U.S. v. Garner

Decision Date19 July 1985
Docket NumberNo. 83-4531,83-4531
Citation767 F.2d 104
PartiesUNITED STATES of America, Plaintiff-Appellant, v. L.J. GARNER and Tommie N. Garner, Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Glen H. Davidson, U.S. Atty., Oxford, Miss., Robert S. Greenspan, Susan Sleater, Peter R. Maier, Dept. of Justice, Civ. Div., Washington, D.C., for plaintiff-appellant.

Isaiah Madison, Greenville, Miss., Ben T. Cole, II, Oxford, Miss., for defendants-appellees.

National Housing Law Project, David Madway, Gideon Anders, Berkeley, Cal., for amicus curiae.

Appeal from the United States District Court for the Northern District of Mississippi.

Before WISDOM, RANDALL and JOLLY, Circuit Judges.

RANDALL, Circuit Judge:

This case involves the validity of a rule promulgated by the Secretary of Agriculture precluding the Farmers Home Administration from refinancing its own loans. The government brought this action against L.J. and Tommie N. Garner 1 for foreclosure and possession of their residential property following their default on a loan obtained from the Farmers Home Administration. At trial, the Garners claimed that they were entitled to have their loan considered for refinancing and that, until this was done, foreclosure could not occur. The district court agreed, holding that the rule prohibiting the refinancing of Farmers Home Administration loans was not reasonably adopted and was contrary to the congressional statute under which it was promulgated. Accordingly, the court barred the government from proceeding with foreclosure until (1) the Secretary of Agriculture issued regulations providing for refinancing by the Farmers Home Administration of its own loans to qualified debtors and (2) the Farmers Home Administration considered whether its mortgage loan to the Garners qualified for refinancing under those regulations.

On appeal, the government argues that Congress had no intention of compelling the Farmers Home Administration to refinance its own loans. At most, the government argues, Congress intended to give the Secretary of Agriculture broad discretion in determining eligibility requirements for refinancing. We agree with the government that the Farmers Home Administration is not obligated by statute to refinance its own loans. However, because the Secretary of Agriculture has failed to present an adequate basis and explanation for treating Farmers Home Administration loans differently from other loans, we are unable to conclude that the regulation is the product of reasoned decisionmaking. We, therefore, hold that the challenged regulation cannot survive judicial scrutiny and affirm in part and remand.

A. Statutory and Regulatory Framework.

A brief review of the rural assistance housing program, under which the Garners' loan was made, is necessary to set the stage for our analysis. Title V of the Housing Act of 1949, Secs. 501-502, as amended, authorizes the Secretary of Agriculture ("Secretary"), through the Farmers Home Administration ("FmHA"), to make direct loans to very low-, low-, and moderate-income rural residents for the purchase, construction, rehabilitation, or refinancing of decent, safe, and sanitary housing. 42 U.S.C. Secs. 1471-1472. The express purpose of the Act is to promote "the realization as soon as feasible of the goal of a decent home and suitable living environment for every American family." Id. Sec. 1441. To qualify for section 502 financing, an applicant must receive as income an amount not in excess of FmHA limits and be unable to obtain credit from other sources on reasonable terms. Id. Sec. 1471(c).

Under current regulations promulgated by the Secretary, "income" is defined as current monthly income received by the applicant and all adult members of the household times twelve. 7 C.F.R. Sec. 1944.2(c). 2 Pensions, social security, welfare, unemployment benefits, and child support payments are considered income for this purpose. Id. Sec. 1944.8(c)(4). Presently, in the Garners' region of the country, a moderate-income person is an individual with a maximum annual family income of $17,000; a low-income person is an individual with a maximum annual family income of $11,500; and a very-low-income person is an individual with a maximum annual family income of $5,300. 7 C.F.R. Sec. 1944, Sub. A, Exh. C. Prior to 1983, at least 60% of the FmHA loans had to be made to persons with low incomes. 42 U.S.C. Sec. 1487(o )(1) (1980 & Supp.1983). As of 1983, at least 40% of all FmHA loans had to be made to persons of very low income. 42 U.S.C. Sec. 1472(d)(1).

