past due more than fifteen days at the date of purchase except purchases of notes under the provisions of § 501.12.

(e) Prior approval by Commissioner. Any loan in excess of $2,500, exclusive of

financing charges, or any loan which increases the principal amount outstanding as to all Class 1 or Class 2 loans to any individual borrower to an amount in excess of $2,500 will be accepted for insurance only upon prior approval of the Commissioner.

(f) Security. The taking of security to secure the payment of a loan is left to the discretion of the insured unless specifically required by the Commissioner in accordance with the provisions of paragraph (e) of this section or of § 501.3 (d) (2) (iii). An insured may permit the substitution or subordination of security provided it can be shown when claim is made that at the time of such action the original security value was not impaired or reduced as a result of such action. Upon presentation of the facts the prior approval of the Commissioner may be obtained by the insured to any proposed substitution or subordination of security.

§ 501.7

Eligible expenditures—(a) Property location. The property to be improved shall be located within the United States, its Territories, or Possessions.

(b) Use of proceeds. The proceeds of a loan shall be used only to finance alterations, repairs, and improvements upon real property or in connection with existing structures, commenced in reliance upon the credit facilities afforded by Title I of the act.

(c) Reliance on credit application. An insured acting in good faith may, in the absence of information to the contrary, rely upon all statements of fact made by the borrower, which are called for by the borrower's credit application, in determining the eligibility of the improvements to the property.

(d) Technical services and direct costs. The proceeds of a loan may be used to pay the cost of architectural and engineering services, and fees paid for obtaining building permits that are directly connected with the eligible alterations, repairs, or improvements financed in accordance with this part.

(e) Supplementing an uninsured obligation. The proceeds of a loan shall not be used to supplement another obligation of the borrower not reported for insurance, the payment of which is to be secured by a prior lien created in connection with the proposed alteration, repairs, or improvements.

§ 501.8 Disbursement of loan proceeds-(a) Disbursement. Before disbursing the proceeds of a loan to one other than a borrower or a borrower and another jointly, the insured shall:

(1) Dealer approval. Have approved the dealer after such investigation as the insured considers necessary to establish to its satisfaction that the dealer is reliable, financially responsible and qualified to perform satisfactorily the work to be financed and to extend proper service to the customer. This approval signed and dated together with the supporting information shall be in the insured's file.

For the purpose of this section the term "dealer" means the one who executes the dealer's completion certificate.

(2) Completion certificates. Obtain a completion certificate signed by the borrower and a completion certificate signed by the dealer on forms prescribed by the Commissioner. If there are two or more eligible borrowers involved in the transaction, only one signature is required on the borrower's certificate.

(b) Authorization to pay loan proceeds. If the insured is the payee of the note the proceeds shall not be disbursed to one other than the borrower without his written authority.

§ 501.9 Refinancing—(a) General requirements. New obligations to liquidate loans previously reported for insurance pursuant to Title I of the act after July 1, 1944, which may or may not include an additional amount advanced will be covered by insurance, provided they meet the requirements of all applicable regulations and the special provisions of this section.

(b) Maximum maturity. (1) A Class 1 (a) loan or a Class 2 (a) loan may be refinanced for an additional period not in excess of three years and thirty-two days from the date of the refinancing, but not to exceed five years from the date of the original note.

(2) A Class 1 (b) loan may be refinanced for an additional period not in excess of seven years and thirty-two days from the date of the refinancing, but not to exceed ten years from the date of the original note.

(3) A Class 2 (b) loan may be refinanced for an additional period not in excess of seven years and thirty-two days from the date of the refinancing, but not to exceed ten years from the date of the