Rank v. Nimmo
| Decision Date | 06 May 1982 |
| Docket Number | 79-3205,Nos. 79-3128,s. 79-3128 |
| Citation | 677 F.2d 692 |
| Parties | John and Dolores RANK, Plaintiffs-Appellees, v. Robert P. NIMMO, * Administrator of the Veterans Administration, et al., Defendants-Appellants. John and Dolores RANK, Plaintiffs-Appellees, v. Robert P. NIMMO,* Administrator of the Veterans Administration, et al., Defendants, and The Kissell Company, an Ohio corporation, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John F. Cordes, Washington, D. C., Andrea Sheridan Ordin, U.S. Atty., Los Angeles, Cal., for Nimmo.
Franklin K. Lane, III, Richard A. Rothschild, Los Angeles, Cal., argued, for Rank; Richard A. Paez, Los Angeles, Cal., on brief.
Appeal from the United States District Court for the Central District of California.
Before WALLACE, NORRIS, and REINHARDT, Circuit Judges.
In 1971, appellees John and Dolores Rank bought a home financed through a mortgage guaranteed by the Veterans Administration (VA) pursuant to the VA Home Loan Guarantee Program, 38 U.S.C. § 1801 et seq. In 1976, the mortgage was foreclosed. The Ranks subsequently brought suit against the VA and the Kissell Company, a private firm that serviced the mortgage, seeking to set aside the foreclosure. On cross-motions for summary judgment based upon stipulated facts, the district court held that the VA Act and various publications distributed by the VA to implement the loan guarantee program created a duty on the part of the VA and private lenders to take all reasonable measures to avoid foreclosure; that the VA and Kissell had breached this foreclosure avoidance duty; and that the veteran borrower could enforce this duty in an equitable action to set aside a foreclosure. The district court further held that the VA's failure to refund to the lender the unpaid balance of the Ranks' loan and receive an assignment of the loan, as authorized by 38 U.S.C. § 1816(a), constituted an abuse of discretion and that the VA had illegally failed to exercise its discretion because it refused to implement an assignment program in the Los Angeles region. Judgment was entered setting aside the mortgage foreclosure, and this appeal followed.
The policy of the VA housing program "is, broadly stated, to enable veterans to obtain loans and to obtain them with the least risk of loss upon foreclosure, to both the veteran and the Veterans Administration as guarantor of the veteran's indebtedness ..." United States v. Shimer, 367 U.S. 374, 383, 81 S.Ct. 1554, 1560, 6 L.Ed.2d 908 (1961). This policy is effected through a loan guaranty mechanism. A home loan (mortgage) to a qualifying veteran is automatically guaranteed by the VA in an amount equaling 60% of the loan or $27,500, 1 whichever is less. 38 U.S.C. §§ 1803(a)(1) and 1810(c). This guaranty enables the veteran to obtain a home mortgage, through conventional sources, without making a substantial downpayment; "the guaranty provisions ... operate as the substantial equivalent of a downpayment in the same amount by the veteran on the purchase price, in order to induce prospective mortgagee-creditors to provide 100% financing for a veteran's home." United States v. Shimer, supra, 367 U.S. at 383, 81 S.Ct. at 1560.
The veteran obtains the guaranteed loan from private commercial lenders. 2 Such lenders may be denied participation in the veterans' home program if, upon "notice and opportunity for a hearing," the Administrator finds that a lender has failed to keep adequate records, failed "to demonstrate proper ability to service loans adequately," failed to exercise proper credit judgment, or taken actions detrimental to the government or to veterans. 38 U.S.C. § 1804(d).
Upon default by a veteran on his mortgage, the private lender must notify the VA within forty-five days, 38 C.F.R. 36.4315, and if the lender intends to foreclose, he may not begin legal proceedings until thirty days after delivering a notice of his intent to the VA. 38 C.F.R. 36.4317. Upon foreclosure, the lender, if he turns out to be the purchaser, generally may convey the property to the VA. 38 C.F.R. 36.4320.
An option known as "refunding" is available to the VA in cases of default. The "Administrator may, at the Administrator's option, pay the holder of the obligation the unpaid balance of the obligation plus accrued interest and receive an assignment of the loan and security." 38 U.S.C. § 1816(a); 38 C.F.R. 36.4318. The VA thus may take over defaulted mortgages from private lenders and avoid foreclosure by extending forebearance to the veteran.