Although a form of social welfare legislation, the section 502 loan program is also a legislative response to the legitimate credit needs of rural residents subject to the vicissitudes of an agrarian economy. Cf. Curry v. Block, 541 F.Supp. 506, 513-14 (S.D.Ga.1982) (holding that the 7 U.S.C. Sec. 1981a loan program is a unique mixture of social welfare legislation and legislation designed to supplement business needs of high-risk farmers), aff'd, 738 F.2d 1556 (11th Cir.1984). Hence, before extending financing, the FmHA must find that an applicant "has the ability to repay in full the sum to be loaned, with interest." 42 U.S.C. Sec. 1472(a). A qualified borrower usually can receive a loan in the amount equal to the purchase price of the home, 7 C.F.R. Sec. 1944.17(a), and for a term up to thirty-three years. 3 Id. Sec. 1944.25(c). The interest rate of the loan is based on the cost of the funds to the government. 42 U.S.C. Sec. 1490a(a)(1)(A). The mortgage note is standardized and includes many of the covenants usually in a commercial mortgage. See 7 C.F.R. Secs. 1807, 1944.33(c).

Because low-income borrowers in an agrarian economy often experience financial difficulties in making their monthly loan payments, whether to the FmHA or some other lender, Congress has provided the FmHA with three financial tools to aid distressed borrowers. The first tool, interest credits, is available only to FmHA borrowers and is a need-based subsidy that reduces the effective interest rate on a section 502 loan from the FmHA market rate to a rate as low as 1%. 7 C.F.R. Sec. 1944.34(d). In order to receive interest credits at the closing of a loan, a borrower must have (1) annual income that does not exceed the applicable low-income limit and (2) a net worth under $7,500 (unless an exception is authorized). Id. Sec. 1944.34(f)(1). Interest credits are also available on an existing loan if (1) the above two requirements are met, (2) the loan was originally approved as a low- or moderate-income section 502 loan, and (3) the FmHA determines that interest credits are needed to enable the borrower to repay the loan. Id. Sec. 1944.34(f)(5).

The amount of interest credits for which a borrower qualifies is determined by a formula designed to provide the borrower with a subsidy sufficient to meet his needs up to the limits of the program. Simply stated, the qualified borrower is entitled to a reduction of his loan payments to the greater of (1) 20% of the family's adjusted income (which satisfies taxes and insurance charges) or (2) the amount necessary to amortize the loan over its term at a 1% interest rate plus taxes and insurance charges. Id. Sec. 1944.34(d). Thus, an FmHA borrower who is confronted with a loss of income can obtain relief by virtue of the interest credit program if he satisfies its threshold eligibility requirements and, prior to the loss of income, was not already receiving interest credits sufficient to reduce his real interest rate to 1%.

The second financing tool entrusted to the Secretary--moratorium relief--also is available solely to FmHA borrowers. To be eligible for a moratorium, a borrower must (1) already be receiving all the interest credit authorized, id. Sec. 1951.313(b)(2)(ii)(B), and (2) demonstrate that, due to circumstances beyond his control, he is unable to make scheduled payments without unduly impairing his standard of living. Id. Sec. 1951.313. Moreover, a borrower may only obtain a moratorium if his shelter costs exceed 35% of adjusted income, id. Sec. 1951.313(a)(2)(i), and he has not been granted a moratorium within the last five years, id. Sec. 1951.313(b)(5). A moratorium permits a borrower who has sustained either a sudden reduction of income or an exceptional increase in essential family expenses to suspend payment for a six-month period. Id. Sec. 1951.313(b)(4). If the borrower remains eligible, the moratorium may be renewed for additional six-month periods up to a total of three years. Id. Sec. 1951.313(b)(5). Interest continues to accrue during the moratorium period, usually at a 1% rate. 4

At the end of a moratorium, a borrower may be treated in one of several ways. When a borrower's income level is at sufficiently high levels, the FmHA requires him to pay over the next two years the amount of principal and interest deferred over the moratorium period in addition to his regularly scheduled loan installments. Id. Sec. 1951.313(e)(1)(i). Should the borrower's income not be as high, the unpaid principal and interest balance is reamortized over the remaining term of the loan. If necessary, the term of the loan can also be extended by a period not to exceed the length of time that the moratorium was in effect. Id. Sec. 1951.313(e)(1)(ii)-(iii). Finally, in cases of extreme hardship, the FmHA can cancel the accrued interest.

The effect of a moratorium is to give the borrower a temporary breathing spell during times of financial hardship. A moratorium is not designed to provide the borrower with long-term relief, such as lower monthly payments. In fact, following a moratorium, payments often increase because accrued interest and possibly the deferred principal are amortized over the loan period. At best, when the loan term is extended by the moratorium period and the accrued interest is cancelled, the amount of future payments remains the same.

Finally, Congress has...

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