In connection with its home mortgage program, the VA publishes, inter alia, a Lenders' Handbook and issues circulars to its regional offices. The Lenders' Handbook, VA Pamphlet No. 26-7 (Revised), is introduced by a note stating:
The text of the Lenders' Handbook provides, inter alia:
It is the policy of the VA, consistent with the beneficial nature of the law, to encourage holders (servicers) to extend all reasonable forebearance in the event a borrower becomes unable to meet the terms of his loan. Its purpose is to help veteran-borrowers retain their homes, farms and businesses without prejudicing the holders' rights under their contracts of guaranty or insurance.... (I)t is not expected that holders will file claims or institute action to terminate loans, until every reasonable effort has been made to arrive at some other solution.
The Lenders' Handbook advises lenders "to follow accepted standards of loan servicing employed by prudent lenders generally" and notes that the "VA may, where the circumstances warrant, supplement the holder's efforts in connection with the servicing of defaulted loans." It points out, however, that the loan guaranty "is in part predicated upon the understanding that adequate loan servicing will be performed by the holder" and that "(t)he VA does not prescribe how loans should be serviced."
In Circular 26-75-8, sent to its employees in January 1975, the VA pointed to adverse economic conditions and ordered its employees to attempt to ameliorate veterans' economic difficulties. Specifically, the VA employees were instructed to review carefully each notice of default to determine if servicing was adequate, to urge private lenders to perform adequate loan servicing, to counsel veterans with mortgage problems, and to undertake supplemental servicing when necessary. See VA Manual M26-3, Change 46, 2.35.
Finally, VA Manual M26-3 (intended for use by VA employees) provides criteria, in cases of default, to guide VA employees in exercising the assignment/refunding option authorized by 38 U.S.C. § 1816(a). Paragraph 2.39(d) of that Manual states that refunding is permissible when it is "established beyond reasonable doubt that:
1. The refunding will be in the best interests of the VA.
2. The default was not willful.
3. The borrower is desirous of retaining his property.
4. The borrower is deserving of VA assistance."
The material facts in this case were stipulated. In 1971 plaintiffs, John and Dolores Rank, bought a home in Pomona, California for $16,950 and financed their purchase through a loan for the full purchase price from the Trinity Mortgage Company. The VA guaranteed the loan pursuant to its housing program. Ultimately, after several transactions, the loan (which was secured by a deed of trust-i.e., a mortgage) and mortgage were assigned to the Government National Mortgage Association (GNMA), with a private mortgage firm called the Kissell Company acting as the servicing agent. The Ranks were to pay the Kissell Company $148 per month.
Throughout the 1973-74 period, the Ranks had difficulty making their loan repayments on time, but they eventually would cure their delinquencies. Beginning with the payment due in February 1975, however, the Ranks failed to make further payments. John Rank had been laid off from his $900 per month job in December 1974, and was subsisting on $360 per month in unemployment benefits, except for two months of salary as a welder. A Kissell representative, C. B. Cohen, subsequently met with the Ranks, but was unable to resolve the non-payment problem. A later meeting was similarly unsuccessful, as Cohen concluded that the Ranks' expenses exceeded their income. 3 In the meantime, the Valley Association of Cities (VAC) had contacted the VA and Kissell regarding the Ranks, and John Rank himself wrote to the VA. In late May, the VA contacted Kissell and was informed that Kissell would consider forebearance upon presentation of a "more definite" repayment plan. Later, Cohen told VAC that the Ranks should offer a written plan, which they eventually did. 4
There were subsequent communications among Kissell, the VA, VAC, and the Ranks. Ultimately, though, Kissell sent to the VA, in September 1975, a Notice of Intention to Foreclose. It stated that the borrower's "income is less than his expenses," and that "no arrangements can be made due to the borrower's financial problems". Kissell gave notice to the Ranks of the impending foreclosure, and the VA informed the Ranks that it could do nothing for them. In early 1976, John Rank had obtained employment and made a new repayment proposal to Kissell, but it was refused.
In December 1975, a Notice of Default was recorded in Los Angeles County pursuant to California law. In April 1976, the property was sold at a non-judicial foreclosure sale to Kissell. Pursuant to VA regulations, Kissell then conveyed the property to the VA as part of the guaranty arrangement. Just before the...
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